Middle Kingdom Agriculture

Slow Start & High Prices Mark Start of Cotton Reserve Auction

2010-08-14T12:07:00.000-05:00

Excellent cotton commentary on the ongoing China Cotton Reserves auction from the Globecot News Network:

A tepid response from mills toward bidding in China’s cotton reserve auctions remains the consensus view from the market, resulting in a declining average price this week. Over the first four days of the auction, hardly 59,623 metric tons, or 7.4% of the 600,000 metric tons allocated for bidding has been sold, at an average price of 18,186 yuan per ton. The commencement of the auction process is prompting some skittish merchants to lower spot prices in order to avoid the risk of paying storage costs, but few mills seem active buyers at present. The short supply of high grades is causing some mills to focus attention on the reserve auction, but few are active buyers, at least yet.

If daily auction volume continues to average roughly 15,000 tons, the 600,000-ton reserve will conclude in roughly forty trading days, near mid-October. By that time, new-crop supplies will begin to trickle into the market. While we acknowledge the auction is young, we remain intrigued at the lack of co-movement between average auction prices and ZCE futures, as the graph below demonstrates.

FCStone's Weekly Commodity Update, ( July 26th, 2010)

2010-08-03T09:05:00.000-05:00

Download FCStone's weekly commodity analsyis for the week of July 26th. Click the following linkhttp://www.intlassets.com/commodities/fibers/Documents/Weekly%20Commodity%20Recap%20-%20Full.pdf :

More Ink for China's Cotton Market

2010-04-21T13:52:00.000-05:00

China

’s need for cotton is getting a tremendous amount of ink recently. Once it makes the front page of the WSJ or FT, you know it’s not a secret anymore. However, one of the biggest discrepancies in the information offered is the amount of imports China is expected to swallow in the 2009/2010 season. The USDA and the ICAC have projected total imports for China to be just over 2 mmt, whereas the National Cotton Market and Monitoring System (NCMMS), a subsidiary of the China National Cotton Information Center (CNCIC) as well as the China National Cotton Reserves Corporation (CNCRC), has estimated imports to be around 2.83 mmt.

This discrepancy deserves special mention due to the status of the NCMMS. The NCMMS is an information monitoring, publishing and early warning system approved by the government. This means the NCMMS is a recognized on-the-ground body assigned the task of determining intended cotton acreage, planted cotton acreage, harvested cotton acreage and total cotton output. While other government bodies offer their respective estimates and the market trades the sum, the smart money is following the NCMMS. They have 10 regional offices located in the cotton producing and consuming provinces. In addition, they have more than 200 monitoring stations in the same provinces observing the cotton crop and working directly with textile mills. Hence, they are well positioned to know exactly what’s going on in the greater cotton market in China. More importantly, the government listens to what they have to say and I would suspect makes some key decisions (perhaps the amount of import quota to be released) based on their information.

As a result of the above, I am keen to see what type of adjustment, if any, may be forthcoming in the USDA’s May WASDE report.

India Bans Cotton Exports; China's Textile Mills in a Pinch

2010-04-20T06:18:00.000-05:00

Breaking news from the Globecot News Network.....

In a surprise move Monday, India, the world’s second-largest exporter of cotton, announced the suspension of new registrations of cotton exports effective from April 19th 2010 until further notice. The announcement from the Office of the Textile Commissioner here impacts new registrations of raw cotton, cotton waste, and combed or carded cotton. The ministry indicated it took this action in response to the steep increase in local cotton prices, which comes on the heels of an announcement just last week of a new 3% tax on raw cotton and cotton waste exports. Ironically, while this action may ease supply constraints in India, it is likely to exacerbate the situation for foreign buyers, particularly in China and Pakistan. In turn, by effectively removing a sizable portion of exportable supplies from the world balance sheet, this is likely to boost world price as importers and exporters alike scramble to shift fiber sourcing in response to this news.

While the Office of the Textile Commissioner did not determine the exact volume of cotton likely to be affected by this suspension in new registrations, the tally originally due for shipment just in the remaining months of this marketing year is likely to be sizable. So far this marketing year, an estimated 4.4 million 480-lb bales of Indian cotton have already been shipped through the end of March. With the latest USDA forecast anticipating exports were to have reached 6.1 million bales, this implies that roughly 1.6 million bales—minus bales already registered or shipped in the first three weeks of April—now may not be shipped this marketing year. On balance, we gauge the bales likely to be subject to this suspension in the remaining three months of the marketing year at roughly one million bales.

The impact of this suspension is likely to be felt in several key importing markets across Asia. To begin with, assuming this estimate of one million bales is accurate, this will effectively remove roughly one in eight bales from global exportable supplies in the next three months. In particular, over the October – March time period, China alone imported 2.3 million bales from India, accounting for roughly 56% of season-to-date exports of Indian cotton. What’s more, India’s ten largest export markets are all net importers of cotton, meaning that with this major supplier curtailing shipments in coming months, these buyers will have to turn elsewhere to meet their import needs. At this late point in the marketing year, much of that exportable supply is likely to come from the U.S., dramatically dwindling U.S. exportable supplies and presumably driving price higher.

While we caution against drawing premature conclusions from India’s announcement, the impact of such a suspension certainly could be far-reaching and could drive global cotton prices higher. We will continue to monitor this breaking issue as new issues develop.

Thoughts on China in the Year of the Tiger

2010-02-04T14:34:00.005-06:00

A majority of the world’s calendar year is well underway. However, roughly one fourth of this world’s year is about to close and a new one is set to begin. Of course, I’m referring to China and the coming Spring Holiday, which will usher out the Year of the Ox and bring in the Year of the Tiger. Since this blog focuses on issues dealing with China’s agriculture sector, I thought it appropriate to write the first blog on the eve of the Spring Holiday.

Here are some items of interest I’ll be watching in the Year of the Tiger:
Without a doubt, the single most concern of the Chinese government is the growing income/standard of living gap between its urban and rural residents. Enter the new circular emphasizing China’s commitment to improving and boosting rural development jointly issued by the Central Committee of the Communist Party and the State Council.

Specifically, the document declared a need for maintaining grain production and helping farmers continue raising their incomes. At the same time, it called for additional subsidies to increase the output of grain, barley, potatoes and peanuts. It even mentioned additional subsidies for agricultural machinery.

Buried within the bowels of the circular were words about strengthening the financial services to the rural sector by offering micro-credit loans and insurance. Likewise, it mentioned additional banking services to the rural areas.

I particularly noticed the commitment and perhaps because it was so boldly stated for the government to continue purchasing and stockpiling key commodities, such as corn, soybeans and rapeseed.

How I translate the above is fairly simple and straightforward. The Chinese government plans to do whatever necessary to not only stabilize its vast rural populace but will do so entirely at the expense of anyone or anything that gets in its way.

For example, while the reserve policy worked remarkably well this year, its distortion created variances either by production imbalances or price run ups/downs, which we must agree will be commonplace as long as the reserve's policy is in place. But, truthfully, this should really come as no surprise especially if you read this blog. With the commodity price run up in 2008 and the subsequent inflation, China’s government made a decision to maintain a stable food policy at all costs. Since then, they have been remarkably consistent and true to this policy. I expect more of the same in the Year of the Tiger.

Cotton Demand Set to Rebound in 2010

2010-01-10T11:07:00.004-06:00

Excellent article on global cotton demand rebounding in 2010. The article was prepared and written by FCStone Fibers and Textiles Chief Economist, Gary Raines.
http://www.intlassets.com/commodities/fibers/Documents/CNCotton%20Yearbook%20article%202.pdf

Could Global Cotton Prices Move Higher in 2010?

2010-01-05T06:10:00.003-06:00

Below is the link to FCStone Fibers and Textiles Chief Economist, Gary Raines, take on global cotton prices in 2010. Enjoy!
http://www.intlassets.com/commodities/fibers/Documents/CNCotton%20Yearbook%20article%201.pdf

Part 1: ICE & ZCE Could Strengthen in LH of 2009/10

2010-01-02T08:17:00.003-06:00

Excellent cotton futures price commentary from my colleague and FCStone Fibers/Textiles Chief Economist, Gary Raines....

A Global Price Outlook for 2010
By Gary A. Raines, Vice President, Economics & Analysis, FCStone Fibers & Textiles

After the unprecedented spike in global cotton prices witnessed in 2008 and the resultant shockwaves felt thereafter across the global cotton market, prices in 2009 returned to levels more in line with traditional influences. These drivers include factors internal and external to the cotton market, and show strong correlations to futures prices. Looking ahead to 2010, these signals suggest cotton prices are likely to remain firm, above their long-term average level, as the global economy re-accelerates from a tumultuous 2008, driving renewed growth aggregate demand for cotton textiles and apparel.

Perhaps one of the most influential drivers on global and U.S. cotton prices is fundamental analysis. The study of the ebb, flow and interaction of supply and demand yields insight into current price levels and can hint at the future direction of price. A measure of this interaction, the stocks-to-use ratio, is often strongly correlated with price. More specifically, the tighter or looser the ratio between anticipated ending stocks and expected demand changes, the higher or lower we can expect price to trend. This relationship is evident in the graph below, showing that in recent months, the forecasted stocks-to-use ratio for the U.S. cotton market has fallen, or tightened. As this has occurred, the monthly average futures price has risen in tandem, breaching 70 cents per pound over the first few days in December.

