Textile Mills Are Hurting

A recent survey of Chinese textile mills in Hebei and Henan by our China joint venture partner, CN Cotton, confirms the industry is still hurting and many mills in these two provinces are not only idling production but also shutting down until raw material prices become cheaper. According to the survey, finished product stocks are high--in some cases more than three months--while raw materials are considerably reduced. Many of the mills in Henan and Hebei have been buying lint hand to mouth for months. Downstream demand remains in the doldrums and cash flow is tight with very high account receivables at many of the mills. In both provinces, T328, the standard grade, is equal to 12,900 yuan/ton delivered. The landed the mill price is about 1000 to 1500 yuan/ton above what mills believe they could pay and still make a profit. State owned textile mills are further burdened by the mandate to not layoff staff and keep the mill running. As noted in a previous entry, the additional 1 percent to the VAT rebate, now at 16 percent, has for the most part gone into the pockets of buyers and retailers. One mill said the textile VAT export rebate really keeps Chinese products cheap and offers no real value to a mill. As reported in the last entry, mills are become louder about the government immediately releasing reserve stocks or issuing additional import quota.

To Release or not Release?

China's government must make a decision quickly if it is to help the textile mills reduce their rising raw material costs. As measured by the CNCotton B Index, the standard grade T328 (M) now stands at 12,928 yuan/ton, a rise of more than 1,000 yuan/ton since February. The price is the average of all the key geographical lint cotton buying/selling areas in China. For the lucky textile mills with 1% quota in hand and using a 60.16 cents/pound CNF price any China port as offered by the Globecot Standard Index, a quick landed the mill conversion equates to 10,735 yuan/ton. If based on the sliding tax scale (and remembering no additional quota other than the 1% as mandated by the WTO), the landed the mill price equates to 12,556 yuan/ton. In either case, the landed the mill price is a considerable reduction compared to the CNCotton B Index. Calculating the costs is easy, but understanding just where the government is thinking remains a crap shoot. Normally at this time of the year the government is thinking about the textile mills and usually releases additional quota. However, the previous cotton reserve procurement program effectively did its job removing excess surplus from the market. It also created a shortage of high grades as most were tendered to the reserve. Farmers ultimately received higher seed cotton prices and a certain amount of lost acreage has most likely been returned, yet the textile mills remain out in the cold. With a major holiday on the way (Friday, May 1st) and a three day weekend which will see many mills close their doors, it is likely an announcement is forthcoming. We have no crystal ball here, but we think the government very well may issue additional quota while at the same time release some state reserves.

Comments on China's Textile Industry Stimulus Plan

China released further details on the textile industry's stimulus plan. I have included the highlights with comments:

1. Hit both the domestic and export market. For the former, the country must expand consumption in countryside--new stimulus plan is pushing this ahead with economic incentives to rural residents. For the latter, must diversify products and move up the value chain;

2. Textile mills must upgrade their technology and strengthen home grown brands. Again, new stimulus has earmarked funds for upgrading
spinning, weaving, dyeing–printing & finishing equipment;

3. Reduce the burgeoning textile mill capacity in the country. This means new standards will be put in place to eliminate the additional capacity. This is very similar to reducing gin capacity by eliminating the small bale and focusing only on 270 kg bales. Now, railways can not transport small bale and small bale ginners are fading away;

4. Emphasize geography by taking low cost production westward and into inland provinces. This helps keep labor costs down. Encouragement to textile industry via economic incentives to shift basic operations inland is well underway;

5. Strengthen financial and tax support. Govt has done this with increasing VAT rebate to 15%. There is talk it will go higher. I have my doubts on this point b/c savvy retailers/buyers will take that VAT increase and use it to lower prices for themselves.

China Commodities Update: FH April

To download China Commodities Update for FH April, please click http://www.globecot.com/20090420china.pdf

China's Wheat Market Consolidating

April began with the news that the drought, which affected most of the North China Plain and the growing winter wheat crop, had been defeated. On the strength of this news, China’s National Grain and Oils Information Center released its current total wheat acreage at 24.01 million ha for the calendar year 2009. The number was a slight rise over 2008. Aggregate output for the year is expected to be 111 million tons, a slight drop over the previous year and obvious nod towards the effects of the drought. Over the next few months as the situation is better known, CNGCOC will adjust their numbers to reflect the effects of the drought.

