With the temporary cotton purchase and storage policy abolished, how should cotton farmers and enterprises respond?
Cotton prices fall to their lowest level in recent years
From a spatial layout perspective, China's cotton is divided into the Xinjiang cotton region and the inland cotton region, with the inland cotton region mainly comprising the Huang-Huai River basin and the middle and lower reaches of the Yangtze River.
The Dongting Lake Plain, long known as the “land of fish and rice,” spans Hunan and Hubei provinces and is an important commodity cotton base in China. It is currently the local cotton purchasing season, yet this magazine's reporter could not see much joy of harvest. Wang Huanjin, a large-scale cotton grower in Lidong Village, Li County, Hunan, wore a worried expression as he pointed to the sparse cotton fields and told the reporter: “In a normal year, cotton yield is about 600 jin per mu; this year it will be 320 jin at most.”
Wang Huanjin is not alone. Many major cotton-producing areas, including Hunan, Hubei, Jiangsu, Shandong and Jiangxi, have reported that cotton yields per unit area fell markedly in 2014. The supply and marketing cooperative and other departments of Anxiang County, the second-largest cotton-growing county in Hunan Province, conducted a survey and found that the local cotton yield per unit area in 2014 fell by about 40% compared with a normal year.
Misfortunes never come singly. While cotton yield per mu fell to its lowest point in recent years, the price also fell to its lowest point in recent years. The reporter learned through interviews in many places along the middle and lower reaches of the Yangtze River that the current village purchase price offered by cotton traders is 2.6 yuan to 2.9 yuan per jin of seed cotton, the lowest price in nearly 6 years. Over the past 3 years, this price averaged 3.8 yuan per jin.
Li Wenlin, a cotton farmer on the Dongting Lake Plain, did the accounts: seeds, fertilizer, pesticides, base film, land transfer, hired labor for picking cotton and various other costs add up to 685 yuan per mu. He himself invests at least 3 labor-days per mu, and calculating each labor-day at 100 yuan, that is 300 yuan in labor. “By my reckoning, the cost of one mu of cotton is 985 yuan, and selling at the current price brings in only 945 yuan per mu. That means after working a whole year, I still have to pay out of my own pocket!” Li Wenlin said.
With prices falling to their lowest level in nearly 6 years, cotton farmers generally are reluctant to sell. At the Xiaodukou branch of Hunan Huaxiang Cotton Industry, in previous years at this time, the reporter could always see a line stretching more than a thousand meters from the company gate to the warehouse, with the square in front of the warehouse, half a football field in size, crowded with vehicles and buzzing with voices. On this visit, the reporter saw that the vast site was unexpectedly empty.
Pang Haiqing, business manager of the Xiaodukou branch, told the reporter: “People think the price is too low and are unwilling to sell cotton.” Since the company began purchasing cotton at the opening of the scale last year, it has bought only 300,000 tons in total; in the same period in previous years, it had purchased at least 6 million tons.
The pains of the “new policy”
This magazine's reporter found through investigation that in previous years, once cotton farmers were reluctant to sell, processing enterprises would become restless and take the initiative to purchase at their doorsteps. Strangely, while cotton farmers are unwilling to sell, enterprises are also unwilling to buy, creating a deadlock in purchasing.
Wang Jialong, head of Hubei Songzi Yinfeng Cotton Industry, said that of the 6 large cotton processing enterprises in Songzi City, 4 only began purchasing at the opening of the scale not long ago, but they bought little. “They all buy a token amount, with purchase volume only 5% of the same period in previous years.”
Why would these processing enterprises rather leave warehouses empty, machines idle and workers resting than buy cotton for processing?
Wang Jialong did a detailed calculation: the price at which cotton traders deliver to the processing plant is between 3.05 yuan and 3.15 yuan. Calculated on the basis of a lint percentage of 38% (that is, 100 jin of seed cotton ginning out 38 jin of lint) and a cottonseed price of 1 yuan per jin, the purchase cost of one ton of lint is about 13,300 yuan. Processing costs, marketing and office expenses, and loan and financial expenses are about 1,200 yuan, making the cost of one ton of lint about 14,500 yuan. “At the current market price, one ton of lint sells for 14,000 yuan, which means for every ton of lint I process, I lose 500 yuan. Who would still do this business? Better to idle and rest,” Wang Jialong said.