Analysis of the stocks-to-use ratio can yield important clues to the future direction of price. For example, the USDA’s November forecasted stocks-to-use ratio for the 2009/10 marketing year is 35.2%, the smallest ratio in fourteen months. Not coincidentally, November’s average prices for nearby cotton on ICE Futures U.S. were 68.73 cents per pound, the highest in fifteen months. Reports of likely changes in supply and demand can cause this anticipated ratio to rise or fall, in turn driving price lower or higher in tandem.

Looking ahead to 2010, we expect the U.S. stocks-to-use ratio to tighten further in coming months, suggesting price could strengthen even further. We base our forecast on prospects that the U.S. harvest size may be smaller than currently projected, and on the belief that U.S. exports may outpace the current target in the remaining months of this marketing year. Certainly, this bullish outlook is tempered by the notion that prices already outpace the level suggested by this historic relationship. This implies that any continued appreciation in futures prices may not be commensurate with continued declines in the stocks-to-use ratio. Regardless, we look for the market to remain firm well through winter, perhaps until attention turns to the outlook for higher cotton plantings again in the spring.

Looking more broadly across the U.S. economy, factors external to the cotton market are also having a strong influence over cotton prices. First, the weaker U.S. dollar is boosting the outlook for a host of exportable commodities, including cotton. Both the dollar and cotton prices moved in lock-step over the last two years and presently stand near levels not seen in sixteen months. The outlook for the dollar in 2010 is dependent upon myriad factors both in the U.S. and abroad, including the outlook for interest rates, capital markets, inflation, government policies, and other economic indicators. While it remains impossible to accurately forecast the value of the dollar, we, along with many other market observers, remain pessimistic on the prospects for the greenback, helping support the outlook for a range of commodity prices, including cotton.

China; Cotton Plantings for 2010/2011 Estimated Slightly Higher

2009-12-14T08:13:00.002-06:00

Excellent article by my colleague and FCStone Fibers and Textiles' Chief Economist, Gary Raines

According to the latest planting intentions survey from China’s National Cotton Market Monitoring System (NCMMS), Chinese cotton farmers are likely to sow an additional 2.6% more land to cotton next spring than was planted this year. The NCMMS survey suggests acreage changes will vary substantially from one province to another, with some regions seeing double-digit declines, while others may increase at a double-digit rate. Plantings in North China, or the Yellow River area, are forecast at 31.6 million mu (5.2 million acres), down -3.0% from this past spring. The area around Shandong area is likely to increase 1.1%, while producers in the provinces of Henan, Hebei, Shanxi and Shaanxi reported anticipated declines of -5.6%, -6.3%, -11.4% and -19.9%, respectively.

Closer to the coast, cotton plantings in East China, or the Yangtze River Valley are projected to uniformly rise across each province in the region. At 21.7 million mu (3.6 million acres), total areas sown to cotton is projected to be up 6.5% from 2009. Acreage in Jiangsu, Hunan, Hubei, Anhui and Jiangxi is set to increase 11.7%, 9.5%, 7.3%, 1.5% and 3.1% respectively. Producers in these provinces cited a number of factors behind their pending switch away from cotton. In particular, farmers complained about 1) lower returns on cotton due to unfavorable weather impacting yield and a fast cotton delivery from growers to merchants before cotton rally; 2) lower returns compared to other crops, and 3) changing planting methods after a few years of crop losses, especially in Henan, that resulted in lower profitability.

The cotton area in the Northwest is forecast at 26.4 million mu (4.3 million mu), up 6.8% from this past spring. Xinjiang area will surge 7.1% and Gansu will see a modest increase of less than 0.1%. Producers said the increased planting intention in some provinces primarily is due to steadily higher seed cotton prices and a difficult season producing competitive crops.

Globecot Cotton Market Commentary for Week Ending 11/12

2009-12-12T10:15:00.000-06:00

Globecot On The Market
11 December 2009 22:44 GMT

The US is becoming a bit more competitive; however, it is still not the growth of choice for buyers in the Far East. There was some light business done last night into Indonesia and Taiwan, but once again, nothing in volume. Despite the recent lack of sales though, merchants are becoming more and more bullish. One merchant stated this morning inquiry and chatter were increasing, and several merchants seem to believe that if there is a price dip, mills will come rushing to the table.

Funds maintain the bullish story line, but they are much less active. Whether it’s because they are waiting for price to move beyond its recent range, or they are taking money off the table prior to the year end, the CFTC shows hedge funds as adding only 518 contracts to their net long position now at 43,556. Index funds were sellers for the week ending December 8, decreasing their net long position by 1,516 contracts to 79,691.

After first walking into the door this morning, the market was stronger; but after retail sales were released, the dollar strengthened and cotton weakened. Retail sales were up 1.3% for the month of November, which was higher than the estimated 0.7%. When one discounts automobiles, gasoline and building materials, core retail sales rose by 0.6%. A further breakdown of the retail sales components shows a 0.7% decline in clothing and accessories. Overall though, the equity markets viewed retail sales as a positive number; and in a change from recent trading behavior, stocks rose as did the dollar. The Dow managed to close at 10,471, up about 65 points. The Dollar Index gained 0.54, to close at 76.585, or up about 0.71%.

Given the dollar’s strength, it was actually remarkable that cotton managed to post a close in the green, much less be up 59 points on the day. Volume continues to be very light with less than 9,000 contracts trading, and of those, 58% were related to spread activity.

After the ACSA announcement regarding the expected release of import quotas, the Chinese markets have been generally weaker. This morning, though, prices stabilized. The ZCE futures rallied, but ended up settling about 100 yuan/ton lower than the highs of the day. The most active contract, May, finished 40 yuan/ton higher at 15,805. Session volume for all contracts was 311,870 contracts. Open interest increased 15,428 contracts to 245,096. The CNCE forward market saw its most active contract, March, close 44 yuan/ton higher at 15,530. Session volume totaled 8,680 tons and open interest now stands at 91,600. Import prices fell .40-1.00 cents/lb. The reserve auction offered and sold 20,096 metric tons of cotton at an average T328 price of 15,068 yuan/ton. In this latest round of reserve auction, there have been a total of 299,065 metric tons. According to China Customs, cotton imports reached 112,900 metric tons in November, down 5,700 tons (5.1%) from October. In other news, China's industrial production grew by 19.2%, which was more than the estimated 18.2%.

We won’t rule out that a dip may occur, but sentiment is increasingly bullish from the trade and the speculators. With the holidays approaching, the cotton trade may well continue to have light volume and remain sideways until after the New Year.

Technical Commentary

It was in an inside day, so although the close was indeed higher, the trading action remains well entrenched in a consolidation pattern. We continue to find support at 73.06, 72.80, 71.73 (lower Bollinger Band), and 70.99. We continue to find resistance at 75.09, 75.74, and 75.85 (upper Bollinger Band).

By Candice Graham

FCStone Crop Survey

2009-11-05T09:43:00.002-06:00

Here is the latest crop survey from FCStone. Click on the following link to download it.
http://www.fcstone.com//UserFiles/File/NOV2009.pdf

Weekly Commodity Update

2009-11-03T16:10:00.001-06:00

The below URL is a weekly commodity update courtesy of my colleagues at FCStone. It's a good read and provides a quick recap on the week that was. Download the file at:
http://www.fcstone.com//UserFiles/File/ComRecap11022009.pdf

China's Soybean Dilemma....Continues...

2009-10-28T14:46:00.006-05:00

Earlier this week, I was asked if China’s restriction of canola imports for phytosanitary reasons could ever be reason enough to do the same to soybean imports. Just today newswires reported China’s imported soybean stocks are running dangerously low despite the oncoming of harvest in the northeast part of the country. This is exactly why China could never restrict soybean imports into the country—at least for any length of time. Even for political reasons it would be tantamount to suicide. Why? As I have long argued in this blog, while China is loathe being at the mercy of foreigners for anything other than FDI, soybeans (and palm oil) are two agricultural commodities that will always need to be imported. Palm oil plantations aren’t even planted in the country (maybe a bit in Hainan but that’s their version of Hawaii). For soybeans, what’s grown in the north simply isn’t enough and moving them elsewhere in the country is a logistical nightmare. Further, while the protein level is good, the oil content isn’t. And while roughly 2 mmt of soybeans are sitting in the state reserves, don’t bet on any major crushers seriously wanting to purchase these beans. They are bound and determined for crushers located in the northeast. Foreign crushers along the coast and in the major transportation areas don’t want them. Even now, as a colleague of mine laid out several months ago, the 15 mmt of domestic soybeans grown in NE China are a huge political liability. Better to get these in the hands of locally owned and operated crushers and ultimately solve the problem of offering a solution to NE China soybean farmers. In China, keeping the farmers happy and operating is never far from the government’s state of mind when solving most all agricultural issues.

Weekly Commodity Update

2009-09-29T10:46:00.000-05:00

The below URL is a weekly commodity update courtesy of my colleagues at FCStone. It's a good read and provides a quick recap on the week that was. Download the file at: http://www.fcstone.com//UserFiles/File/weeklycommodityrecap.pdf

Weekly Commodity Update

2009-09-22T12:33:00.002-05:00

The below URL is a weekly commodity update courtesy of my colleagues at FCStone. It's a good read and provides a quick recap on the week that was. http://globecotnews.com/files/globecotnews.com/20090922commodityrecap.pdf

A Creative Solution for China's Soybean Problem

2009-09-16T05:10:00.002-05:00

First, let’s remember China (most nations actually) has an obsession with grain production and self-reliance on food production. And, it loathes the fact the nation must import 35 to 40 million tons of beans every year. Worse, it knows this number will continue rising each and every year. Still, there are millions of soybean farmers producing an estimated 15 mmt each and every year to contend with. So, what to do with those beans? From my last trip, it seems China’s government may be moving to a situation where that entire lot is first purchased by the reserves every year and then crushed by one state owned company sensibly located somewhere in the northeast.