Chart: Zhengzhou (ZCE) Wheat Futures

Spot prices have been stable to slightly higher while DCE futures have been in consolidation the last couple of weeks. There is a negative sentiment over wheat prices as the interest in buying from the government’s reserves is on the wane. One of the main causes of the sagging prices is the fact there is simply too much milling capacity. Even now, mills are not running at full capacity and heavy flour stocks are weighing on the market. In the short term, minimal price fluctuations are predicted though feed companies are expected to bump up their by-product purchases in the coming months.

Corn Supplies Remain Tight

By month’s end, the reserves procurement of the last 10 million tons (out of a total of 40 million tons) should be completed. Similar to the procurement programs for cotton and soybeans, the primary objective to provide stability to northeast corn prices and in turn push more money into farmers’ pockets has been met. There is still active buying and will be up until the last day of the month. Supply, especially in Heilongjiang and Jilin, is tight with traders hoping to buy and tender to the reserves must continue competing with the starch and alcohol manufactures for the better grades. For the latter, the reserve program has been a continual thorn in the side in what should have been a cheaper raw material supply. Downstream demand for alcohol and starch remains weak therefore most of these manufacturers have suffered deteriorating margins due to higher raw material costs.

With 15 days left in the reserve program, further price rises are expected in the extreme northeast while areas on the North China Plain—Dezhou, Shijiazhuang, Zhengzhou—have more upside potential.

State Reserves Still Buying Soybeans (Part 2)

In other mentionable news, foreign crushers are still looking for creative ways to circumvent the government ruling about adding additional capacity. Most of this “foreign” owned capacity strictly runs imported beans and with the population’s growing interest in eating more meat the policy runs counterproductive to China’s long term interests of having a greater control over their food supply. For what it’s worth, the country will never be able to grow enough soybeans for the crush capacity. More likely, China will continue to adroitly play off the US against its main competitors of Brazil and Argentina. At the same time, crushers in China—both foreign and Chinese owned—admit while they may have other issues with the US, what they don’t question is whether the ships will stop loading tomorrow. The same can not be said for Brazil or Argentina.

State Reserves Still Buying Soybeans

The biggest news for China’s soy complex is the drama unfolding in the northeastern province of Heilongjiang. The reserve’s procurement of soybeans achieved its objective of nudging prices higher while stabilizing farmers’ incomes. It’s estimated the reserves is sitting on more than 4 million tons of beans. And while this has many traders fretting over an “impending” release to the market, we believe the bigger issue is solving the problem of Heilongjiang farmers and the undeliverable supply to the state reserves. Granted, a majority of farmers in Heilongjiang were quite happy with the reserve procurement program. However, some weren’t due to the fact their beans did not meet the reserve’s quality specs. What has happened is that farmers in Heilongjiang are now storing the bulk of the previous marketing year’s output. This situation comes at a particularly tough time since most farmers are preparing to enter their fields and theoretically should have little to no on farm storage. The situation would not be as dire if the crushing capacity located in the Heilongjiang were up and running. As it stands, most of it is down and will remain so due to poor margins. Those crushers still operating are beginning to drop their prices due to the increased interest in farmer selling. It’s an extremely tough situation for the province’s soybean farmers who have been encouraged in recent years to expand their soybean acreage to help alleviate the food crisis and dependence on imported beans.

China Cotton Update (April): Part 2

Several weeks ago, there was rampant speculation the reserves would continue their buying, this time targeting the approximately 700,000 tons of stock still in storage in Xinjiang. To date, Xinjiang has sold 1.5 million tons, or 55.6 percent, of the total reserve procurement. In addition, the current sales volume of the 2008/09 crop is estimated at 800,000 tons. Based on a provincial production number of 3.0 million tons, it would appear there would be 700,000 tons of cotton left in the province. However, there are reports circulating that the total is actually much less. Of course, this brings up the question about the “official” production number but we will leave that for another time. This has helped fuel the recent run up in prices (in addition to the lack of high grades) and thus it would be very unlikely for the reserves to continue purchasing.

A more likely option is for the government to switch their sympathy from the domestic farmer to the domestic textile mill and distribute additional import quota. Textile mills around the country remain under intense pressure to cut costs while at the same time run their operation profitably despite higher raw material costs and a less than impressive downstream market. Some improvements have been noted especially with the more vertically integrated mills, i.e. those with spinning/cloth production/finish & dyeing/garment/brand name. This is especially true with verticals that have switched from pure cotton yarns to a cotton/polyester mix. Having met with more than seven top verticals on my recent trip, we can’t help but wonder just how a pure spinner will remain in business in the coming years.

