China Refines Its Cotton Policy

The new government-set target price for cotton grown in China's Xinjiang province will remain flat with last year at CNY18,600 per ton (US1.22 per pound), and will remain in place through the 2019 planting season.

In order to maintain a stable supply of cotton, the subsidy will only apply to output less than 85% of the average annual production grown from 2012-2014 (around 7m tons), according to the International Cotton Advisory Committee (ICAC). The level of subsidy for extra-long staple cotton will remain unchanged at 1.3 times the price of upland cotton.

The latest monthly update from the inter-governmental group also notes world cotton production is forecast to grow by 1% to 23.1m tons in 2017/18 as high prices in 2016/17 encourage farmers to plant cotton. However, the average yield is expected to decline by 2% to 761 kg/ha, similar to the 4-year average.

India's production is projected to grow by 2% to 5.9m tons while production in China could reach 4.8m tons in 2017/18 as area expands by 3% to 3m hectares after five seasons of contraction.

High yields and firm prices will also encourage farmers in the United States to expand cotton area in 2017/18. However, production is expected to remain unchanged from 2016/17 at 3.8m tons as the average yield is assumed to be closer to the 5-year average.

World cotton mill use in 2016/17 is seen unchanged at 24.1m tons due largely to weak global economic growth and competition from polyester. Global consumption may recover by 1% in 2017/18 to 24.4m tons as cotton prices decrease, and growth in the global economy is expected to be much stronger in 2017 and 2018.

After several seasons of decline, China's mill use is projected to rise by 2% to 7.6m tons in 2016/17 and by 1% to 7.7m tons in 2017/18. The gap between China's domestic cotton prices and international cotton prices has narrowed, making yarn imports less attractive than in recent seasons. In addition, mill use in Xinjiang has expanded, and the proximity to the higher quality cotton grown in this region offers cost advantages over yarn imports.

After declining by 3% to 5.1m tons in 2016/17 due to high domestic and international cotton prices, India's mill use is projected to recover by 1% to 5.2m tons in 2017/18.

During the first seven months of 2016/17, China has imported over 600,000 tons of cotton, up by 6% from last season during the same time period. China's total volume of imports is expected to rise by 2% to 983,000 tons in 2016/17.

Imports by Bangladesh are expected to rise by 6% to 1.4m tons, and Vietnam's imports are projected to grow by 17% to 1.17m tons in 2016/17.

Given its large exportable surplus and the high quality of its crop this year, the US is expected to export 2.9m tons of cotton in 2016/17, accounting for 37% of global exports. India's exports are projected to decline by 23% to 960,000 tons in 2016/17, partially due to the delay in harvesting earlier this season while

China began selling cotton from its national reserve last month, and has so far the total volume sold has reached 450,000 tons. If the level sales that occurred last month continue, a similar volume of cotton may be sold this year as well, bringing the total volume held by the government to around 6m tons at the end of August 2017.

At the end of 2016/17, China's total stocks – including those in the private sector – are projected to fall by 17% to 9.3m tons. World ending stocks in 2016/17 are likely to decline by 7% to 19.1m tons.