When the theory was first explained to me, I had a million questions but the more I put I arms around it the more I began to understand. Getting the 15 mmt in the hands of one company will for the moment help the government first solve the issue of the soybean farmers and their annual production. Second, if nothing else China’s government is incredibly creative and will devise a scheme whereby the crushers in the northeast will be consolidated into one massive unit and remain state owned. Further, they eventually may allow this theoretical unit to increase capacity over time and include foreign soybeans. Remember, too, that currently foreign crushers are at least on paper not allowed to increase crushing capacity. What’s worrying about this is almost overnight a major crushing entity emerges with unrestricted access to a very large amount of soybeans.

Again, this is mere conjecture at the moment but what is not is the government’s sincere desire to maintain price control for farmers as well maintain strong role in the very important soybean crushing arena.

Weekly Commodity Update

2009-08-25T16:37:00.003-05:00

The following URL, http://globecotnews.com/system/files/pdf/20090825report.pdf, is a weekly commodity update courtesy of my colleagues at FCStone. It's a good read and provides a quick recap on the week that was.

China Textile Industry Poised for a Rebound????

2009-08-21T14:22:00.002-05:00

I found the below article courtesy of our friends at the China National Textile and Apparel Council. It’s not often that you find any article offering reasons why the greater Chinese textile industry is on the rebound. Buried within this article, however, are the reasons why the Chinese textile industry will not only survive but thrive. Compared to other countries that have lost their textile industry, China is taking the steps now to avoid a complete evaporation. Urging consolidation across the supply chain and at times coercing smaller players to either get bigger or to leave the industry altogether has been part of the government’s plan from day one. The world economic crisis notwithstanding really hasn’t derailed their over arching goal: that is, a smaller, leaner and meaner textile industry. There needs to be some polish on the article but I do think it is a worthwhile read. You download the original at http://english.ctei.gov.cn/Headlines/192171.htm.

Domestic textile industry sees rebound in Q2
DATE: 2009-08-18

By Bao Yuanyuan
China economic prosperity index report in textile industry shows that since the second quarter of 2009, part operation indexes in textile industry have changed towards active orientation, among which, the prosperity indexes in both textile enterprises and chemical fiber enterprises have recovered obviously, the prosperity index in garment manufacture enterprises has also rallied again; both the sales index and investment index in the above-mentioned three fields have presented the warm-up trend. The related information released by China Textile Industry Association also evidences that the industrial production growth has upswung compared with that in the first quarter and the operation quality has been improved; at the same time, among the 173 enterprises followed and surveyed by the association, 87 percent of which are expected to hold equal amounts or more product orders (including both domestic and overseas sales) compared with the early 2009.
Industrial operation have changed towards active orientation
On the "China-Jintan Forum on Garment Export 2009" held on 26 July, the participating experts and enterprise representatives believed that benefited from the central government's multiple policies on answering the international financial crisis and the specified measures on promoting the development in textile industry, since the second quarter, many indexes in the industry have recovered, and the overall textile industry has presented a trace that the industry has steadied and recovered.

A series of policies and measures issued by the government and the gradual put-into-place of the plan on adjusting and revitalizing textile industry is one of the main reasons for the overall warm-up of the industry in the second quarter. Wang Tiankai, Deputy Chairman of China Textile Industry Association, told the reporter in the interview that, "Benefited from the central government's decisions and deployment on answering the international financial crisis, domestic demand keeps rallying. Meanwhile, the active effect on adjusting the export rebate rate for textile garments is also taking on gradually."

"Enterprises' favorable development in the first half of this year is indispensable to the key word "support". Xu Weimin, a principle of Jiangsu Dongdu Textile Group, told the reporter that a portfolio of favorable industrial policies represented by the plan on adjusting and revitalizing textile industry had embodied the government's great attention to textile industry. Policy support is a significant reason why enterprises could keep steady and step up under the unfavorable effect of the international financial crisis. Meanwhile, what needs to be done on adjusting enterprises' production and operation strategy in the next step is to leverage related policies properly and adequately.

Textile industry plays an active role in adjusting structure and promoting transformation and upgrade, which has also boost the development of the industry. As an industry with more proportion on export, the textile and clothing industry has been impacted severely in the international financial crisis. Facing the unfavorable situations, the enterprises actively transform the train of thought from the earlier passive adjustment to the present active transformation, whose sense of seizing opportunities to advance the development has been boosted obviously. Many enterprises have completed the transformations from single OEM and garment production to independent brand establishment and a series of functional garment development, what's more, they have benefited from the market. In the first half of 2009, both the production value and profit have been increased in some textile enterprises represented by Jiangsu Boshiman Garments Co., Ltd and Chenfeng Group Co. Ltd.

China economic prosperity index report in textile industry showed that compared with the same quarter of last year, the total export volume in textile and garment manufacture industries slipped in the second quarter of 2009, but the decrease range has been narrowed; the total export volume in chemical fiber industry has begun to recover. The data from China Textile Industry Association showed that although the overall situation in overseas demand market is still not so plummy, the global proportion of China's textile industry has recovered based on stable groundwork. "Currently, the reason why our order target can be achieved basically is that we have noticed the development potential in U.S.'s middle and low-grade product markets in time and made corresponding operation adjustment." Zhu Yinmei, Production Manager of Changzhou Into Industry Clothing Co., Ltd, told the reporter. Sun Huaibin, Director of China Textile Economy Research Center, believes that to adjust production strategy promptly according to market demand is a major experience of those successful garment export enterprises represented by Changzhou Into Industry Clothing Co., Ltd.

To improve operation quality further

For the moment, textile industry is in the key stage of steady recovery. Wang Tiankai, Deputy Chairman of China Textile Industry Association, expressed that as the recovery basis in textile industry has not been stable or balanced yet, the industrial development will still face new challenges, and how to expand the domestic market demand in textile garment industry and boost the industrial adjustment and upgrade further is an important task for textile industry's development in the second half of 2009.

Firstly, the textile garment industry shall be attached great importance to marketable products. "To solve the problem of weak domestic demand, it seems particularly important to develop marketable products." Wang Tiankai hopes that textile industry continues studying domestic consumers' demand earnestly and develops real marketable products; product price shall also adapt to domestic demand on consumption, only such products with quality and price advantages can stand firm in the domestic market.

Secondly, industrial inter-area adjustment shall be strengthened and industrial connection and transformation shall be conducted in good time. Wang Tiankai believes that the combination of the resource advantage in mid-western China and the technical advantage in China's eastern littorals will be propitious to enhance industrial competitiveness and boost the further development of the industry. Thirdly, textile enterprises shall continue making great efforts to improve both the contribution rate of science and technology and the contribution rate of brand. "Anyway, enterprises shall only drill internal work and strengthen management, can they withstand the testing of market competition." Wang Tiankai also believes that when the industry indicates the recovery, it is more necessary that enterprises seize opportunities actively, expedite technical innovation and enhance brand value to lay a solid foundation for the development in future.

Additionally, enterprises shall take multiple measures to enhance comprehensive quality and make new progress in terms of product quality, management, rapid reaction and social responsibility construction.
As understood, China Textile Industry Association is compiling related guidance about the programming on adjusting and revitalizing the textile industry, where the specified measures will be proposed in allusion to structural adjustment and industrial upgrade in the whole industry, and the insider experiences on key technologies and innovations in both system and management shall be promoted vigorously, so as to advance the persistent recovery on the industrial production growth and improve the operation quality further.

China Cotton Production Set to Fall

2009-08-14T12:36:00.004-05:00

This past year I published an article depicting the fall of Chinese cotton now and for the foreseeable future. While the picture I painted was more or less a gradual decline, most of the reasons why are still very relevant. Here is the article again.

*****

The debate over Chinese cotton production now and for the foreseeable future is slowly becoming a moot point. Much like the US, China is moving towards a situation where cotton acreage levels will incrementally decrease until a balance is reached among competing crops, such as grains, oilseeds and vegetables.

This trend started in Xinjiang last year as the Party Secretary and Chairman of the province, Wang Lequan, questioned the role of cotton in the province’s future claiming that farmers should look to improve their income by considering alternative crops besides cotton. At the time, no one really paid too much attention to Secretary Wang but his words have certainly proven to be quite prescient, given the rampant food inflation that hit China late last year and continues today. Earlier this year at the 11th National Party Congress, Secretary Wang used the national stage to bring the debate front and center about reducing cotton acreage, admitting “any further expansion in cotton acreage would have a negative impact on the provincial agricultural sector.” In the same speech, the Secretary questioned the role of Chinese textile exports in the overall economy, stating the industry operated with low margins and was a constant source of trade friction with developed countries. Most recently, Secretary Wang has encouraged the powerful Production Construction Corps and Xinjiang farmers to consider other crops in addition to cotton. Perhaps most importantly, he is on record stating the province should maintain cotton acreage at or around 20 million mu, the equivalent of 1.33 million hectare.

