China: June Cotton Update

It is well known the Chinese government wears two hats when it comes to the greater textile industry in China. By harvest, they will be deeply concerned over prices farmers receive for their seed cotton. This usually lasts up until the end of the year and sometimes into January; depending on how short of cash farmers are before the Lunar New Year holiday. However, once the holiday is concluded the government is continually taking the temperature of the textile industry. This year, the textile industry had been seriously complaining about a lack of quality supply even after the reserves release started in late May. In fact, the industry voiced its displeasure by a lack of support for the 2008/09 grades. Therefore, June began with the China National Cotton Reserves (CNCRC) announcing a heavier release of stocks from the 2008/09 season. The reason why was simple: textile mills were not getting enough of the higher grades needed to fill export orders. We pointed this out in May’s recap as well as on my blog in several posts. Still, as June crept by it was obvious the textile mills were gaining the upper hand and supply concerns were warranted. Therefore, the rumors currently hitting the market of an additional 400,000 to 500,000 TRQ quota with a 1% processing tax to be forthcoming should really come as no surprise. Actually, it’s not officially announced yet but we all know China operates on the release of information; pays attention to the feedback; makes adjustments; and then announces the official policy. I see no difference here.