Last, some comments on the 2009/10 cotton acreage are worthy of inclusion.
The prevailing estimates have Chinese cotton acreage down 15 to 20 percent for coming marketing year. Farmers are currently entering the fields and we won’t have any real indications for the next month or so. Our partner in China, CNCotton, has pegged cotton acreage at 4.7522 million ha, which would indicate a decline just under 18 percent. We think it will be closer to 15 percent, but that’s not really important. What is important and should be monitored is the recent approval by the State Council to bump grain production to 550 million tons by 2020. For comparison, in 2008 China produced 528.5 million tons of grain. What this approval means and what we have long argued at Globecot is that Chinese cotton acreage is on the long term decline.

Cotton Update FH April: Part 1

The state reserve’s purchase of cotton has now come to an end with the third installment completing the allotted 1.5 million tons. To date, the state reserve has purchased more than 2.7 million tons of cotton, just about equaling forty percent of 2008/09’s total output. The cumulative effect of these purchases has helped push seed cotton prices higher so much that farmers are now considering planting slightly more cotton than originally anticipated.

Second, as merchants rushed to buy tenderable lint cotton around the country to deliver to the reserves higher quality grades became harder and harder to find. In turn, the absence of high grades from the market has seen a rapid run up in lint prices around the country. This is probably best illustrated by China’s top spinner, Weiqiao, which has raised procurement prices for all grades by more than 700 yuan/ton since late March. At the same time, the ZCE and CNCE E-Forward Market have rebounded as well with sharp price increases the past couple of weeks.

China's Long Staple Cotton (LS) on the Rise

Two years ago, Globecot conducted an extensive study of China’s extra long staple (ELS) cotton production base in Xinjiang. The study originated from a Globecot forecast correctly identifying a global surplus of ELS—mainly because of China—and a subsequent plummet in ELS prices. In 2006, China produced a record 178,000 tons of ELS. In 2007, the tonnage had dropped to 153,000 tons and this past year total output was less than 90,000 tons. Heavy stocks and low prices have kept local farmers and the Production Construction Corporation from planting more ELS. For the coming marketing year, ELS acreage intentions are expected to be considerably lower. A waning interest in ELS production has coincided with an increasing interest in planting more long staple (LS) cotton, something we correctly identified in the original survey. In fact, LS production has risen from 50,000 tons in 2006 to an estimated 85,000 tons in 2008. In the previous survey, we identified LS production mainly in the northern part of the province—in and around Shihezi and Kuytun. At the time, we mentioned the very important PCC#3 in Kashi was also planting a trial run of LS. It was a success because the PCC#3 in 2008 didn’t plant one acre of ELS. The question remains how will this battle for acreage between LS and ELS in the coming years pan out.

We are contemplating a new study, incorporating a closer look at the LS production phenomenon in Xinjiang, but we will also include an updated version of the original ELS report--two for the price of one. In addition, included in the new study would be a special section reporting what 20 major vertical textile mills in China think about both LS and ELS cotton. A new prospectus will be distributed in the next few weeks so please stay tuned for announcements on the http://www.globecotnews.com/ website.

I have prepared the following short sample from the original study. To download the sample, simply click here.

China's Soybean Crisis

It’s estimated more than 3 million tons of unsold soybeans are sitting in farmers hands in China’s northeastern province of Heilongjiang. It must be noted with equal awe that China’s massive reserve purchasing program is also storing a huge quantity—at best estimate about 5 million domestic beans and 2.5 million tons of imports for a grand total just under 8 million tons, ready, willing and waiting to be dumped on the domestic market at the appropriate time. However, that is another story and will have to wait for a blog entry later this week. Now, the crisis facing the government is how to satisfy very disgruntled Heilongjiang soybean farmers just as they are preparing to hit the fields and plant more soybeans. Rumors surfaced today that the government was “studying” the issue and considering various alternatives on how to dispose of the soybeans. As I see it, they have two alternatives. One is to allow the farmers to sell directly to traders, both foreign and local, and let them do their magic. This, of course, raises many questions such as what if the higher priced, higher moisture beans are mixed with the lower moisture and lower cost imported beans. Never mind the fact that mixing has been an ongoing deal since China began importing soybeans. And we all heard the rumors about cheaper imported beans being mixed with local beans in the northeast and delivered to the reserves.