It would be foolish to think party secretaries in agriculturally strategic provinces such as Henan and Shandong are not following Secretary Wang’s words and actions closely. It would be equally as foolish to think that the upper echelons of power in Beijing are thinking more about maintaining cotton acreage versus ensuring an ample supply of grain if not vegetables, oilseeds and the like. While no official—other than Secretary Wang—is on record suggesting farmers opt for other crops at the expense of cotton, government policy makes it clear that grains are the clear winner in this battle for acreage. Farmers willing to plant grain in China receive a total subsidy of 960 yuan per hectare, of which 210 yuan is a direct subsidy and the remaining 750 yuan is for agricultural inputs. Cotton, however, only receives a subsidy of just 225 yuan per hectare, which only functions to encourage farmers to use improved seed varieties. Adding to farmers’ enthusiasm for planting other crops besides cotton are the price rises for grains, rice, corn and beans, all of which are up sharply versus a year ago. Though cotton prices have remained relatively strong in China this year, they have not witnessed the kind of price increases seen in competing crops. Further, as the cost of production has increased dramatically from last year, farmers have been forced to consider these price gains in the equation. Nevertheless, the single largest obstacle facing farmers in terms of planting cotton is the dramatic labor shortage hitting the countryside. Several generations of youth have left the fields for better opportunities in urban areas and are not likely to return. As a result, this has left an acute shortage of bodies that rural farmers have yet to replace. In turn, labor costs—field hands, planting, etc—have all skyrocketed, while there are additional costs of harvesting the cotton once it is ready. Even now, the Xinjiang province is recruiting field labor for fall harvest.

Given the current reduction in cotton acreage has started in Xinjiang, the province is a good reference point to see where Chinese cotton production might be in 2008, 2009 and beyond. In 2007, Xinjiang planted 25.7 million mu of cotton (1 mu = 15 ha). According to Secretary Wang, acreage in 2008 should be closer to 20 million mu, indicating a drop of 22 percent. Using a five year historical yield average of 106.7 kilogram per mu for the province would deliver an output of 2,134,000 million metric tons—the equivalent of 9.8 million 480 pound bales. Xinjiang usually accounts for 30 to 35 percent of annual output. Knowing that steeper drops in acreage will occur in Xinjiang in 2008 we can assume that acreage for the rest of the country will be about the same. Therefore, the weighted overall drop in acreage for China will probably fall between 5 to 10 percent. By using a five year national yield average, total output would fall somewhere between 6.34 to 6.7 million tons. If using the USDA’s 7.6 million ton production estimate, this would imply a drop of 11 to 16 percent in total production from 2007. As other provinces follow Xinjiang’s lead in reducing cotton acreage for other crops, total output for cotton will be sharply affected in the coming years.

Inevitably, China has topped in cotton production and is likely heading to production levels closer to the beginning of this decade—perhaps even lower. And, while no official word has been passed it seems highly likely the country has made a major economic decision, preferring to import what they wear and planting what they need to eat.

China's Soybean Dilemma Continues

2009-08-10T13:52:00.004-05:00

It’s been very interesting to watch the multiple commodity reserve auctions in China. To date, corn, cotton, soy, sugar, rape and wheat have all either been offered via national auctions as a means of supporting or suppressing market prices. While not faulting the fundamentals behind the auctions, the disjointed effort and haphazard execution of the auctions clearly shows how the Chinese are scrambling and in most cases lack a consistent policy for commodity price support.

For example, with soybeans there have been three designated auctions with a fourth scheduled for the middle of this week. None have achieved anything close to impressive sales. About 5,000 tons in the respective auctions has been sold. Most traders and more importantly, crushers, are shying away from bidding due to the high offering price. The reluctance of the grains bureau to discount the beans on offer, despite solid feedback from the market that a high offering price wouldn’t work, illustrates the complexity from which the government is operating. On one hand, they would clearly like to see market prices ease whereby northeastern crushers could finally start crushing again. For the coastal and centrally located crushers northeast beans are of no consequence. They crush imports as I have mentioned often in this blog. Still, these same crushers at the right price would go through the logistical nightmare if it were an attractive option. It’s not.

Worse, there are deep concerns the failed auctions will spread over into farmer sentiment about future soybean crops. The current crop is widely reported to be substantially lower than in year’s past and with the heavy rain mixed with cold temperatures, there are deep concerns yields will be heavily impacted. In my opinion, the auctions on the surface may be the magician’s trick, forcing us to pay attention to the success or lack thereof; while the real issue is faltering output. As with the ongoing reduction of unnecessary textile capacity in China, the government very well may be forcing the northeastern based crushers into a position they simply can’t recover from.

China Revises Cotton Reserves Sales’ Policy

2009-07-21T09:49:00.002-05:00

With the cotton auction now in motion over a couple of months and the continued higher price of cotton on the domestic market, China’s reserves has decided to make some changes with implementation. First, an additional 5,000 tons will be added to the daily offered amount. Second, warehouse space in major consumption markets will be increased. Third, middlemen traders who have been entrusted as agents for the textile mills will now not be allowed to take part in the daily reserve’s auction. And last, to increase the distribution of Xinjiang stocks, a transportation subsidy will be given to lots within the province that must be transported to the eastern based mills. The powers that be have made these changes in light of a much stronger than expected domestic market as prices have continued to move higher, despite the additional tonnage released on the market. To make matters worse, the logistical movement of cotton from warehouse storage to deficit areas has not proceeded as smoothly as the reserve would like. Further, warehouse space that was supposed to be guaranteed has, in some instances, not been there at all. The absence of the middlemen should help relieve prices a bit though it may make it more difficult for the mills that are still in precarious financial shape. As for the transportation subsidy, it is an absolute necessity to help the reserves move more cotton from the west to the eastern based mills as well as reduce the landed the mill price. We expect the reserves to act far more aggressively with the movement of cotton in China until harvest begins.

China's Textile Industry Gets Fresh Capital

2009-07-15T14:12:00.002-05:00

I read with interest the press release in my mailbox announcing a joint effort by two Chinese companies establishing a new fund aimed at investing in textile companies on the mainland. Specifically, the China Eastern Silk Market and the Suzhou International Development Group will contribute a total of 500 million yuan (US$73 million) to help the development and competitiveness of SME textile mills. According to the release the fund will seek out those SME textile mills that already shown innovation during these tough times and have the capability for growth. In three years time and of course depending on the success, the fund hopes to increase to 3 billion yuan or about US$439 million as well as make the greater Shengze area in around Suzhou a center of textile R&D, price discovery and financing.

Despite the rampant over capacity and very much down market conditions, China’s battered textile industry seems to be breathing new life. Several years into the downturn, I must admit the industry even seems to be quite optimistic on its future. In particular, the vertical textile mills are keen to take advantage of the market’s correction to make moves against weaker, less capitalized competition. Commitments like the aforementioned new textile fund are proof positive China has decided to ultimately keep textiles as a pillar industry while at the same time still forcing smaller and less focused players to leave the business. While this textile fund is primarily geared towards Jiangsu based companies, it would not be difficult to imagine other funds popping up in other top textile provinces.

The Future of High Quality and Branded Cotton?

2009-07-14T12:51:00.003-05:00

For companies thinking cotton is just cotton, the market has some surprises in store. Although the overall quality of cotton globally may be increasing, how the improvement is occurring remains surprising--long staple cotton has expanded to become the dominant type of quality cotton produced today, while at the same time these gains have translated into a decline in Pima and other extra-long staple varieties, and the traditional lower end of the market, generic upland cotton.

So what had been the middle of the market has now become more important than ever in understanding the global cotton business.
Indeed, what are the ramifications of such changes? Will cotton become cheaper or more expensive? What about supply versus demand? Will there be shortages or new market opportunities?

To help answer these and other questions, FCStone Fibers & Textiles announces a new multi-client study entitled "The Future of High Quality and Branded Cotton".

With particular focus on China, India, the U.S. and Egypt, this study will examine global supply and demand trends for the major varieties of cotton, the attitudes of buyers and sellers of cotton internationally and the implications these trends and attitudes will have on merchants, mills, and retailers throughout the entire textile supply chain.

FCStone Fibers & Textiles proposes to undertake this essential strategic study for delivery to subscribing clients by August 31st. Please click http://www.globecot.com/20090615prospectus.pdf to reserve your copy of the "The Future of High Quality and Branded Cotton". If you have any questions regarding this study, please contact Saira Farrukh (saira.farrukh@fcstone.com) or Fred Hardin (fred.hardin@fcstone.com).

China: June Cotton Update

2009-07-01T14:51:00.003-05:00

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.

2009-06-25T13:56:00.001-05:00

I am pleased to announce that FCStone Fibers & Textiles will conduct a multi-client study entitled, "The Future of High Quality and Branded Cotton."

With particular focus on China, India, the U.S. and Egypt, this study will probe into the possibility that global production of the highest quality of cotton -- extra-long staple (or ELS) -- is declining due to the expansion of long staple (or LS) cotton as the dominant type of quality cotton produced today. In so doing, the study will not only explore the rise of new, branded varieties of LS cotton that have helped to raise the overall level of cotton quality globally, but have also prompted a decline in Pima and other ELS varieties, while at the same time reducing the share of the traditional lower end of the market, generic upland cotton.

For example, in China there is a major shift away from ELS in favor of LS cotton in Xinjiang, the country's top cotton-producing province. At the same time, U.S. Pima acreage is rapidly disappearing, while Egypt has suffered a 50 percent reduction in its production of ELS cotton.

Ultimately, there will be ramifications of the rise of LS cotton for merchants, mills and retailers as the purchasing, consumption and marketing of such varieties will change how cotton is utilized throughout the entire textile supply chain.

