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.