A second option would be to work a deal with the country’s foreign owned (including COFCO which is very much Chinese owned) crushing capacity and have them work the supply into their storage. Offer them a discounted price—considerably less than the 3,700 yuan/ton official procurement price. Do this over the course of the year so as not to disrupt the current DCE price levels and flatten the market. The government could easily strong arm the crushers about this and make them take the beans just as they made them keep vegetable oil prices under guards when inflation was out of control. But, I believe the government is interested in finessing a deal and today’s “story” was a way to gather feedback before making a decision. If I were a crusher in China, I would have already approached the government about “helping” out with the soybean situation. In return, I’d like to have some of the current restrictions on additional foreign owned crushing capacity lifted.

China Buzz

China’s government has two faces when it comes to the fate of the greater cotton/textiles supply chain. Towards the end of the year, there is grave concern over the plight of the nations famers and how much they will plant after the downtime offered by the Lunar New Year Festival. Here is when the government will launch almost a yearly stimulus to prop up the farmers’ sagging income. I cotton’s case, it began last fall with the start of the government’s massive state reserve procurement plan which has now come to an end with a total of 2.7 million tons. For farmers, the plan’s effect has been enormous with a tremendous bounce in seed cotton prices and in effect their incomes. Even better, there was a trickle of enthusiasm over perhaps planting more cotton for the 2009/10 marketing year. For textile mills, however, the reserve procurement has become a nightmare as average prices for all grades of lint cotton have risen dramatically the past month or so. The gist of this has been the strict quality parameters for the reserve’s procurement program has created a severe shortage of high grades around the country as merchants rushed to buy local and deliver to the reserves. This would have been solved had the government issued additional import quota other than the 894,000 tons as mandated by the WTO. What is likely to happen now with the farmers in much better shape and mills complaining bitterly over rising raw material costs are the release of additional import quota despite the government’s strong desire to not do so.

China Cotton Reserve Procurement Finished

Today CNCE and CNCRC jointly announced that the third round or reserve procurement of 1.5 mil tons has finished. April 10 is the last day for the reserve auction. No word yet if the CNCRC will include another round of reserve procurement with a focus on Xinjiang. Prices are higher, and moving higher. If anything, government is very likely to issue an additional round of export quota in the very near future. The rise in lint prices is hurting the textile mills whose downstream market--though better recently--is still very much in the doldrums...

China Cotton Market

China’s cotton market continues to be driven by government policy and will so for the foreseeable future. Spot prices have risen dramatically this week—so too has the ZCE futures prices as well as price CNCE E-Forward Market prices—on the growing shortage of higher grade varieties. The shortage has come because of the previous two month’s of national reserve purchases which have finally depleted the market of top varieties. The reserve purchases have come across a spectrum of commodities, including soybeans, corn, wheat and of course cotton. Now, the government is facing a crucial test: do they release cotton reserves (which they just bought) or do they issue more import quota, which they said they wouldn’t at the begging of the year? With the recent run up in spot prices and a textile industry hanging on for dear life, it is likely the government will issue more import quota in the coming weeks. Also, just yesterday the State Council approved a plan which would see grain acreage increase more than 50 million tons over the 2007 grand total of 500 million tons. This does not bode well for cotton acreage in China which we project to be 15 to 20 percent lower yoy. What we may see in the coming years is the disappearance of cotton acreage in the eastern part of the country.

Update on China Cotton Reserve Purchases

Below is an abstract from our website, the Globecot News Network. Full article can be found at http://www.globecotnews.com/index.htm?inc=22&sid=52328.

After six months of procuring cotton for the state reserve and steadying markets with a steadfast purchase price, China’s mandated reserve procurement program is rapidly approaching its target of just over 2.7 million metric tons. Daily volume continues to ease, sliding to a season-to-date low of just 10,000 tons by April 2. This included 9,200 tons of Xinjiang cotton and 800 tons of inland cotton. The scheduled procurement for April 3 is 14,800 tons, including 10,000 tons of Xinjiang cotton and 4,800 tons of inland cotton, but has not yet been confirmed, given the holiday in China.