FCStone Fibers & Textiles proposes to undertake this essential strategic study for delivery to subscribing clients by August 31st. Please click http://globecot.com/20090615prospectus.pdf to download a copy of the prospectus.

Which hat is the government wearing?

2009-06-19T13:05:00.002-05:00

There is the general consensus that in the fall the government is worried about how much the farmer receives for his seed cotton while at the turn of the new year the textile mills get their wish for additional quota allocation. The system works like clockwork—usually. This year, however, the reserves has stepped in first to take cotton off the market, thereby buffeting the farmers price he received for seed cotton. Then, as the market shortage took effect the reserves began releasing stock from the 2003/05 and 2008/09 marketing years. Due diligence was conducted but not from what the mills actually needed or for that matter wanted. Rather, it came from what was determined best for the market. In this case, the reserves wanted supply and to get rid of old stock at a likely profit. Smart move on both accounts. However, mills, particularly vertical ones and further up the value chain, remained in the same condition—short of high grades and no quota. We continually have pointed this out so the recent revelation that high grades are still in short supply and that the reserves is now likely to issue additional import quota really should come as no surprise. Current estimates being considered by the government range from 100 to 500k.

The Future of High Quality and Branded Cotton?

2009-06-16T15:25:00.004-05:00

Several blogs ago I mentioned FCStone Fibers and Textiles was preparing a multi-client study on the replacement of Extra Long Staple (ELS) cotton acreage with Long Staple (LS) cotton in China’s Xinjiang province. The blog entry drew quite a bit of commentary about including Pima as well as Egyptian. Well, we have and are proud to announce the forthcoming multi-client study, "The Future of High Quality & Branded Cotton". A copy of the prospectus can be downloaded at the following address: http://globecot.com/20090615prospectus.pdf. I’ve included the opening introduction which pretty much is the gist of the study. Should you be interested in subscribing feel free to contact me directly at jim.lambert@fcstone.com.

High quality and branded cotton acreage is on the decline around the world. In China, there is a major shift from extra long staple (ELS) to long staple (LS) cotton acreage underway in Xinjiang, the country’s top cotton production province. In the US, Pima acreage is rapidly disappearing while Egypt suffered a 50 percent reduction from the previous year’s output. Ultimately, the rise of long staple cotton is supplanting high quality and branded grades; the ramifications of which will have a huge bearing on how merchants, mills and retailers trade, purchase, consume, market and brand high quality cotton as a fiber and end product.

FCStone Fibers and Textiles (formerly Globecot) proposes to undertake a strategic study of the key countries producing long staple (LS) and extra long staple (ELS) cotton with a primary focus on China, India, the US and Egypt. Because the supplanting of high quality and branded cotton acreage with long staple cotton will have such a dramatic effect on the world’s textile industry, we will include an additional section detailing what 20 major vertical textile mills—all primary users of ELS, Pima and/or Egyptian cotton—think about how this switch will impact their business. An additional bonus to the report will include a section offering thoughts and opinions from up to ten of the top US, Asia and European retailers (and brands) currently using and promoting high quality and/or branded cotton in their final products be it apparel or home furnishings.

China Commodities Update--LH May

2009-06-06T08:26:00.001-05:00

Apologies for getting this update out later than usual. In preparation for another trip to China, which will be reflected in FH June's update. To download China Commodities Update for LH May, please click http://www.globecot.com/20090605lambert.pdf

Reserve Release....A Disappointment so Far

2009-06-04T06:42:00.003-05:00

While China has seemed to cool the cotton market with a reserve release of 1.5 million tons over the course of several months, many, myself included, are beginning to wonder just how effective the move has been. To date, volume has not even reached 50% of the the daily alottment. To remedy this, the initial reserve price of 12,900 for 2008/09 was dropped to 12,600 yuan/ton as a way to stimulate demand from lesser capitalized mills. It has certainly helped increase volume but not as much as one would expect. Likewise, the announcement that the reserve would look to add more tonnage (keeping the 1.5 million tons in tact) from the original one million tons of 2008/09 crop to help with the shortage of high grades has achieved the opposite of the intended effect. Even today, one of the biggest concerns of the market is still the tight cash market underscored by an absence of the high grades mills want. Herein lies the choice facing the reserve: continue on and hope things work out best or release a minimal amount of import quota and let the mills buy the cotton they actually want. Otherwise, we will continue to have a very lukewarm response to reserve auction.

China Commodities Update: FH May

2009-05-21T13:37:00.001-05:00

To download China Commodities Update for FH May, please click http://www.globecot.com/20090521china.pdf

China Edges Closer to Reserve Announcement

2009-05-15T16:46:00.002-05:00

It's been a whirlwind of rumors on the quota/reserve release saga the last couple of weeks, the greater part of which I observed from the hospital due to the birth of my second daughter. Hence, the lack of blags the past week or so. The latest comments we have heard have the government releasing about 800,000 tons from the state reserves--with a mixture of approximately 500k from the old crop and 300k from the 2008/09 crop---the very one they just spent time, energy and renminbi buying earlier this and last year. We are told there will be foreign growths included as well. The set price has not be settled yet, but we hearng ranges of 12,000 to 13,000 yuan/ton.

Last week, our joint venture partner in China released commercial stocks estimate of appx. 1.1 million tons, which, according to them, was less than two months of consumption. Therefore, the current release is realistically one or very close to one month's consumption. This begs the question what's next on the horizon. As we see it, the move is temporary and will certainly help. But, the problem of a tight supply remains. Further, the absence of high quality grades, though certainly helped by the inclusion of the 2008/09 crop, can not be completely solved by its release. This brings us back to the question of to include or not include quota. I still believe quota will be included--just at a later date. The government will monitor the spot prices around the country, best exhibited by the CN Cotton A/B indices which are currently quoted at 13,173 and 12,896 yuan/ton, respectively. Should the market decide the release was inadequate one would see sharp rises in both indices and in my opinion a quicker decision by the government on what to do next.

China Commodities Update--LH April

2009-05-07T14:32:00.003-05:00

To download China Commodities Update for LH April, please click http://globecot.com/20090506.pdf.

China LH April Cotton Update: Part 1

2009-05-05T08:07:00.002-05:00

Last half of April was characterized by the constant rumors of whether or not the government would either issue additional import quota or allow the state reserves to release cotton stocks on to the market. As of writing this update, no decision had been made. The most recent rumor has the government deciding to only issue quota later in the year and at near term release stocks from the 2004/05 crop year. Honestly, one could make the case for either way, depending on the viewpoint. However, as previously stated, at Globecot we think the better and more practical choice would be to issue additional import quota at a fixed rate—maybe not as low as one percent but probably about 3 to 4 percent—and conserve the reserve stocks until absolutely necessary.

The current reserve purchase scheme has driven up domestic prices with the CNCotton B Index now standing at 12,928 yuan/ton, up more than 1400 yuan (the equivalent of 9.00 cents/pound) versus a month ago. In other parts of the country, mills are paying the equivalent of 13,000 yuan/ton and higher delivered. Using the Globecot International Index price of 62.04 cents/pound CNF China ports and assuming a mill has some 1% quota in hand, the yuan equivalent price delivered to an inland textile mill is now 11,050/ton. Even using the sliding tax scale, the delivered price to an inland mill equates to 12,705 yuan/ton. Compared to the CNCotton B index, each delivered price is well below the average market price and most mills would prefer additional quota rather than playing the “quality lottery” with a release of state reserves. Despite the prevalent rumors a more likely option for the government and one we think they might eventually choose is a mixture of quota and state reserves release.

Textile Mills Are Hurting

2009-04-30T15:56:00.003-05:00

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?

2009-04-28T15:27:00.003-05:00

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

2009-04-24T09:50:00.000-05:00

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

2009-04-23T15:26:00.001-05:00

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

China's Wheat Market Consolidating

2009-04-23T14:57:00.004-05:00

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

2009-04-22T09:50:00.002-05:00

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)

2009-04-21T11:41:00.002-05:00

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

2009-04-21T09:30:00.005-05:00

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

2009-04-20T14:42:00.001-05:00

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

2009-04-20T06:12:00.001-05:00

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

2009-04-17T14:05:00.005-05:00

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

2009-04-15T11:52:00.001-05:00

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

2009-04-14T05:53:00.000-05:00

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

2009-04-12T07:07:00.002-05:00

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

2009-04-09T13:11:00.000-05:00

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

2009-04-07T05:27:00.002-05:00

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

2009-04-07T04:41:00.001-05:00

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

2009-04-07T04:35:00.000-05:00

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

2009-04-07T04:31:00.002-05:00

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

2009-04-03T06:29:00.001-05:00

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.

Thoughts for the New Trading Week

2009-03-22T19:10:00.001-05:00

Textile mills in China are switching payment terms from cash on delivery to 20 days credit. The move is a clear sign mills believe prices are topping and on their way down. Conversely, merchants are happy to hold stock knowing most mills are keeping lower inventories and must continue making purchases. Plus, merchants believe the amount of supply pushed into the reserves has created a shortage of high grade cotton. Once the stimulus package hits textiles (and it will) mills may wish they had been making steady purchases all along.
200/400 type merchants are halting seed cotton purchases over the shortage of quality product combined with the rising cost, making it unprofitable to tender.

Some rumors floating about additional Xinjiang purchases. One tends to think the government keeps this mixture stirred up intentionally just to see how the market reacts.

As farmers around the country are pondering planting decisions in the coming weeks, cotton growers in Shandong are being told planting season may be delayed by as much as a week due to a lack of precipitation. Shandong growers normally plant in mid April. Now, it appears they may be in the fields closer to the lh of the month.

