Cotton price reform responds to excessive domestic and international price gaps, cotton enterprises wait and see on subsidy distribution

On September 22, a relevant official of the National Development and Reform Commission said at a press conference on "Cotton Target Price Reform Pilot and Market Regulation" that the NDRC will suspend the release of reserve cotton and implement target price reform.

It is reported that, with the approval of the State Council, the NDRC approved last week the "Implementation Plan for the Cotton Target Price Reform Pilot" of the Xinjiang Uygur Autonomous Region and the Xinjiang Production and Construction Corps, marking that the long-prepared cotton target price reform has entered the implementation stage.

Regarding the introduction of this policy, a person from a relevant department of a cotton enterprise told a reporter from Securities Daily that it is still unknown how the subsidies will ultimately be distributed, and with no specific measures issued, it is impossible to estimate what the future will be like.

Reform responds to domestic and international cotton price gap

In fact, because the price gap between domestic and international cotton is too high, domestic cotton enterprises have been scrambling to obtain quotas to buy foreign cotton, hoping to buy lower-priced imported foreign cotton, while domestic cotton prices remain high because of higher production costs, and cotton farmers, in order to survive, have had to change to growing other crops.

"At present, the domestic cotton price is above 18,000 yuan/ton, while the price of imported foreign cotton is only around 13,000 yuan/ton. With such a large price gap, and with the company mainly focused on exports, the costs brought by the cotton price gap have reduced the company's international competitiveness," a person from a relevant department of a listed textile and apparel company told the reporter. Previously, the company could still obtain quotas to buy imported foreign cotton, but now it cannot even get quotas.

The above-mentioned person complained to the reporter, "The cotton the company buys domestically is not of very good quality, and some of the cotton is old stock that has been hoarded for several years."

In fact, people from several cotton enterprises had long complained to the reporter that the large domestic and international cotton price gap has led to excessively high enterprise costs and uncompetitive product prices. This has also led many cotton enterprises to scramble for the limited import quotas for foreign cotton. It is precisely against this backdrop that the state began piloting cotton target price reform and market regulation.

Liu Xiaonan, deputy director of the Department of Economic and Trade of the NDRC, said that after the implementation of the target price, the linkage between domestic and international cotton markets will be strengthened, and the domestic and international price gap will narrow to a reasonable level. This will be somewhat beneficial for improving the competitiveness of textile enterprises, especially export-oriented textile enterprises, and will place them in a relatively fair and reasonable competitive environment.

Some reports say that starting from September 1 this year, market price monitoring for Xinjiang cotton has officially begun. The target price for Xinjiang ginned cotton is set on a one-year basis. The target price of ginned cotton in 2014 is 19,800 yuan/ton, equivalent to a seed cotton price of about 4.4 yuan per jin. At present, the initial opening purchase price for actual seed cotton coming to market is only about 3.3 yuan per jin. On this basis, the 1 yuan per jin price difference for seed cotton will be subsidized by the state.

Direct subsidies to cotton farmers

It is understood that if relevant departments adopt the cotton target price system, the previous temporary purchase and storage system will be abolished, and cotton farmers will be directly subsidized.

Zhou Wangjun, deputy director of the Department of Price of the NDRC, pointed out that the target price has a guiding role: when output is high, the target price guides farmers to plant a little less; when output declines, the target price can guide farmers to plant a little more. This is the goal we want to achieve.

However, whether this cotton price reform can bring domestic market cotton prices close to international cotton prices is still unknown. A person from a relevant department of a cotton enterprise told the reporter that it is still unknown how the subsidies will be handled, how much can be subsidized, and whether domestic cotton prices can be level with international cotton prices. All of these are unknowns.

Compared with cotton enterprises' wait-and-see attitude and worry about the implementation of cotton target price reform, cotton farmers who are directly subsidized are more concerned about how much subsidy they will receive and worry about whether they will lose money.

A local cotton farmer in Xinjiang said in an interview with the media that because strong winds this year affected cotton output, he expects to harvest about 37,000 tons of cotton. He did the math: according to the state's target price subsidy policy, with 19,800 yuan/ton converted into a seed cotton price of about 8.8 yuan/kg, the cotton he planted on 120 mu of land will not lose money, and below that price, there is subsidy protection. "If the subsidy is based on mu, I will not lose money this year, but if the subsidy is based on output, then my income will be much lower. What I care about most now is the cotton purchase price."

Because the cotton target price pilot has just started, how much the subsidy will be cannot yet be determined. In this regard, Zhou Wangjun said that the actual price should be calculated based on the average price of cotton sold by farmers in September, October, and November, and the gap between the target price and the actual price is the amount of subsidy we should distribute to farmers.

Zhou Wangjun gave an example: "The most fundamental thing is that the cotton price must be determined by the market. In this process, we determine a target price based on farmers' planting costs plus basic returns. According to this principle, the target price we set this year for Xinjiang cotton is 19,800 yuan per ton. The current domestic cotton price is 14,000 yuan per ton. The difference between the two is 5,800 yuan/ton, which is the amount we should subsidize farmers this year."

"In addition to the pilot areas in Xinjiang, the state will also provide appropriate subsidies to the main production areas in the Yangtze River and Yellow River basins. This principle has already been decided by the State Council. How to subsidize and how much to subsidize will be announced by the Ministry of Finance," Zhou Wangjun said.

Unlike cotton farmers who worry about how much the subsidy will be, those enterprises that purchase cotton buy cotton entirely at market prices.

"Our enterprise purchases according to market conditions. Whatever the market says is the price," a relevant person in charge of a local enterprise in Xinjiang told the media, saying that the current market quotation is 6 yuan/kg to 8 yuan/kg, but the specific price will not come out until around October 10.

It is understood that because Xinjiang is piloting cotton target price reform this year and state reserve cotton has stopped being sold off, some textile enterprises with order production tasks are currently in urgent need of cotton.