Through this date, cumulative reserves now stand at 2,705,750 tons, including 1.5 million tons from Xinjiang and 1.2 million tons from inland regions. With hardly 60,000 tons remaining before the program reaches saturation, daily volume is likely to fade further this week. While rumors continue to swirl, the CNCRC has not indicated whether the government will extend the procurements after it reaches its target in coming days. Such a move would be certainly be welcomed by producers across China and particularly in Xinjiang, but doing so may push market prices higher.

China March Commodity Review: Part 3

Corn

The ongoing reserve purchase of corn has helped keep prices stable to slightly higher for the month of March. As the chart for DCE’s corn contract illustrates, the price rise began in mid December, but really took off in the middle of February, once the effects of the surplus withdrawal took hold. The total allocated amount to be purchased is 40 million tons, of which there have been 4 separate rounds designated at 10 million tons each. We are now in the fourth round. The contributing provinces thus far are Jilin, Heilongjiang, Liaoning and Inner Mongolia.

Similar to cotton and soybeans, the government has used a higher than average spot price—in this case 1,500 yuan/ton— to encourage farmers to steer their corn towards the reserves. Spot prices have also held steady to slightly higher since early February. Traders note prices will likely hold for the next few months until the reserves began releasing corn on the open market.

While the removal of surplus corn has helped improve farmers’ incomes, it has also given them every incentive to plant corn for the coming planting season. Outside of political stability, grain production is a huge concern of the government. Plus, in the current economic climate the government has a desire to have sway of the prices of basic commodities. In this case, the mission has been accomplished. However, the complications—and there always are—will come once planting season is over and the southern regions began demanding more corn deliveries. What could easily result with this amount of corn under the control of one entity and not in traders’ hands is a potential logistical nightmare. While the auctions are scheduled to take place in late April to early May, the corn, once sold, must still be transported out of the northeast. One should not forget that the May 1st holiday, as well as the Dragon Boat Festival, is just around the corner. It will be interesting to see if the government can handle the release as easy as the purchase has been.

In other relevant monthly news, custom statistics revealed a sharp drop off in January through February’s corn exports to 2,696 tons, a whopping 96% year on year reduction. For the same period a year ago, China had exported 62,497 tons of corn.

Wheat

Drought concerns which had consumed the country since the beginning of the year were finally brought under control in March. According to information provided by the Ministry of Agriculture, by the first half of the month, roughly 2.17 million ha of winter wheat covering 8 provinces was suffering drought conditions. Approximately 461,000 ha of winter wheat were rated as suffering “serious” drought conditions. Compared to peak values, these were reductions of 8.63 million ha and 4.11 million ha for each category, respectively.

The marketing of wheat remains active as a result of the government’s decision to release wheat from the state reserves in order to keep prices in check. Weekly amounts have continued to rise since February and are averaging about 1.3 to 1.5 million tons. The increase in volume has also seen a corresponding rise in the transactional price. This is due to several reasons, beginning with an expected reduction in total winter wheat output. On March 12th, the China National Oil and Grains Information Center estimated the total area for wheat cultivation in 2009 would be about 24.01 million ha, an increase of 110,000 versus 2008. Total output, however, is expected to reach 111 millions, which would be a drop of 1.5 million tons year on year. The agency attributed the reduction in output as a result of the drought in the early part of the year. Second, traders around the country are actively buying wheat released to the market with expectations of higher prices in the forward markets. Most point to the premium commanded in the wheat contract at the Zhengzhou Commodity Exchange, where the nearby contract is trading between 2,100 and 2,200 yuan/ton. Third, sensing an opportunity, farmers have been unenthusiastic about selling any wheat they still have in storage.

Despite the relative success of the wheat release program, there is concern that prices may have topped and are on their way down. The rapid rise in available stocks is meeting a curtailed demand by flour producers, who have seen their market remain in a sluggish state. Many smaller flour producers are rumored to have shut their doors until raw material prices come down. Still, the return of children to school should help stimulate demand in the current school period.

China March Commodity Review: Part 2

Soybeans

For most of the month, domestic soybean prices have been stable to slightly higher, supported by the ongoing state reserve purchasing program. On the surface, the state reserve purchasing program of soybeans—much like its cotton counterpart—has helped keep domestic prices artificially higher than imported beans and, most importantly, protected growers’ income, the sole objective of the government. The unintended consequences, however, have seen domestic crushers located in the northeastern part of the country, the heart of the soybean belt, temporarily shut down because of poor margins due to higher raw material costs combined with very slack demand for downstream products of soybean meal and oil. Some of the smaller owned crushers in Shandong and Guangdong province have also idled equipment until raw material costs move sharply lower. The chart below offers a quick look at price differences between domestic and imported soybeans at several key delivery points around the country.

