Domestic cotton production falls short of demand; a new purchase-and-sale system is being built at a faster pace

At the national cotton work teleconference held recently, Lian Weiliang, deputy director of the National Development and Reform Commission, said that domestic cotton demand will recover somewhat in the new year, and the domestic production-demand gap is expected to be about 2 million tons, but the domestic cotton market still has favorable conditions for maintaining stable operation.

The reporter learned that with the launch of China's pilot reform of the cotton target price, the operating environment of the cotton market has undergone major changes, and China will accelerate its exploration of a new cotton purchase-and-sale system that gives full play to the role of market mechanisms and better brings out the role of the government——

Domestic cotton production falls short of demand

⟦NL> In 2013, China's domestic cotton production was generally stable, but affected by the international and domestic economic situation, textile growth slowed, cotton demand decreased, and the production-demand gap narrowed somewhat; international cotton supply exceeded demand, prices fell, and the price gap between domestic and foreign cotton remained at a relatively high level; pressure to protect cotton farmers' interests and stabilize textile development increased.

To respond to this situation, the state promptly launched temporary purchase and storage, purchasing and storing a cumulative 6.58 million tons of cotton at a price of 20,400 yuan per ton, accounting for more than 90 percent of that year's total cotton output, effectively protecting cotton farmers' interests. At the same time, by reasonably arranging the release price and grasping the quantity, pace and quality structure of releases, it filled the demand gap and guaranteed the need for textile cotton; by reasonably arranging cotton imports, it met the needs of textile exports with both ends abroad and cotton blending, stabilizing textile production and exports.

“In 2013, the domestic market cotton price was roughly equivalent to the release price of reserve cotton, and the cotton market remained basically stable.” said Lian Weiliang, deputy director of the National Development and Reform Commission, noting that entering 2014, China's domestic cotton market demand has recovered somewhat, and the relationship between cotton production, demand and supply has undergone major changes.

According to a survey by the China Cotton Association, this year's national cotton planting area was 63.4 million mu, down 9.4 percent from the previous year, and output was about 6.5 million tons, down 500,000 tons from the previous year. Among this, the Yangtze River basin and the Huang-Huai-Hai basin saw relatively large area declines due to rising cotton production costs, declining comparative benefits of cotton planting, and the cancellation of the temporary purchase and storage policy; Xinjiang maintained basically stable cotton planting area due to the implementation of the pilot target price reform policy.

On the market demand side, after cotton prices in the new year are formed by the market, the price gap between domestic and foreign cotton is expected to narrow, which will help curb chemical fiber substitution and reduce cotton yarn imports, and cotton demand will also recover somewhat. It is expected that cotton demand in the new year will be about 8.5 million tons, an increase of about 500,000 tons over the previous year. Based on this calculation, the domestic cotton production-demand gap in the new year will be about 2 million tons, an increase of about 1 million tons over the previous year.

“In the new year, domestic cotton production for the year falls short of demand, but reserve releases and import arrangements are controllable, and favorable conditions exist for keeping the domestic cotton market running smoothly.” Lian Weiliang said that as long as the relationship between new cotton sales, reserve releases and import arrangements is properly handled, the relationship between protecting farmers' interests and improving textile competitiveness is properly handled, and the relationship between market-formed prices and government regulation is properly handled, market cotton prices can be guided to run within a reasonable range, and the overall balance of domestic cotton supply and demand and basic market stability can be maintained.

Do a good job in market guidance and regulation

As early as 2011, China established the temporary cotton purchase and storage system, and this policy played an important role in protecting cotton farmers' interests and stabilizing cotton production. However, in recent years, as international market cotton prices continued to decline, China's cotton market faced problems such as a relatively high price gap between domestic and foreign cotton, weakened role of market mechanisms, a sharp increase in the state's purchased and stored volume and inventories, and weakened competitiveness of textile exports.

At the beginning of this year, the state launched the pilot reform of the cotton target price in Xinjiang, and at the same time canceled the temporary purchase and storage policy nationwide. After implementation of this policy, whether in Xinjiang or the inland areas, new cotton prices were mainly formed by the market, and cotton circulation truly returned to the market.