Soybean crushers in the northeast and some smaller ones on the coast are taking down time until crushing margins improve. Import beans continue to trade at a premium to domestic ones, though the recent resurgence of commodities may see this spread narrow quickly.
As corn has been removed from the market via the reserve purchases, it will be interesting to watch how the logistics will sort out with the product being stored in the northeast and the primary end users are on the coast and in the south.

China Buzz

2009-03-20T05:42:00.000-05:00

Import quotes surged .50 to 1.00 cents/pound on the strength of ICE gains. Indian styles were up .75 cents/pound. Domestic lint prices were higher as well, with particular price strength noted in Shandong and Henan. Offtake was decent around the country today as well as for the entire trading week. Price strength was also found at the ZCE with increases of 55 to 85 yuan/ton as volume surged to more than 17,400 contracts. May added 80 to close at 12,090 yuan/ton. CNCE E Forward Market contracts were mixed with spot month March dropping 132 and the main month May adding 35 to finish 12,243 yuan/ton. The scheduled reserve procurement today was set at 19,700 tons. Cumulative reserve purchases for the 2008/09 marketing season are reaching 2.6 million tons with about 1.4 million tons from Xinjiang and 1.2 million tons from the inland provinces.

China’s yuan enjoyed its fourth straight day against the dollar ending the trading week up .15 percent to 6.8277.

China Buzz

2009-03-19T06:57:00.000-05:00

Derivative markets closed mixed today with ZCE trading down 10 to up 15 yuan/ton. Volume was just over 8,500 contracts. CNCE finished down 23 to up 40 yuan/ton on volume of 7,000 plus tons. In today's lint markets, gains of 13 to 14 yuan/ton were noted with inland averages. Similar grades in Xinjiang, however, were unchanged. Import quotes were lower with the US down by .75 cents/pound; Central Asian down 1.00 cents/pound; and India down 1.5 cents/pound. Offtake around the country was minimal, though with reduced supply, especially with higher grades, traders are still thinking prices will remain firm at least in the near term. Mills are on the opposite side of the trade and think prices will turn weaker. Most remain cautious about any large purchases and buying as needed remains the norm. In the current economic climate, cotton merchants are demanding cash payment, which, at the moment, is very difficult for textile mills. The scheduled reserve procurement today was for 20,000 tons, split evenly between Xinjiang and inland provinces.

The World Bank threw a wrench in China’s plan to maintain a yearly GDP of 8% by forecasting the world’s most populous country would only grow by 6.5% in 2009. However, the bank did go on to mention the country would still outgrow most other economies. If China does only hit 6.5%, it would be the slowest rate of growth since 1990.

China’s hot stock market continued its surge this year with the CSI adding 2.1 percent in today’s trading. China’s CSI has gained more than 24 percent this year. Still, it is down more than 63 percent from its peak in October of 2007.

The yuan is up against the dollar this morning and is currently quoted at 6.8285.

China Buzz

2009-03-18T06:00:00.002-05:00

There was a pervasive negative tone to China’s lint markets today. Prices remain under pressure despite minimal gains around the country, especially in Henan and Hebei. Mill sentiment has not changed nor do we expect it to do so. On the import front, prices were stable to slightly lower with Brazil and Central Asian styles declining by .50 and 1.00 cents/pound, respectively. ZCE prices were 5 to 40 yuan/ton higher, save the distant November month, which dropped 10 yuan. May added 20 to finish at 11,995 yuan/ton, the equivalent of 79.61 cents/pound. The CNCE E-Forward Market closed mixed, down 22 to up 50 yuan/ton. The May contract added 39 to end the day 12,229 yuan/ton or 81.16 cents/pound. Seed cotton prices remain under pressure as the reserve procurement program dies down. Volume, in recent days, has been reduced as today’s scheduled allotment was only 19,800 tons split just about evenly between Xinjiang and inland provinces. To date, reserve purchases total just over 2.5 million tons with 1.3 million tons from Xinjiang and roughly 1.2 million tons from inland provinces.

The yuan is trading at 6.8348 against the dollar this morning.

China Buzz

2009-03-17T06:44:00.000-05:00

The moribund ZCE came to life today, passing the 12,000 daily volume mark for only the third time in three weeks. Prices closed on the plus side too, adding 20 to 70 yuan/ton. May increased 65 to finish at 11,975 yuan/ton. At the CNCE E-Forward Market, contracts closed higher as well, up 6 to 92 yuan/ton on volume of 6,000 plus tons. Lint prices were firm again today though, to be fair, only minimal gains of 6 to 8 yuan/ton were noted around the country with particular price strength in the usual suspects of Hebei, Henan and Shandong. Import quotes were up as well, marginally increasing .25 cents/pound for most styles. Mills were in a better mood today with most curious about the rumors of China’s textile VAT export rebate being increased from the current 17 percent. To add fuel to the fire, an official from the Commerce Department has stated the current rate has upside. Translated into this morning recap means it will likely be increased in the coming days or weeks. There still remains a shortage of high quality cotton.

The scheduled reserve procurement total was 19,600 tons with 9,600 designated from Xinjiang and the rest from the inland. As of yesterday, March 16th, total 2008/09 reserve procurement has reached 2,517,850 tons, 1,360,600 tons from Xinjiang and 1,157,250 tons from inland.
The well respected NCMMS continues its interviewing key cotton districts and their planting intentions for the 2009/2010 season. The latest to show a decrease is the very important Hengshui area of the Hebei province, where cotton acreage is expected to decrease around 2.3 percent this year. Most of the interviewed growers cited lower seed cotton prices as the main reason for the decline.

The yuan is virtually unchanged against the dollar this morning at 6.8372.

China Buzz

2009-03-16T05:54:00.001-05:00

Lint prices were firmer around the country with average gains of 6 to 11 yuan/ton. Inland averages for the two primary grades, T328 and T229, are 11,519 and 11,891 yuan/ton while the same styles in Xinjiang are quoted at 11,833 and 12,167 yuan/ton. Mills remain vigilant about protecting cash flows while steadily buying hand to mouth needs. Most are feeling with the reserve procurement program winding down—this despite rumors of additional Xinjiang purchases—prices will gravitate lower. The industry seems less than excited over the government’s proposed plan to help it weather the current economic funk. ZCE futures added 5 to 130 yuan/ton as more than 8,000 contracts traded. CNCE contracts, however, felt the weight of the ending of the reserve buying and closed mixed, down 20 to up 23 yuan/ton. Volume for the day passed 7,000 tons. In today’s reserve procurement approximately 19,700 tons was scheduled to be purchased, including 9,600 tons of Xinjiang cotton and 10,100 tons of inland cotton.

According to China's Stats Bureau, cotton fabric output totaled 2.123 bil square meters in February, up 266 mil or 14.32% from a year ago and 440 mil or 26.14% higher from a month ago. Cumulative cotton fabric output for the first two months of 2009 totaled 3.806 bil square meters, down 6700 mil square meters or 1.73% year on year.

Foreign Direct Investment (FDI) flows dropped for the fifth consecutive month to 5.83 billion US dollars in February. This came on the heels of several prominent high tech US companies announcing plant closures in China. In 2008, China’s FDI increased almost 24 percent year on year to just under 93 billion US dollars.

Stock valuations in China have investors worried around the world worried that the "China Story" simply isn’t enough to prop up the global economy. Since the end of 2008, respective stock exchanges in both Shenzhen and Shanghai are up 21 percent for the current calendar year. The yuan is quoted at 6.8384 against the dollar this morning.

More Reserve Purchases Coming.....

2009-03-15T07:27:00.001-05:00

In China, rumors are still in circulation that additional Xinjiang cotton may be purchased for the state reserve. As of March 13, 1,353,400 tons of Xinjiang cotton has been purchased for the reserve out of an estimated 2008/09 crop of 2,700,000 tons. If additional purchases are announced, it will have an impact on domestic prices. 3.982 million tons of the 2008/09 crop have been HVI classed. The Fiber Inspection Bureau reports that it has classed 17,092,506 227-kilogram bales of cotton, of which approximately 17% classed Grade 2 (strict middling) and 59.65% Grade 3 (middling). The crop was also long staple, with over 82.5% of all cotton classed at 1-1/8" and longer. An additional 29,600 tons were purchased for the state reserve today.

The AQSIQ reports that a total of 104 firms listed have currently registered to export cotton to China. The regional Xinghua office of the NCMMS in Jiangsu Province just completed its planting intention survey for 2009 crops, with results indicating an anticipated 28.6% reduction in the level of cotton acreage.

China Buzz

2009-03-13T06:16:00.000-05:00

Import prices surged higher again following a strong U.S. equity and commodity complex. U.S. advanced 0.75-1.25 cent. West African surged 1 cent and Central Asian styles rose 0.75 cent. U.S. cotton continued to enjoy steady demand these days. News reports said ASCA has reconciled with AQSIQ on the issue of import registration. This will serve to help cotton import in the future. World cotton price is likely to move further higher without additional negative economic news.

