Chinese high cotton reserve continues to discourage cotton imports in MY16-17

Chinese high cotton reserve continues to discourage cotton imports in MY16-17

Despite a forecast yield gain in Xinjiang, given the continuing nationwide decline in cotton acreage, Post’s forecast for China’s MY16/17 cotton production is 4.65 million metric tons (MMT)

This is lower than the MY15/16 estimate of 4.83 MMT. MY16/17 cotton use is forecast up to 7.8 MMT mainly due to a forecast decline in yarn imports and steady growth in domestic demand for textile and apparel products. Given that China is scheduled to restart selling state cotton reserves beginning March 2017, China is unlikely to add additional import quotas. Correspondingly, the forecast for MY16/17 cotton imports remain low at 980000 tons.

Despite a forecast yield gain in Xinjiang, given the continuing nationwide decline in cotton acreage, Post’s forecast for China’s MY16/17 cotton production is 4.65 million metric tons.  This is lower than the MY15/16 estimate of 4.83 MMT. MY16/17 cotton use is forecast up to 7.8 MMT mainly due to a forecast decline in yarn imports and steady growth in domestic demand for textile and apparel products. Given that China is scheduled to restart selling state cotton reserves beginning March 2017, China is unlikely to add additional import quotas. Correspondingly, the forecast for MY16/17 cotton imports remain low at 980000 tons.

Forecast MY16/17 Cotton Production is Lowered to 4.65 MMT

Post forecast for MY16/17 cotton production is lowered to 4.65 MMT, due to a decrease in planted area primarily as a result of lower government support since 2014. This production forecast is lower than the MY15/16 estimate of 4.83 MMT but slightly higher than the USDA November official data of 4.57 MMT.

In its October report, the China Cotton Association (CCA) forecast MY16/17 cotton production at 4.64 MMT, with Xinjiang accounting for about 3.61 MMT. The CCA forecast is based on recent harvest and marketing updates and is down 3.7 % from the previous year.

Conversely, based on a field survey conducted in October, Cncotton.com1 published in its November report, a higher forecast cotton production of 4.88 MMT. Cncotton.com also forecast high yields averaging at 1,668 Kg/Ha, up 9.2 % over the previous year, while planted area remains at 2.92 MHa. More specifically, forecast production for the Northwest Region stands at 3.84 MMT (of which Xinjiang production accounts for 3.81 MMT), the Yellow River region at 660000 tons, and the Yangtze River region at 345000 tons. The generally favourable weather conditions in Xinjiang contributed to the higher yields, up 10.9 % to 1,969 Kg/Ha in MY16/17. In the Yellow River region, the appropriate temperature and moisture conditions resulted in a more stable yield and a higher lint ratio and cotton quality. However, production in the Yangtze River region declined due to low yield as a result of wet weather during the growing period.

As a result of wet and cold weather impacting crop growth in Xinjiang, the cotton harvest is delayed slightly compared to the past two years. However, the marketing for seed cotton and the ginning pace remain generally similar to the previous year. As of November 20, the harvest in southern Xinjiang was 82 to 85 % completed, while harvest for Xinjiang’s Production and Construction Corp (PCC) and other non-PCC farms with mechanized harvesting methods was 92 to 95 % finished. Ginning is expected to be complete by the end of December 2016.

Chinese industry insiders agree that the MY16/17 Xinjiang cotton production is larger and the quality is better than the previous year.  Forecast production varies depending on the information source with the difference for Xinjiang production at about 200000 tons. However, sources do agree that the forecast production for all other provinces stands at about 1 MMT. As of November 23, China’s Fibre Inspection Bureau data shows total official classified cotton as 2.45 MMT, of which 2.41 MMT were Xinjiang crop. Based on other information regarding harvest, seed cotton purchase, and ginning pace, industry insiders believe MY16/17 Xinjiang cotton production may exceed 3.6 MMT.

Since October, the transport of Xinjiang cotton to eastern provinces became a problem mainly due to a rule restricting the overloading of trucks. The rule increased transportation costs by about 20 percent. At the same time, the supply of railcars was tight given the high shipping season for Xinjiang fruits to eastern provinces. As a result, delivery delays of Xinjiang cotton contributed to the recent increase in the domestic cotton price.

Ginners complained that the excessive ginning capacity competed for limited resources, thereby driving prices high in MY16/17. Since October, spinners have been increasingly challenged by the rapid increase in domestic cotton prices.

China’s cotton subsidy policy continues to support cotton production in Xinjiang

On October 28, 2016, the Xinjiang Provincial Government published implementation details for the 2016 Xinjiang cotton subsidy based on the central government’s previously announced target price of RMB18,600/ton (down by RMB500/ton from MY15-16). The implementation details remain virtually unchanged from the previous year. In an effort to reduce administrative costs and increase farmer confidence in cotton planting, subsidy payment to farmers will be paid in a timelier manner and completed in two instalments rather than four. One payment will be made at the end of October 2016 and the other at the end of January 2017. Basic data collection (that is, data related to cotton planted area/distribution and ginning facilities) and lessons learned from the subsidy implementation in MY16-17 are expected to shape the government’s formulation of the cotton support policy for MY17-18 and beyond. Based on official reports, MY16-17 is scheduled to be the final year of the government’s three-year trial implementation period for the “Target Price-based Subsidy Policy.” However, Post expects the current subsidy policy will continue in Xinjiang in the coming years.