“After the market-oriented reform of cotton, the state should, in light of the current cotton production and sales situation and the needs of advancing reform, further strengthen and improve macroeconomic regulation, do a good job in the overall balance of cotton, and guide the market to run smoothly.” Lian Weiliang said.

It is understood that, in order to leave room for the sale of new cotton, after the start of the new year the state has suspended reserve cotton releases to guide enterprises to actively purchase, process and sell new cotton. After cotton purchase and processing are basically completed in March next year, when the market shows supply falling short of demand and prices rise by a certain margin, the state will, depending on the progress of new cotton sales, release part of the reserve cotton again on the principle of not suppressing the market, so as to meet market demand.

At the same time, next year China will do a good job in cotton import-related work according to the domestic cotton supply and demand situation. In addition to issuing the 894,000-ton tariff quota promised upon accession to the WTO, in principle no additional import quotas will be issued, and domestic textile enterprises will be guided to use more domestic cotton.

Liu Kun, vice minister of finance, believes that to maintain a basic balance between domestic cotton supply and demand and relatively stable domestic cotton prices, market regulation must be done in a timely and appropriate manner. On the one hand, the quantity of cotton imports must be well controlled to prevent low-priced imported cotton from hitting the domestic market; on the other hand, cotton market conditions must be closely tracked, reserve cotton management strengthened, market regulation improved, market fluctuations smoothed, state reserve cotton actively digested, and the total volume and timing of reserve cotton releases into the market well grasped.

The new system emphasizes the role of the market

“This year is the first year of the pilot reform of the cotton target price. The market environment has changed considerably, and the task of cotton purchase and sale is heavy and difficult.” Lian Weiliang said that China will actively and steadily advance reform, achieve a smooth transition between the old and new mechanisms, and at the same time correctly handle the relationship between the government and the market.

The reporter learned that China will explore and establish a new market-oriented cotton purchase and sale system suited to the requirements of the new situation. Lian Weiliang revealed that the new cotton purchase and sale system will give full play to the role of market mechanisms, so that cotton purchase and processing enterprises generally become true market entities that operate independently, bear their own profits and losses, and develop themselves.

At the same time, the construction of the cotton market system will be further improved, the trading rules of the cotton spot and futures markets will be perfected, and a unified, open, competitive and orderly market circulation system will be formed; guided by the market, cotton cooperative organizations will be cultivated and industrialized operation actively promoted; the traditional advantages of supply and marketing cooperatives in taking root in rural areas, maintaining ties with cotton farmers, and having many outlets over a wide area will continue to be brought into play, the pace of market-oriented reform of cotton enterprises in the supply and marketing system will be accelerated, and cotton enterprise groups integrating trade, industry and agriculture across regions and ownership forms will be actively developed.

Liu Kun also said that China will continue to make every effort to do a good job in the pilot reform of the cotton target price, and the Ministry of Finance will, in accordance with the pilot plan approved by the State Council, promptly calculate and allocate subsidy funds; support non-pilot areas in adapting to policy changes, coordinate the formulation of specific plans to support the development of the cotton industry under the new situation, and promote the healthy development of the cotton industry.

“After the marketization of cotton purchase and sale, relevant departments and localities must conscientiously do a good job in oversight and services, preventing both excessive government intervention and inadequate oversight.” Lian Weiliang said.

The reporter learned that the National Development and Reform Commission has already required that relevant departments and localities strengthen oversight of the cotton purchase link and maintain order in the cotton market; strengthen management of cotton purchase and sale contracts and processing behavior, and cultivate honest and trustworthy cotton processing market entities; coordinate financial institutions to ensure the supply of funds for cotton purchases, reasonably determine loan thresholds, scientifically arrange credit plans, and avoid defaults. In addition, oversight of cotton quality must be strengthened, oversight of the futures market strengthened, the functions of the futures market in “price discovery and hedging” effectively brought into play, and excessive speculative trading using the futures market severely cracked down on.