ZCE cotton futures continued to rebound with shrinking volume that began this week. Despite this, further advance remain difficult considering the price difference between markets. The ICE/ZCE and CNCE/ZCE spread is expanding. USDA forecast was a confirmation of lower cotton consumption and implies further cuts in the months to come. At the same time, China’s cotton import remain slow and the speculative funds remain on sidelines. As of March 12, cumulative Xinjiang reserve procurement totaled 1.34 mil tons. Assuming an output of 2.7 mil tons, the current procurement is around 50% of the expected production. The other half must be sold via normal marketing channels. However, rumors arose again regarding additional purchase of 2009 crop, with a preference of Xinjiang cotton. This may has some effect on the market. Cumulative HVI classing now totaled 3.99 mil tons. When current reserve purchase finishes, there’ll be no more than 1.27 mil tons of HVI classified cotton. For longer term, cotton planting and demand changes could be a factor. But in short term, the firm physical price may keep ZCE price relatively strong. However, potential government policy may alter the supply situation and direct the price movement.

Declining resource is making seed cotton procurement more difficult and resulted in a steadily higher procurement cost. Cotton enterprises are showing less enthusiasm. In physical market, while cotton price stay firm, turnover has gradually declined and appear flat at the moment. Resources indicated that mills purchase is declining and a growing hesitation is noted due to 1) less quality cotton and 2) potential lower price after reserve procurement. This assumption allowed mills to purchase hand-to-mouth. Despite this, CNCotton A and CNCotton B continued to press higher on March 13.

China Buzz

2009-03-12T05:50:00.000-05:00

Lint markets were subdued over most of the country today with moderate price gains. Particular strength was noted in Hebei, Hubei and Shanxi provinces. Mills are breathing a sigh of relief as the standoff between ACSA and AQSIQ has come to an end with most US exporters of cotton now preparing (or already done so) to register per the government’s requirement. Mills remain committed to buying for immediate use rather than any building of stocks. Preserving cash flow and the 1 percent quota are top concerns. Still, most mills recognize the underlying price strength and are feeling prices may move slightly higher. Sourcing of high grades remains a problem in China. Rumors of additional reserve purchases coming from Xinjiang helped underscore the mills’ overall feeling of higher price moves. Derivative markets were slightly higher though for the most part not a factor at all today. ZCE futures recorded their lowest volume in two years. Traders expect ZCE futures to remain stagnant for the foreseeable future. Reserve procurement for March 12th totaled 28,600 tons, including 10,000 tons of Xinjiang cotton and 18,600 tons of inland cotton. As of March 12th cumulative 2008/09 reserve procurement reached 2,500,550 tons, 1,343,400 tons from Xinjiang and 1,136,750 tons from inland.

Government officials are worried agricultural incomes in the current environment could dip. The concern over the stability of the countryside is always a major concern. One official summed up the government’s sentiment by stating, ""The disparity between the urban and rural population is widening. The high number of unemployed will brew into a social problem and affect social stability." This past year, rural incomes enjoyed a gain of 292 US dollars or 2,000 yuan, the largest gain in more than five years. Average income of the nation’s farmers is about 5,000 yuan/year. Expect the government to be very committed to maintain rural incomes and prevent them from sliding, despite the current economic environment.

The yuan is slightly higher against the dollar this morning while currently at 6.8388.

China: Cotton Imports Extend Declines Again in February as AQSIQ and ACSA Talk

2009-03-11T21:40:00.000-05:00

Chinese textile mills pared back purchases of foreign cotton further in February, dashing any lingering hopes of a robust year of trade for the world’s largest cotton importer. Shipments in this latest month fell -41.2% from a year earlier to 93,000 metric tons (427,149 480-lb bales), the weakest February in four years. This also marks the ninth straight month of year-over-year declines in imports, and the seventh straight double-digit loss.

Given February’s disappointing volume, cumulative imports through the first seven months of the year stand at just 827,654 tons (3.8 million bales), down -39.6% from a year ago. This pace is tracking closely to the trend necessary to reach the latest March forecast from the USDA, pegged at just 7.0 million bales, down -39.3% from 2007/08. If realized, this could be the lowest level of imports in four years.

Separately, sources indicate that several U.S. merchants are preparing to register as per the new mandates from China’s AQSIQ. Doing so will add considerable volume to the burgeoning list of foreign cotton shippers approved by AQSIQ to ship cotton to China. Meanwhile, discussions between the American Cotton Shippers Association (ACSA) and AQSIQ are likely to accelerate next week when a U.S. delegation is expected to arrive in China. At the same time, the U.S. and Australia are said to be considering options in filing a complaint regarding China’s cotton trade-distorting policies at the WTO. Coupled with the heightened tensions from the maritime encounters off the coast of Hainan Island earlier this week, the Spring promises to be a contentious period for U.S./Chinese trade relations, and for cotton in particular.

China Buzz

2009-03-11T07:01:00.000-05:00

Lint markets were stable to slightly higher with noted price strength in Zhejiang, Hubei, Hunan and Shanxi provinces. Currently inland averages for T328 and T229 are 11,488 and 11,867 yuan/ton. In Xinjiang, the same grades are priced at 11,830 and 12,159 yuan/ton. Import prices enjoyed gains today as well, with US styles advancing .75 to 1.25 cents/pound while Indian quotes were up .75 cents/pound. Derivative markets continue to be a non-factor though prices did rise at both the CNCE and ZCE today. The biggest factor for the lint markets today was the apparent break through between US cotton shippers and the AQSIQ.

The feeling from the textile mills is that they are firmly committed to buying hand to mouth and preserving cash flow, if not the 1 percent quota. Additionally, mills received a jolt of bad news with customs acknowledgement that February’s textile and apparel export numbers plunged 35 percent and 36 percent, respectively. Collectively, however, there was a massive drop of 56 percent in the total export value year on year. In February, Chinese textile mills exported 6.7 billion US dollars worth of textiles and apparel. For the current Chinese marketing year, September to February’s cumulative textile and apparel figures now total 88 billion US dollars, up ever so slightly, about .42 percent, versus the same time period a year ago.

Other relevant numbers published had total cotton imports in February at 93,000 tons, a rise of 15,000 tons from January but still a dismal 41 percent lower versus a year ago. Through February, cumulative cotton imports for the marketing year total 641,000 tons, down 471,000 tons or 42.4% year on year. Yarn production for February was up 263,00 tons from year ago, totaling 1.504 million tons for the month. For the calendar year 2009, total yarn production has reached 2.868 million tons, up almost 6 percent year on year.

The reserve purchasing program has begun to wind down and decreasing volumes have been noted all week. Today’s reserve procurement totaled 24,600 tons, including 10,000 tons of Xinjiang cotton and 14,600 tons of inland cotton. As of March 10th, cumulative 2008/09 reserve procurement has reached 2,475,550 tons, with 1,331,600 tons from Xinjiang and 1,133,950 tons from inland.

The yuan is slightly lower against the greenback this morning at 6.8404.

China Mills Were Active Buyers of Cotton in February

2009-03-10T19:00:00.000-05:00

The NCMMS March survey of mill inventories and purchases revealed mills have been active buyers of cotton over the past 30 days. 81% of all mills surveyed indicated they plan to purchase cotton this month; this is up 19% from February. The average mill inventory equals 39.6 days of consumption, which is 15.3% higher than a year ago. The total level of industrial stocks is down 8.8% from the previous year. Unsold inventories of fabric are now at 36.7 days, down 8.9 days from February. Unsold yarn stocks equal 26.3 days of output, which is near unchanged from last month.

Any Chinese farmer still holding seed cotton is being rewarded with a major price increase. In Shandong, seed cotton prices have reached their highest level of the season at 5.20 to 5.66 yuan per kilogram. The government is continuing to make grain prices more attractive to farmers. The minimum procurement price for wheat has been raised for the 3rd time this season by 40 yuan per ton. So far in 2009, the average wheat procurement price has rallied sharply along with some gains in wholesale and retail prices.

China Decreasing Cotton Acreage

2009-03-10T18:56:00.000-05:00

Following an earlier survey of 2,800 cotton-farming households in January, the Shandong Agricultural Department just released results of a second survey covering 33 counties across the province that point to a similar decline in cotton plantings. The report suggests cotton farmers will plant -13.2% less land to cotton this spring than last year, closely matching the -13.9% decrease in the earlier survey. Following a similar mantra of lower cotton area in favor of increased grains noted across other provinces, the department’s report indicates that total planted area will be relatively unchanged, but plantings of specialty crops and grains will expand, while cotton area will likely decline 116,800 hectares from last spring’s record area to 771,467 hectares (1.9 million acres).

Acreage in Hebei, another key cotton producing province, is on the wane too. Plantings in this province are forecasted to slide -7.1% to just over 641,000 hectares (1.6 million acres). Lower procurement costs for cotton from a year earlier—down -27.8% to just 4.55 yuan per kilo—are the primary reason prompting farmers to shift land into other crops—particularly grains. Given data from the Hebei Bureau of Statistics indicating the current crop reached 737,000 metric tons, if yields and abandonment in the forthcoming crop are comparable to this year, Hebei production in 2009/10 may fall -7.1% from this year to less than 685,000 tons (3.1 million bales).

Cotton area in Jiangsu Province is likely to fall between 20-30% this Spring, as production shifts to corn, soybean, and other specialty crops. This concurs with similar double-digit acreage declines anticipated in Xinjiang Province and Shandong Province as mentioned earlier in the article. The key reasons for the switch are anticipated higher production costs this year and government-funded subsidies for the production of select specialty crops.

