Cotton prices keep falling; the move toward technology and mechanization should come sooner rather than later

“The fireworks of March will soon pass, and the cotton-planting season has arrived.” Every year at this time, cotton prices rise, but compared with previous years, the increase this year has been greatly reduced. At present, the average domestic spot price of ginned cotton is 13,330 yuan/ton, down 31.3% from last year and slightly up 0.11% from last month.

⟦NL> According to a report by China National Radio's “Sannong China,” this is now the tail end of cotton purchasing, and the bulk of cotton purchasing work is basically over. From past experience, cotton prices rise at this time every year, but compared with previous years, the increase this year has been greatly reduced. At present, the average domestic spot price of ginned cotton is 13,330 yuan/ton, down 31.3% from last year and slightly up 0.11% from last month.

Han Zhongmin, a villager from Dongliang Village, Baiquan Town, Wusu City, Xinjiang, told reporters that cotton prices are currently low and returns are poor, making it hard for cotton farmers to make money; they can basically only rely on state subsidies to avoid losing money.

Han Zhongmin: If this year's cotton returns are calculated at market prices and there are no state subsidies, it is an absolute loss. If the state does not subsidize, then one's own labor is thrown in for nothing, and there is no money to be made; it just about breaks even. Some with lower yields even have to pay out of pocket.

Why is there currently a phenomenon of weak upward momentum in cotton prices? Zheng Bo, a market analyst at Zhuochuang Information, believes that the relatively large inventory pressure of Xinjiang cotton and the impact of imported yarn are the main reasons for the insufficient upward momentum in cotton prices.

Zheng Bo: At present, the operating rate of domestic spot textile enterprises remains at a low level, and scattered purchasing is unlikely to form scale. Although inland cotton enterprises are selling at a moderate price in line with the market, the inventory pressure of Xinjiang cotton still needs to be eased, and overall cotton prices lack upward momentum. Second, in the later stage of seed cotton purchasing, the cotton grade and lint percentage in all areas have declined, and good-grade cotton is still notably lacking. Considering that imported yarn still has an impact on the domestic market, textile enterprises strictly control costs in purchasing, and in the short term cotton prices will mainly be sold at prices in line with the market.

However, market analysts point out that due to the reduction in planting area and reduced supply, cotton prices will rise slightly later, but the price gap for high-grade cotton may widen further.

Zheng Bo: As various policies become increasingly clear and the planting area continues to decrease, cotton prices may see a slight rise. Considering that low-count yarn will still be impacted by foreign yarn, the market purchase and sales of low-grade cotton with a relatively large supply may find it hard to pick up, and the price gap between high- and low-grade cotton will widen further.

The cotton target price system implemented last year and today's sluggish cotton prices have both left cotton farmers' wallets badly “hurt.” Many cotton farmers have given up planting cotton and turned to other agricultural products. Xinjiang, which has policy advantages, saw a decline of 15%, while in inland areas a decline of more than 25% in cotton planting is fairly common. It is expected that in 2015 the domestic cotton planting area will challenge the 50 million mu mark. On this point, Han Zhongmin, a villager from Dongliang Village, Baiquan Town, Wusu City, Xinjiang, has deep personal experience.

Han Zhongmin: The cotton area in Xinjiang has decreased. In our village, for example, it has decreased by 10,000 mu, a drop of 20 to 30 percent, overall in this area.

So is this choice by farmers correct? Du Min, director of the Economic Research Office of the National Cotton Industry Technology System, believes that given the current situation, a reduction in cotton planting area is unavoidable. In areas with many substitutes, not planting cotton is acceptable, but if no very good substitutes have been found, stability should still be the priority.

Du Min: There are many substitutes in the Yellow River basin; vegetables, fruits, and grain crops are all substitutes for it. In short, this year's cotton area is certain to decrease. If no very good substitutes have been found, stability should be the priority. If there are very good substitutes, arrangements can be made according to the size of the returns.

Zheng Bo, a market analyst at Zhuochuang Consulting, also suggests that cotton farmers pay close attention to national policies, adapt to local conditions, treat market changes rationally, and increase returns by improving planting techniques.

Zheng Bo: 2015 is the second year of cotton subsidies. Cotton farmers need to view the cotton production situation and cotton price trends rationally, and promptly pay attention to the guidance of national policies and subsidies for the market. According to the characteristics of their own land, they should follow the principle of adapting to local conditions to obtain stable returns; purchase excellent and qualified seeds, increase the effective germination rate, and at the same time improve knowledge of planting techniques, promote fine sowing, lay a good foundation for sowing, and be innovative in cotton management, so as to reduce costs and achieve high returns.

As China's economy enters a new normal, the cotton industry has also entered a new stage. The target price era has announced the return of cotton prices to a low level. Since October 2014, cotton prices have basically hovered at 13,000-14,000 yuan/ton. Although on the surface cotton farmers' interests have suffered losses, the state's cotton planting subsidy policy has, to a certain extent, safeguarded cotton farmers' interests. On the other hand, as cotton prices return to rationality, the price gap between domestic and foreign cotton tends to narrow, and the raw material cost pressure on cotton textile enterprises will also be reduced, which is an important positive for improving their competitiveness. It is just that this positive still needs to be slowly released, especially against the backdrop of overall sluggish terminal demand.

In 2015, a fourth consecutive decline in China's cotton planting area can no longer be changed. Apart from the new pattern in which “the market mechanism has returned to the throne, and policy guidance has retreated to the second line,” most cotton farmer friends are still led by the nose by past prices and returns. Adjusting the planting structure in a timely manner according to market trends and the new year's supply and demand pattern is still the weapon with which a small number of large cotton growers resist market risks. The gap in agricultural participation is widening, making it particularly important to build an effective agricultural information service platform.

For this year, whether it is the inland areas where the wave of abandoning cotton continues, or Xinjiang, which is bathed in the spring breeze of special subsidy policies, none can escape the survival-of-the-fittest selection that the market mechanism imposes on participants. With cotton prices fluctuating within a range, incomes declining, and effective guidance from agricultural departments, a decline in domestic enthusiasm for planting cotton has become unavoidable. Grain, vegetables, fruits, and so on are increasingly becoming better choices for cotton farmers. Even the Xinjiang region, which accounts for 60% of the country's area and output, has already begun guiding the adjustment of the cotton planting structure, especially in areas where cotton planting returns are relatively low. For inland areas, overall support is limited, the cotton production and quality market has suffered from abnormal weather, and comparative returns are unsatisfactory, and so on, which has already broken cotton farmers' hearts. However, the fixed subsidy in inland areas is basically around 200 yuan/mu. Purely setting aside actual returns, cotton subsidies have for the first time exceeded grain subsidies, which has also increased cotton farmers' confidence in planting cotton relative to grain. We mentioned earlier that some relief was obtained, and that is also why.

There is no hope for the market to return to its former glory for the time being. What more growers care about now is the 2015 target price. According to the release time in 2014, it is expected that this year's target price will not be far from being released. Although some representatives at the Two Sessions suggested keeping the target price stable, given that the global cotton market has entered a new price level, supply and demand have entered a new stage, and considering the state's fiscal pressure, an adjustment to the target price may already be unavoidable.

But we must also see that the gloom over the cotton market will disperse sooner or later, and price fluctuation cycles still exist. Before ushering in a new cycle, we still have many things to do. For example, agricultural departments should provide effective guidance and strengthen publicity for subsidy policies, while for cotton farmers, improving management levels and moving as early as possible toward technology- and mechanization-based cotton planting is the general trend.