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.