Industry Trends: Defending China'S Cotton Pricing Power

China is the world's largest cotton producer, cotton consumer and the largest cotton importer, and has its own trading of cotton futures varieties, it should be said that China is a country with the right to cotton pricing.

But this rally began with the intercontinental futures exchange.

In mid July, the US cotton futures began to exert its strength and constantly pushed up the cotton futures price of the Zhengzhou Mercantile Exchange.

Cotton farmers have low willingness to grow cotton, and domestic cotton is decreasing year by year.

In recent years, Chinese farmers are abandoning cotton planting as China's largest cotton producer in the world. Cotton planting area is gradually losing ground. In 2 years, the planting area has decreased by 14 million mu.

According to a survey, cotton farmers' confidence has been frustrated and their planting area has been reduced due to low cotton prices in 2008.

Statistics show that China's cotton output in 2009 was 6 million 400 thousand tons, which was 1 million 100 thousand tons less than that in 2008, with a drop of nearly 15%.

On the other hand, last year, cotton production in Xinjiang and other major cotton producing areas decreased by nearly 1/4 due to climate disasters and other reasons, which further aggravated the contradiction between supply and demand imbalance.

Fig. 1 annual output of cotton in China (10000 tons)

Henan is one of the main cotton producing areas in China. The cotton planting area in the whole province has reached 10 million mu at the most.

The official estimate of Henan's planting area is 6 million acres this year, while the industry's most pessimistic estimate is only 2 million -300 mu.

According to information from the cotton producers association of Shandong Dezhou supply and Marketing Association, the cotton planting intention in 2010 was reduced by more than 10% over the previous year.

Last year's high cotton prices did not stimulate farmers' enthusiasm for planting cotton. This year, the city's cotton area is only 1 million 550 thousand mu, down 32% from last year, to the lowest level in 11 years.

Fig. 2 cotton planting area in China (1000 hectares)

{page_break}

Textile industry revived, strong demand for cotton

The added value of textile industry rebounded rapidly after hitting the bottom in 2008 and increased by 10% over the same period in 2009.

Since 2009, the retail sales of clothing, shoes and hats and needle textiles have increased by more than 20% over the same period last year, and the growth rate has been increasing.

Learned from the National Bureau of statistics, in 1-9 months, the total retail sales of consumer goods in China totaled 111029 billion yuan, up 18.3% from the same period last year, or 0.1 percentage points from last month.

According to the classification of commodities, the retail sales of textile and clothing commodities have been greatly increased.

In September, retail sales of clothing, shoes and hats and needle textiles were 45 billion 900 million yuan, an increase of 26.7% over the same period last year. Retail sales of clothing shoes and hats and needles and textiles were 400 billion yuan in 1-9 months, an increase of 24% over the same period last year.

According to the latest statistics of the Statistics Center of China Textile Industry Association, in 2010 1-8, the yarn production of Enterprises above Designated Size reached 17499031 tons, an increase of 16.23% over the same period last year, of which cotton yarn production reached 13386364 tons, an increase of 15.25% over the same period last year.

In the first 8 months of this year, the largest increase in output should be chemical fiber yarn, an increase of 24.34% over the same period last year.

Fig. 3 China's textile cotton (10000 tons)

On the one hand, China's cotton production is gradually decreasing. On the other hand, China is a big textile country and a strong textile country. The demand for textile cotton is strong. In recent years, textile cotton has remained stable at more than 10 million tons, while domestic cotton can only supply 60% cotton demand. The textile industry is a strong industry in China. Its rise and decline is directly related to the vital interests of tens of millions of cotton farmers and textile workers. The gap between supply and demand can only depend on imported cotton, and the largest cotton export in the world is the United States. When the supply of resources is controlled in the hands of others, the pricing power of cotton will undoubtedly fall to others.

In the current domestic cotton market supply imbalance, the international cotton multinational group may rely on abundant funds to purchase cotton in large quantities, and take advantage of capital and experience in the domestic cotton futures market to take the leading position. Through the dual control of the domestic and foreign futures market and the domestic spot market, the domestic cotton merchants will be defeated and the cotton pricing power will be obtained.

The government must attach importance to this problem. In order to prevent foreign businessmen from controlling the cotton industry in China, on the one hand, the state should track and control the foreign multinationals who have entered the domestic cotton market; on the other hand, it should enhance the competitiveness of the domestic cotton industry by giving more support policies to domestic producers, circulation processing and textile enterprises.

First, it is suggested that cotton farmers should be directly compensated.

The main problem that affects cotton growers' enthusiasm is efficiency.

Through direct subsidy, the state can let farmers taste the sweetness and let farmers feel that they can make money from planting cotton.

China's cotton production mode is still lagging behind the developed countries such as the United States, and its labor productivity is low and its comparative efficiency is low. This situation needs the attention and change of the state.

At present, grain farmers in China can receive direct subsidies, improved seed subsidies and comprehensive subsidies for agricultural products.

For example, farmers can get a subsidy of 75 yuan for planting an acre of wheat, and only 15 yuan for planting one mu of cotton.

In terms of price regulation, rice, wheat, corn, rape and other crops have implemented a minimum purchase price policy, and farmers can get stable expected income from grain production.

In addition, the comparative advantages of crops such as grain and other crops are gradually emerging as a result of the labor and labor intensity of cotton production and so on. Farmers have adjusted their planting structure to reduce cotton area.

Fig. 4 income per mu of cotton growers in China (yuan / mu)

Second, we need to establish a dynamic monitoring mechanism for foreign-funded enterprises in the domestic cotton market.

It is recommended that the NDRC take the lead, the joint agriculture department and the SFC and other departments will report the trend of major foreign enterprises in the cotton purchase and sale market and the cotton futures market in a timely manner, especially to monitor the trend of the merger and acquisition of domestic cotton circulation enterprises by foreign enterprises.

Third, we must speed up the cultivation of the main body of the cotton market, develop the industrialization of cotton management, and establish a modern cotton production service system.

We should actively explore the business model of "leading enterprises + farmers", encourage the development of all kinds of cotton cooperative economic organizations, establish a high quality cotton production base, and form a large-scale operation.

Fourth, we must strengthen market information service.

We should further strengthen the prediction and study of the cotton market, establish and improve the information network, and provide timely, reliable, systematic and complete market information to producers, operators and consumers.

We should study and establish a unified, accurate and authoritative cotton data statistics system, and adopt scientific statistical methods to find out China's cotton production and sale data.

Only in this way can the decision-making level and control effect of the cotton industry be improved. Otherwise, the regulation of China's cotton industry is still unable to get rid of the data puzzle. The international market will continue to impact domestic cotton supply and demand market and affect the price trend.

To sum up, the control of cotton pricing power is directly related to the vital interests of tens of millions of cotton farmers and textile workers. The government must do everything possible to prevent price fixing from dropping others. On the one hand, it will expand the subsidy policy for cotton farmers, restore the cotton planting area, and gradually increase the output; on the other hand, expand the source of cotton imports, and not rely too much on the US cotton. Increase the dynamic monitoring mechanism of foreign-funded enterprises in the domestic cotton market behavior, and prevent foreign enterprises from hyping the cotton prices with the domestic hot money through futures and spot markets.