Cotton Target Price Reform Will Promote Healthy Industry Development
Since 2004, China's cotton price adjustment system, built around measures such as the temporary purchase and storage policy, the agricultural subsidy system, and import and export regulation, has achieved the goals of increasing farmers' efficiency and raising agricultural workers' incomes, and to a certain extent has played a positive role in the sustained and healthy development of the cotton industry in China's key cotton-producing regions. At the same time, however, some potential problems in these policies have become increasingly prominent. At this point, a new policy for the cotton industry——the target price subsidy policy——emerged.
Cotton target price reform advances steadily
It is understood that the target price reform policy implemented by the state in Xinjiang stipulates that when the average cotton price during the price collection period (September to October) is below the target price of 19,800 yuan/ton, the state pays the price difference directly to cotton producers as a subsidy; when the average price is above the target price, no subsidy is paid.
It is reported that the goal of this Xinjiang cotton target price reform is to protect cotton producers' interests from harm and stabilize production for Xinjiang growers. The state will no longer carry out purchase and storage at a fixed price, and the role of the market mechanism in pricing will undoubtedly increase.
Zhang Yanlin, deputy director of the Supply and Marketing Cooperative of the Xinjiang Production and Construction Corps, said at the 2014 Zhengzhou Agricultural Products (Cotton) Futures Forum that when market prices fall, growers' planting income can be subsidized through the target price, thus effectively protecting farmers' enthusiasm for planting cotton and having practical significance for protecting the country's high-quality cotton and promoting the sustained and healthy development of Xinjiang's cotton industry.
In Zhang Yanlin's view, the target price reform not only helps improve the Corps' ability to respond to the market and pushes the Corps to reform the current cotton management system and accelerate the adjustment of the cotton industry structure, but will also raise the quality of the Corps' cotton. He explained that although in recent years the state has promoted the development of the cotton industry and safeguarded farmers' interests through purchase and storage, a decline in overall cotton quality has appeared. The marketization of cotton prices will also help improve this phenomenon.
A Futures Daily reporter learned that in terms of implementing the detailed rules of the cotton target price subsidy policy, the Corps proposed “six unifications and one guarantee.” That is, unified management measures, a unified settlement platform, a unified brand, unified sales, unified pricing, and unified participation in hedging. The “one guarantee” is quality assurance, and quality is the key to the Corps' sustainable cotton development.
Saying goodbye to high-priced cotton, textile enterprises' competitiveness will rise
How great is the target price policy's impact on the cotton industry chain? Wang Wanxiang, general manager of China Cotton Group Co., Ltd., said that the purpose of this policy is first to guarantee cotton farmers' returns while also emphasizing the market in price formation, rationally guiding production, circulation and consumption, and promoting the competitiveness of textile enterprises. Overall, it is intended to make the entire industry coordinated, healthy and sustainable. Since the pilot implementation, major changes have taken place in the financial environment of the entire market, with significant effects on every link in the industry chain.
From the perspective of cotton planting, the first aim is to guarantee cotton farmers' returns, while also helping optimize the planting and layout of cotton production. Wang Wanxiang believes that Xinjiang's cotton industry development is in the process of transitioning toward intensive and large-scale production and planting, with many places replacing manual labor with machine picking, lowering costs and promoting cotton production.
The target price policy not only guarantees cotton farmers' interests but also lets cotton textile enterprises say goodbye to the era of high-priced cotton. “Although this year is the first year of implementing the cotton target price and it is only a pilot in Xinjiang, the entire industry has changed. The days when cotton processing enterprises relied on policy for their livelihood are gone forever. The price gap between domestic and foreign cotton is continuously narrowing, cotton prices are beginning to be truly regulated by the market, textile enterprises will say goodbye to the era of high-priced cotton, and Chinese textiles will also be more competitive in the international market.” the head of a cotton textile enterprise in central China told a Futures Daily reporter.
In Wang Wanxiang's view, the pilot target price policy also helps rationalize the price relationship between cotton and textiles, enabling textile mills' competitiveness to recover and improve. “This phenomenon is fairly obvious after new cotton began to come onto the market. After new cotton was listed, prices fell all the way. Although cotton yarn prices also declined, the extent was far less than that of cotton, and textile enterprises' profit margins have rebounded fairly noticeably.”
The cotton futures and spot markets will be more closely integrated
In conversations with participants, the reporter learned that the current domestic and foreign cotton price gap is gradually narrowing, having shrunk from the previous 6,000—7,000 yuan/ton to the current 2,000—3,000 yuan/ton. “After the target price subsidy policy is implemented, the narrowing of the domestic and foreign cotton price gap will be a long-term trend.” said Ren Xingzhou, director of the Market Economy Research Institute of the Development Research Center of the State Council.
From customs data on imported cotton yarn, the reporter learned that since April this year, China's imports of cotton yarn have declined noticeably. “The use of domestically produced cotton yarn has also increased greatly compared with before, which is of great significance for promoting the sound development of the cotton textile industry.” Wang Wanxiang said.
Cotton enterprises attending the conference told the reporter that in the “cotton purchase and storage era,” circulation enterprises were basically just purchasing and processing plants; once the cotton came in, it was purchased and processed and then all handed over to China National Cotton Reserves Corporation. After the target price pilot was implemented, domestically produced cotton can circulate fully in the market.
“With the market forming prices, it should be said that our operating risks have also increased compared with before, but this precisely can prompt enterprises to change their business philosophy, abandon the previous notion of relying on state policy to conduct business, and move toward market-oriented and internationalized operations. At the same time, in operations we will also pay more attention to the quality of cotton purchasing and processing, to combining futures and spot to prevent and control risks, and to domestic and international cotton operations. This will also help us implement the go-global strategy and participate in international competition.” Wang Wanxiang said.
Ren Xingzhou said that the increase in spot operating risks has precisely left enormous room for futures. Enterprises can use the futures market to discover prices, avoid risks, diversify risks, and lock in costs, and the agricultural products futures and spot markets will be integrated more closely.