According to official media, Xinjiang’s seed cotton price increased by 30 % compared to the previous year. Various sources report that Xinjiang farmers are generally satisfied with the seed cotton price and the anticipated profit margins, including the government’s subsidy that is to be paid early next year. As a result, cotton planted acreage in Xinjiang is expected to be stable or even increase in the coming years. On the other hand, cotton subsidies in the Yellow River and the Yangtze River regions remain low and uncertain. This is primarily due to changes in government support to cotton farmers in those regions since 2014. For example, in MY15-16 cotton subsidies in Shandong Province were about RMB150/Mu (or USD 330/Ha). Despite a recovery in seed cotton prices in MY16-17, cotton profits for farmers in the Yellow River and Yangtze River regions continue to be low compared to other crops.

Different than Xinjiang, cotton farming in these regions is fragmented with manual harvest. Given the relatively low yields and increasing labour costs, low cotton profits in these regions are expected to continue.

State cotton reserves sales will resume in March 2017

To meet domestic spinning demand, China’s National Development and Reform Commission (NDRC) announced that state cotton reserves sales will resume on March 6, 2017 and conclude at the end of August 2017. The daily volume for auction will be about 30000 tons. This volume could be raised if after three consecutive days the daily purchase rate exceeds 70 % of the offered volume. The 2016 sales of state cotton reserves ended on September 30, 2016, with a total 2.66 MMT sold, of which 296000 tons constituted imported cotton (with a purchase rate of 98.2 %) and 2.36 MMT were domestic cotton (with a purchase rate of 87.4 %).

MY16-17 cotton consumption forecast to recover moderately

Post’s forecast for MY16-17 cotton use is 7.8 MMT, up from the 7.6 MMT during the previous year. This is based on a forecast growth in domestic demand for cotton textile and apparel products and a decline in yarn imports.

According to Chinese Customs Statistics, China’s MY15/16 yarn imports stood at 2.07 MMT, down 196000 tons from the 2.23 MMT compared to the previous year. China’s lower yarn imports reflect a recovery in the competiveness of China’s spinning sector as a result of the government’s policy to reduce the gap between domestic and global cotton prices.  Yarn imports during the first three months of MY16-17 stand at 465128 tons, down 22.5 % and lower than the 599800 tons during the same period last year.  The domestic cotton price has been increasing since October, encouraging yarn imports from India and Pakistan in November. However, according to the industry, yarn imports are not likely to grow in MY16-17. This is because the Chinese government intends to boost the use of state reserves and regulate domestic cotton prices at a more “market-oriented” level when the sales of state reserve resumes. In addition, the current cotton price rally is expected to level off along with improvements in the transportation conditions from Xinjiang to eastern regions.

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Industry data supports a moderate recovery in China’s cotton use.  According to the National Statistics Bureau (NSB), in the first nine months of 2016, total domestic yarn production reached 30.74 MMT, up 5.1 % from the previous year. Total fixed asset investment in the textile industry increased 6.9 % and the total sales value of textile/apparels and others increased by 7.2 % from the previous year. Industry insiders remain cautiously optimistic regarding exports for the rest of 2016 and 2017, although total textile and apparel exports declined six percent in value compared to last year. A lower Chinese exchange rate might facilitate textile/apparel exports. Nevertheless, a reasonable domestic cotton price will continue to play a critical role in the competitiveness of China’s textile and apparel products in the global market.

China’s overall economic growth of 6.7 % during the first three quarters of 2016 continues to support more textile and apparel consumption. Additionally, as a result of China’s full implementation of its 2015 policy allowing each couple to have two children, China is expected to have 17.5 million new born babies in 2016, which is one million more compared to 2015. This will also contribute to the demand for cotton fibre products in 2016 and the future.

MY16-17 cotton imports remain low

Post’s forecast for MY16-17 cotton imports is 980000 tons, only slightly higher than the 962000 tons in the previous year.  Preliminary customs data shows China’s cotton imports in the first three months of MY16-17 are 5.5 % higher than the same period in the previous year. However, given China’s continued intention to reduce its large state cotton reserves and to control the issuance of additional import quotas, Post does not expect any major increases in cotton imports during the forecast year. In addition, out-of-quota cotton imports, which are subject to the full duty, are unlikely as the gap between domestic and global cotton prices continues to narrow.

China’s WTO cotton import quotas (894000 tons a year with a one percent import duty) are most likely to be used for imports of high grade cotton from suppliers such as the United States and Australia.

Chinese industry leaders continue to lobby the government for a more flexible import policy but any significant change in import policy is not expected to happen in the near future.

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MY16-17 cotton ending stocks remain high

China continues to draw down its cotton reserves through state sales. Post forecasts China’s cotton stocks to decrease but still exceed 10 MMT by the end of MY16-17. However, this level is lower than the peak MY14-15 level of 14.6 MMT, right before China decided to lower support to cotton farmers. In the near term, reducing state cotton stocks will remain a priority for the Chinese government.

CCA adjusts China’s cotton balance sheet

In its October report, CCA raised MY15-16 cotton use to 7.75 MMT (up from its previous estimate of 7.05 MMT) and forecast MY16-17 cotton use at 7.8 MMT. CCA explained that the higher estimate is due to higher-than-expected spinning and wadding cotton use, fewer cotton yarn imports in 2016, and a recovery of apparel exports. Additionally, CCA lowered the MY14-15 carry in stocks by 404000 tons to 12.41 MMT. This resulted in lower ending stocks for MY15-16 at 11.19 MMT, and 8.93 MMT for MY16-17.  In general, Post agrees with CCA regarding the level of domestic cotton use and trend.


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