Analysis of the Current State of the Cotton Industry's Transformation and Development

January in Xinjiang is dry and cold, and the local cotton market is as bleak as the weather. "It's fallen!" Many cotton farmers describe the current state of seed cotton this way. In the market, seed cotton purchasing has mostly stopped, with only a few cotton enterprises still buying, and at low prices. "Downstream textile enterprises have reduced demand, so naturally we don't dare to buy," said one cotton enterprise purchaser.

One year into the implementation of the cotton target price policy, as old and new policies alternate, the cotton industry is undergoing transformation.

Reality: To sell, or not to sell? That is the question

The reporter learned from the China Cotton Association that as of mid-January, over 90% of seed cotton sales in the Xinjiang region had been completed, but some cotton farmers had still not finished selling. On the 13th, the mainstream price of seed cotton in the southern Xinjiang region was 4.0-5.0 yuan/kg, down nearly 1.0 yuan/kg from mid-last-month.

In Xiajin County, Dezhou, Shandong, cotton farmer Old Zhang believes this is a "big markdown" not seen in 10 years. "Compared with last year, a kilogram of seed cotton has dropped by three yuan." Due to weather conditions, this year's output is not high, and normally the price should be somewhat higher; on the contrary, the price is low and no one is coming to buy. "In the past, whenever the cotton-buying season came, cotton traders would be waiting at the edge of the fields."

This is the first year that the state has cancelled the temporary purchase and storage policy and implemented the target price policy.

Last April, with the approval of the State Council, the National Development and Reform Commission and two other ministries jointly issued the 2014 cotton target price of 19,800 yuan per ton.

Industry insiders analyze that the current situation of "farmers unwilling to sell, enterprises unwilling to buy" has arisen because, after the cancellation of the temporary cotton purchase and storage policy, the price of new cotton is entirely determined by the market. On the one hand, farmers' planting costs are high, and the price is lower than expected, so they are naturally unwilling to sell; on the other hand, although domestic cotton prices have fallen, they are still at a high level compared with international cotton prices, so cotton enterprises are still unwilling to buy. Cotton expert Chen Manyun analyzes that although subsidy policies were also introduced in the interior regions previously, cotton farmers are still in a state of not making money or losing money. "In the 2015/2016 year, cotton farmers in the interior regions may earn even less."

"Ginning factories that process cotton also face a difficult choice. Sell, and there's not much profit; don't sell, and what if prices continue to fall later?" Gao Fang, executive vice president of the China Cotton Association, believes that some cotton enterprises "cannot see clearly and cannot figure out" the current cotton market situation and have adopted a wait-and-see attitude.

At the "Tsinghua Three Rural Issues Forum 2015," Du Ying, counselor of the State Council and former deputy director of the National Development and Reform Commission, said that the pilot direct subsidy under the cotton target price implemented starting in 2014 would not be expanded in 2015 and would still be piloted within the original scope. "This is because the government hopes cotton planting will concentrate from the Huang-Huai-Hai production area toward Xinjiang."

Industry insiders analyze that the purpose of the target price reform is not only to let the market have the final say, but also to allow both cotton farmers and processing enterprises to profit. Such a change will inevitably transform farmers' traditional concepts of production and operation, and will also transform product pricing methods, subsidy methods, and so on. Therefore, there is a process of adapting to the policy, and various detailed rules and supporting measures must also be continuously improved in actual operation.

Cotton farmers: How much subsidy is paid and how it is paid is the key

According to the "Implementation Plan for the Pilot Work of Cotton Target Price Reform in Xinjiang," the target price is 19,800 yuan per ton, and the subsidy method is a 60-40 split, that is, 60% of the central subsidy funds are subsidized according to actual sown area, and 40% according to actual seed cotton sales volume. The implementation of this policy caused a huge response in the industry, and most industry insiders believe that this round of new policy means the government will no longer directly intervene in cotton prices, and the pattern in which domestic cotton prices were previously jointly determined by purchase and storage prices, reserve auction prices, and import prices has begun to be broken.

Gao Fang believes that the current progress of the target price policy in Xinjiang is generally relatively smooth, and the market pricing mechanism has already begun to play a role. However, after the implementation of the 2014 Xinjiang cotton purchasing, sales, subsidy and other links, the problems existing in the reform have also emerged. "Verifying cotton area requires enormous labor costs, and there are also uncertain factors in verifying sales volume," analyzes cotton expert Li Wei.