While prices have remained firm since the start of 2009, traders expect domestic prices to begin moving lower in light of the announcement by Mr. Bao Kexin, General Manager of Sinograin, the government body in charge of reserve procurement, who expressed concern over the company’s inability to purchase the designated amounts for both corn and soybeans as a result of the strict moisture requirements. The reserve had an initially targeted a total of 6 million tons of soybeans and 40 million tons of corn for reserve purchases. However, by the end of February, purchases had only reached 3.5 million tons of soybeans and 27 million tons of corn. Recent reports indicate there are still plenty of soybeans stored on farms, particularly in the Heilongjiang province in the cities of Fuyuan, Raohe, Tongjiang, Baoqualning, Hongxingling and Jiansanjiang.

In other industry news, the state of China’s domestic soybean industry remains a source of concern for government officials on both the national and provincial stage. In Heilongjiang, one CPCC member, Mr. Sun Dongsheng, recently stated that imported BT soybeans beans had dramatically reduced growers’ incomes in the province, claiming farmers made an average of 1174.50 yuan/ha revenue in 2008 from 3234 yuan/ha in 2000. To remedy the situation, Mr. Sun suggests making plans for protecting domestic non-Bt soybean fields, the majority in China, by including them in a food emergency system. In addition, Mr. Sun advocates establishing an independent base for edible oil production as well as increasing the import taxes for all edible oil.

Some quick comments on the DCE’s soybean contract are probably warranted. Since a modest rise in late December and through the early part of 2009, prices have consistently traded within 100 to 200 yuan/ton price band.

One other note to mention is customs date for January through February soybean imports. For the two month time period, China imported 6.29 million tons of soybeans, a 15% increase over the previous period a year ago.

China March Commodity Review: Part 1

Market Recap

Early March was dominated by the 11th National Committee of the Chinese People’s Political Consultative Conference, otherwise known as the People’s Congress. It is an annual event with the usual lip service of providing a better quality of life for the people through a growing economy. This year, however, marked a break with tradition as China’s Premier, Wen Jiabao, used the event as a platform to outline the daunting task of keeping the country’s economy on a positive track in light of the current economic malaise.

Premier Wen is adamant that China can achieve GDP growth of 8% in 2009 and is essentially putting his money where his mouth is. He is no fool and knows the provided stimulus package of 4 trillion yuan ((585 billion US dollars) can only go so far unless the Chinese people pick up the slack and start consuming. To do this, Wen is already in the process of cutting personal income taxes, increasing salaries to teachers, providing more liquidity to banks, reducing stock transaction taxes as well cutting taxes on property sales and perhaps most importantly offering various subsidies to stimulate purchases in the rural countryside.

While there are plenty of people commenting on the “merits” or lack there of China’s stimulus package, there is no doubt it is beginning to work. A commitment to revive the auto industry via subsidies provided to increase auto sales in rural areas have helped the ailing US automaker GM see a 32% jump in minivan sales for the first two months of the year. Farmers, who only months ago delivered produce to markets with the well known three-wheel, oversized, blue motorcycles, are now using bright and shiny new minivans. It’s hard to appreciate just how massive this is unless you’ve been there. But, imagine thousands (and I literally mean thousands) of these wholesale vegetable markets in every corner of the country that had all these motorcycles mentioned above delivering produce. The change over to minivans is utterly astonishing. Likewise, despite a worldwide slump in rubber prices, Chinese tire makers are having a hard time meeting the surging demand for tires as a result of the stimulus offered to the auto industry. The positive benefits to oil and gasoline consumption by the country will soon be evident with the additional cars on the road. Moreover, it will be intriguing to watch in the coming months the ripple effect of China’s economic stimulus package on a range of industries.

This column will attempt to recap the economic climate of the country. Today is on the introduction. In the future it will be several pages, first on a bi-monthly and later on a weekly basis. The second half of the research package will be a similar recap for several of the most followed commodities in China, beginning with cotton, soybeans, corn and wheat. Later, we will add additional commodities where appropriate.

After reading, please feel free to offer comments, questions and/or criticism—all of which are most welcome. I can be reached at jim.lambert@fcstone.com.