The purchasing deadlock of “farmers unwilling to sell, enterprises unwilling to buy” arises because, after the temporary cotton purchase and storage policy was abolished, the price of new cotton is entirely determined by the market, and domestic cotton prices must basically align with international cotton prices. At present, although domestic cotton prices have fallen compared with previous years, they are still at a high level compared with international cotton prices. China's cotton textile enterprises are export-oriented manufacturing enterprises and must “go global” to participate in international market competition. At the current price level, they certainly dare not buy large quantities of domestic cotton. Processing enterprises upstream of cotton textile enterprises naturally do not dare to buy freely either.
Industry insiders analyzed that purchasing and processing enterprises are watching and buying cautiously, cotton farmers are watching and holding back sales, and textile enterprises are cutting inventories. By the end of the year, when farmers have no choice but to sell large quantities of cotton, a “chaotic cotton market” is very likely to emerge, making cotton farmers' returns even more uncertain. At present, this may be an unavoidable “pain” in the policy adjustment.
Cheng Guoqiang, a researcher at the Development Research Center of the State Council, believes that over the past 3 years, China's implementation of temporary cotton purchase and storage stabilized the cotton market, but also continuously encountered the awkward situation of declining cotton quality and an ever-expanding loss-making area in the cotton textile industry. To escape this awkward situation, China implemented a cotton “new policy,” hoping thereby to push the long-sluggish cotton industry to achieve transformation and upgrading, improve the quality of domestic cotton, narrow the price gap between domestic and international cotton, and increase the international competitiveness of domestic textile enterprises.
Transformation has become inevitable; policies still need to keep up
Accelerating the transformation of China's cotton industry has become inevitable, but compared with the Xinjiang cotton region, which is piloting the cotton target price reform, the 9 major inland cotton provinces have not yet carried out this reform and currently only enjoy a fixed subsidy of 2,000 yuan per ton of lint. Their path to transformation will undoubtedly be even more difficult.
According to a survey by the China Cotton Association, China's cotton planting area in 2014 is expected to be 63.4 million mu, down 9.4% from the previous year. Among them, the cotton regions in the Yangtze River basin and the Huang-Huai River basin saw relatively large area declines due to rising production costs, declining comparative returns from cotton planting, and the abolition of the temporary purchase and storage policy.
Li Guoxiang, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, told the reporter that the Xinjiang cotton region more easily achieves mechanization, so costs are relatively low, while the inland cotton region mostly uses a smallholder planting model, with high costs and low returns. As cotton prices gradually return to the market, the competitiveness of the inland cotton region will decline, and some high-cost, low-return smallholder growers and processing enterprises will exit production and processing.
The reporter's investigation found that the currently sluggish cotton prices have dampened cotton farmers' enthusiasm. Many cotton farmers said that if cotton prices do not recover later, they will consider reducing cotton planting area in 2015, or even stop planting cotton altogether. Based on analysis of data from multiple sources, the reporter concluded that under the current market trend, cotton prices are unlikely to recover, and inland cotton farmers' planting intentions in 2015 will undoubtedly decline even more noticeably. The domestic cotton planting pattern will therefore face a major adjustment.
However, the path of adjustment is not easy, and some cotton farmers who tried to transform suffered relatively heavy losses. In Huarong County, Hunan's largest cotton-producing county, many cotton farmers switched to planting pumpkins this year, but when the harvest season arrived, the pumpkins were severely unsold, large numbers rotted in the fields, and the farmers lost everything. In Gong'an County, cotton farmer Yang Jun reported that the local area lacks water sources and has dilapidated water conservancy facilities, making irrigation difficult. Previously, planting cotton did not require frequent watering, so they could cope, but last year they switched to rice and vegetables and encountered a serious water shortage.
He Yuegang, vice president of the Hunan Provincial Cotton Association, said that in 2014 only some cotton farmers switched to other crops, yet so many problems arose. Given the current “difficulty in selling cotton,” in 2015 there will certainly be more cotton farmers switching to other crops, and if the same problems as this year occur then, the negative impact will be even greater. Several grassroots cadres told the reporter that with the purchase and storage policy abolished, cotton farmers have encountered many difficulties, but they do not know how to help. “When I recently went down to the townships, what I feared most was cotton farmers asking: what should we plant next year?”
Dang Guoying, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, suggested pooling the strength of all departments to provide supporting services for cotton farmers' transformation, such as strengthening water conservancy facilities and tractor roads, so as to provide infrastructure conditions for cotton farmers switching to other crops. Market guidance and technical training should also be provided to cotton farmers to prevent them from “rushing in droves” to switch to a certain crop, causing oversupply and ultimately hurting farmers through low prices.