The central finance subsidy to major cotton-producing provinces is based on the cotton output determined by the National Bureau of Statistics, and the subsidy method is decided independently by each province, which may choose to subsidize by area or by output. Subsidy funds are required to be managed in special accounts, run in a closed manner, and used exclusively for their designated purpose, and may not be reserved, misappropriated, or diverted, so as to ensure the subsidy is delivered into the hands of cotton farmers.

At present, relevant national government departments are arranging the later stage of subsidy distribution work. At the news briefing on the pilot work of cotton target price reform held on December 23, 2014, Hu Fangyi, deputy director of the Economic Construction Division of the Finance Department of the Xinjiang Autonomous Region, told the media that the National Development and Reform Commission and the Ministry of Finance were studying and formulating cotton subsidy standards, and the cotton area subsidy standard and sales volume subsidy standard would be announced in January and February 2015.

As the time for distributing Xinjiang cotton target price subsidies approaches, the subsequent subsidy progress and amounts have attracted much attention, and cotton farmers generally hope to receive full subsidies as soon as possible. Gao Fang said that whether in Xinjiang or the interior regions, how it is finally distributed and how much is distributed, the key is that it can be fully delivered into the hands of cotton farmers and not give violators an opportunity to fraudulently obtain subsidies; only then will the cotton target price subsidy policy continue to operate healthily.

Market: Whether to buy and from whom to buy will be up to textile enterprises in the future

In recent years, domestic cotton prices have remained high for a long time, and downstream textile enterprises have fallen into difficulty under the multiple pressures of high cotton prices and declining orders. After the implementation of the cotton target price policy in 2014, prices will be determined by market supply and demand, and the price gap between domestic and international cotton will gradually narrow. In 2015, will cotton market demand improve somewhat? Yang Shibin, assistant to the president of the China National Textile and Apparel Council and president of the Knitting Industry Association, believes that in 2015 enterprises' motivation to restock will rise, market demand will increase, and cotton textile enterprises are expected to usher in a reversal of their difficulties and enhance their international competitiveness.

Yang Shibin said that the past cotton purchase and storage policy was intended to increase cotton farmers' income and stabilize cotton market prices, but the state purchased 98% of the country's cotton at 20,400 yuan per ton, and textile enterprises had to buy state reserve cotton at high prices if they wanted to buy, while even if state reserve cotton was sold to enterprises at 17,250 yuan/ton, it was still the highest price in the world. Since October 2014, in addition to the sharp drop in raw material costs, what has left the deepest impression on textile enterprises is the substantial improvement in cotton quality. "Textile enterprises connect directly with cotton enterprises and cotton traders, giving them greater room for choice; whether to buy and what quality of cotton to buy is entirely up to the textile enterprises."

Yang Shibin believes that during the 3-year temporary purchase and storage period, cotton farmers paid more attention to output when planting cotton, causing a noticeable decline in the quality of domestic cotton, especially Xinjiang cotton. Some ginning factories, in order to increase sales volume, mixed some lower-grade cotton with higher-grade cotton, thereby lowering the quality of higher-grade cotton, and the cotton quality problem became the primary concern of textile enterprises. "Because, apart from a small amount of imported cotton, most of the cotton used by textile enterprises had to be purchased through auctions of state reserve cotton. Now, upstream cotton farmers and ginning factories consciously handle cotton by grade during the process of selling and processing cotton in order to improve returns. In the long run, this is conducive to the entire cotton industry chain moving onto a normal development track."

Outlook: How more than 10 million tons of state reserve cotton will be absorbed will affect the direction of cotton prices

According to investigation and analysis by industry professionals, the scale of domestic reserve cotton is more than 10 million tons, and the huge inventory makes upstream and downstream enterprises unable to avoid worrying - domestic annual cotton demand is 6.5 million to 7.5 million tons, and 2015 is still in a state where supply clearly exceeds demand. Some enterprises compare state reserve cotton to a time bomb; once it explodes, the lethality to textile enterprises will be fatal.

"The national temporary cotton purchase and storage policy did indeed play a role in protecting farmers' interests, and at that time the state's purchase and storage also had a bottom-fishing flavor. Later, the purchase and storage policy changed flavor, leading to the current difficulty in releasing inventory." Yang Shibin believes that the stockpiled cotton formed by purchase and storage has now become a hot potato.

According to statistics, as of January 9, the total cotton processing volume in the Xinjiang region was more than 4.09 million tons, and the market predicts that Xinjiang cotton output this year may exceed 4.2 million tons, or even reach 4.5 million tons, exceeding the earlier market expectation of about 4 million tons for Xinjiang cotton output.

"Cotton consumption this year has not seen obvious improvement. When state reserve cotton is auctioned, at what price, and at what pace will affect the direction of domestic cotton prices," Yang Shibin said.