Best regards,


Jim Lambert
FCStone, China Analyst
615.234.2759

**********
Cotton

By the end of February, seed cotton deliveries had exceeded 90 percent. The ongoing reserve procurement has strengthened seed cotton average prices around the country. A little over a month ago, the national average price paid for seed cotton was approximately 4.76 yuan/kg. Now, it is slightly over 5.00 yuan/kg.

To date, reserve procurement totals now exceed 2.5 million tons with more than 1.3 million tons coming from Xinjiang and the rest split between inland provinces. Recently, daily reserve purchases have begun to taper off as have seed cotton prices. Both 200 and 400 type merchants are beginning to withdraw from the market and some price weakness has been noted around the country. There has been continued talk over the absence of high quality grades as well as the strict requirements for tendering purchases to the state reserves. Therefore, its no surprise purchases for the reserves are coming to a halt.

Rumors continue to surround additional reserve purchases out of Xinjiang but to date no word has been forthcoming. What may likely happen is the government waits to announce additional purchases but allows the rumors to keep circulating long enough for farmers to consider the benefits of planting more cotton. Overall, the reserve procurement program has achieved its dual objectives of preserving and protecting the interests of the domestic growers.

The continuing National Cotton Market and Monitoring Services (NCMMS) weekly and bi-weekly planting intention surveys reveal what most have suspected all along—China will plant fewer acres of cotton for the 2009/2010 marketing year. Major cotton producing provinces announcing prominent reductions include Hebei (down 7%), Jiangsu (down 20 to 30%), Shandong (down 13% ), and Xinjiang (down 5.5%). The strength in seed cotton prices as noted above may switch a few acres back to cotton.

For textile mills, the steady rise in seed cotton prices has translated into higher landed the mill lint cotton prices with price gains of 300 to 400 yuan/ton (1.99 to 2.66 cents/pound) noted since early February. Improved demand for downstream products has also picked up and this has helped boost mill confidence. Another factor giving mills some optimism is the government’s consideration of increasing the current textile export rebate from 15% to 17%. Just recently Ministry of Commerce officials have stated the textile export rebate has plenty of upside potential. This is all the more welcome, considering exports for textiles and apparel in February reached 6.705 billion US dollars, a staggering 56% month on month drop as well as a 34% year on year decline. Improved market sentiment notwithstanding, mills will likely remain hand to mouth buyers, with a keen eye on timely purchases of high quality cotton and a commitment to preserving cash flow.

The ongoing dispute between the American Cotton Shippers Association (ACSA) and China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) over the required registration of all foreign cotton enterprises selling to China ended with American shippers agreeing to the terms set forth by the government bureau.

And last, come commentary on the CNCE E-Forward Market and ZCE futures markets is probably due. CNCE prices have remained strong during the entire course of the reserve’s buying program with the nearby contract, May, approximately 275 yuan/ton higher at 12,210 versus early February. ZCE futures are higher well, with May up 135 to 11,875 yuan/ton versus early February.

China Buzz

ZCE and CNCE E-Forward Market prices closed the trading week mixed. At the ZCE, contracts were down 45 to up 50 yuan/ton, equaling about .30 to .33 cents/pound. Lead contract May added 45 to finish out at 12,400 yuan/ton or about 82.29 cents/pound. CNCE prices were down 30 to up 15 yuan/ton (.20 to .10 cents/pound). Domestic lint prices remain very strong with gains of 79 to 94 yuan/ton noted in the inland provinces while in Xinjiang increases of 11 to 12 yuan/ton were recorded. Price strength is primarily a result of a dwindling supply of higher grades as well as from the government’s desire to keep farmers’ interest in planting cotton in the coming weeks, despite an industry wide belief acreage will drop at least 15 percent this year. The bulk of this decline will come from inland provinces, including Henan, Hebei, Jiangsu and Shandong.

Mills have been complaining over the shortage of high grades as well as over the government’s current refusal to release additional import quota. Some mills believe once acreage reductions are known the government will release additional quota on the market in order to help ease prices. Your more vertical mills are keeping 15 to 20 days of cotton on hand while making sure downstream sales are constant. Mills focused on spinning and cloth production remain in serious trouble with little room to maneuver for cotton purchases amid very weak yarn off take.

The yuan is stronger against the dollar this morning, rising .0337% to 6.8354.