China Buzz

2009-03-09T20:18:00.000-05:00

The trading week started off with a whimper as China’s derivatives markets closed mixed to slightly higher. At the ZCE, contracts were down 15 to up 65 yuan/ton. May added 55 to finish at 11,820 yuan/ton. Volume for the day was just over 20,000 lots. At the CNCE E-Forward Market, prices fell 2 to 40 yuan/ton. The May contract closed at 12,055 yuan/ton. Volume for the day was more than 5,000 tons. Cash prices fared no better, closing unchanged to ever so slightly higher. Price strength continues to be noted in Hebei, Shandong and Henan. Mills are still buying but mainly hand to mouth. No real change to report with import prices. Indian styles have not been aggressively priced. Today’s reserve procurement totaled 24,800 tons, including 10,000 tons of Xinjiang cotton and 14,800 tons of inland cotton. As of March 9 cumulative 2008/09 reserve procurement reached 2,422,050 tons, 1,321,600 tons from Xinjiang and 1,100,450 tons from inland.

Bao Kexin, President of the Grain Reserves, has stated the agency is likely to miss targets for buying up to 6 million tons of soybeans and 40 million tons of corn. Similar to the ongoing purchasing program for cotton, the Grain Reserves has been actively buying domestic soybeans and corn in a bid to prop up farmers’ incomes—especially with spring planting season just around the corner.

In very late Asian trading, the yuan is unchanged against the dollar at 6.84.

Six Factors Shaping the Global Cotton Trade Now and In the Future

2009-03-09T20:04:00.000-05:00

The first factor is the end of the US cotton surplus. That constant hangover of the cotton industry as we know it is on its way down to zero. And once it approaches nil, the party is over. The US Farm Bill of 2000 ushered in an era of over-production backed by needless subsidies. As a result, the world has had a supply cushion for the better part of eight years. During this time, mills have become comfortable knowing that supply shocks would have limited impact because US oversupply meant a reliable supply. A likely outcome is that the US cotton’s historic role as a residual supplier to the world market may very well diminish as stocks erode, putting foreign mills in a pinch each spring after exportable supplies in the rest of the world have been deleted. Globecot estimates that the ever present US surplus will be gone by the end of 2010.

A second factor is the worldwide battle for acreage: Food versus fiber. Again, the backdrop was set against a massive oversupply except in this case stocks have already been drawn down to near zero. Here, the major factors at play include the rise of India and China; an increasingly better off global population; promotion of ethanol and biofuels; climate change and growing water shortages. Cotton must now compete for acreage in several key producing countries. This time around, however, acreage is being determined by economics and not government policy. For example, in the US Globecot forecasts corn and soybeans profit per acre in the coming 2009/2010 marketing year at 435 and 528 US dollars per acre, respectively, while cotton is right at 200 US dollars per acre. Under this scenario who would plant cotton in the US? It’s not just the US, either. In Brazil, the same marketing year has corn and soybeans profit per acre pegged at 365 and 156 US dollars per acre while cotton is still lower at 141 US dollars per acre. At current price levels there is very little incentive to plant cotton and it is highly unlikely that cotton could buy back this acreage anytime soon.

A third and perhaps more ominous factor changing the cotton trade is a projected sharp decline in Central Asian production. The underlying factors accelerating this continued reduction are a combination of mismanagement, environmental neglect and lack of investment in infrastructure. Most of these factors trace their origin to the days of Soviet mismanagement. Even recently, cotton has been little more than a foreign exchange generator, always produced and sold regardless of the market price. In recent years, cotton has taken a backseat as former Soviet republics have turned their attention to higher-priced exports such as energy and metals. Both China and Bangladesh have been big users of Central Asian cotton as a result of proximity and favorable transit times. It will not be easy to replace such a large block of cotton and textile industries located in countries dependent on Central Asian cotton should take note.

A fourth factor shaping the world’s cotton trade is the growing importance of India. This is no understatement considering in a few short years India has become the world’s second-largest producer of cotton, the world’s second-largest consumer of cotton, and the world’s second-largest exporter of cotton. In the not-so-distant future, India will be the world’s largest producer of cotton, the world’s largest exporter of cotton, and be home to the world’s second largest domestic market for textiles and apparel offtake.

A fifth factor shaping the cotton trade is the overcapacity burdening the global textile industry. The world simply has excess production capacity, particularly in synthetics. This condition is a result of massive over-investment into the textile industries of China, India, Vietnam and other Asian countries. Currently, global yarn prices lag behind the upward movement of cotton prices. As a result, spinners continue to face tight margins resulting from oversupply and too little demand. In China, for example, roughly two-thirds of textile mills are operating under a less than one percent margin. What this translates to is a major shakeout of inefficient producers. In China, this was underway until the government caved in to textile industry pressure and increased the textile export rebate. The move is strictly a short-term solution to a long-term problem. What the government didn’t say is that they still want a major consolidation of the industry and those not operating profitably shut down. Regardless, the next few years will see tepid growth in cotton consumption but more attractive margins and improved profitability will return to yarn spinning by 2010 to 2011.

A sixth and final factor shaping the world’s cotton trade is the fact that the US, Japan and Europe are no longer the center of the world. For the better part of 25 years, global cotton consumption at the retail level has been driven by the US, European and Japanese consumer. These markets are now reaching the saturation point, coupled by already-full closets, slower population growth, and an aging populace—the latter two factors are especially true in Europe and Japan. The consumer markets of the future and in turn the drivers for a vibrant cotton trade are the BRIC economies (Brazil, Russia, India, & China), along with much of Eastern Europe and rapidly developing smaller markets in Southeast Asia and the oil-driven markets along the Persian Gulf.

Chinese Cotton Production Set to Fall

2009-03-09T19:50:00.000-05:00

The debate over Chinese cotton production now and for the foreseeable future is slowly becoming a moot point. Much like the US, China is moving towards a situation where cotton acreage levels will incrementally decrease until a balance is reached among competing crops, such as grains, oilseeds and vegetables.

This trend started in Xinjiang last year as the Party Secretary and Chairman of the province, Wang Lequan, questioned the role of cotton in the province’s future claiming that farmers should look to improve their income by considering alternative crops besides cotton. At the time, no one really paid too much attention to Secretary Wang but his words have certainly proven to be quite prescient, given the rampant food inflation that hit China late last year and continues today. Earlier this year at the 11th National Party Congress, Secretary Wang used the national stage to bring the debate front and center about reducing cotton acreage, admitting “any further expansion in cotton acreage would have a negative impact on the provincial agricultural sector.” In the same speech, the Secretary questioned the role of Chinese textile exports in the overall economy, stating the industry operated with low margins and was a constant source of trade friction with developed countries. Most recently, Secretary Wang has encouraged the powerful Production Construction Corps and Xinjiang farmers to consider other crops in addition to cotton. Perhaps most importantly, he is on record stating the province should maintain cotton acreage at or around 20 million mu, the equivalent of 1.33 million hectare.

It would be foolish to think party secretaries in agriculturally strategic provinces such as Henan and Shandong are not following Secretary Wang’s words and actions closely. It would be equally as foolish to think that the upper echelons of power in Beijing are thinking more about maintaining cotton acreage versus ensuring an ample supply of grain if not vegetables, oilseeds and the like. While no official—other than Secretary Wang—is on record suggesting farmers opt for other crops at the expense of cotton, government policy makes it clear that grains are the clear winner in this battle for acreage. Farmers willing to plant grain in China receive a total subsidy of 960 yuan per hectare, of which 210 yuan is a direct subsidy and the remaining 750 yuan is for agricultural inputs. Cotton, however, only receives a subsidy of just 225 yuan per hectare, which only functions to encourage farmers to use improved seed varieties. Adding to farmers’ enthusiasm for planting other crops besides cotton are the price rises for grains, rice, corn and beans, all of which are up sharply versus a year ago. Though cotton prices have remained relatively strong in China this year, they have not witnessed the kind of price increases seen in competing crops. Further, as the cost of production has increased dramatically from last year, farmers have been forced to consider these price gains in the equation. Nevertheless, the single largest obstacle facing farmers in terms of planting cotton is the dramatic labor shortage hitting the countryside. Several generations of youth have left the fields for better opportunities in urban areas and are not likely to return. As a result, this has left an acute shortage of bodies that rural farmers have yet to replace. In turn, labor costs—field hands, planting, etc—have all skyrocketed, while there are additional costs of harvesting the cotton once it is ready. Even now, the Xinjiang province is recruiting field labor for fall harvest.

Given the current reduction in cotton acreage has started in Xinjiang, the province is a good reference point to see where Chinese cotton production might be in 2008, 2009 and beyond. In 2007, Xinjiang planted 25.7 million mu of cotton (1 mu = 15 ha). According to Secretary Wang, acreage in 2008 should be closer to 20 million mu, indicating a drop of 22 percent. Using a five year historical yield average of 106.7 kilogram per mu for the province would deliver an output of 2,134,000 million metric tons—the equivalent of 9.8 million 480 pound bales. Xinjiang usually accounts for 30 to 35 percent of annual output. Knowing that steeper drops in acreage will occur in Xinjiang in 2008 we can assume that acreage for the rest of the country will be about the same. Therefore, the weighted overall drop in acreage for China will probably fall between 5 to 10 percent. By using a five year national yield average, total output would fall somewhere between 6.34 to 6.7 million tons. If using the USDA’s 7.6 million ton production estimate, this would imply a drop of 11 to 16 percent in total production from 2007. As other provinces follow Xinjiang’s lead in reducing cotton acreage for other crops, total output for cotton will be sharply affected in the coming years.

Inevitably, China has topped in cotton production and is likely heading to production levels closer to the beginning of this decade—perhaps even lower. And, while no official word has been passed it seems highly likely the country has made a major economic decision, preferring to import what they wear and planting what they need to eat.