China. Cotton and Products Annual. Apr 2013 May 2, 2013
A shift in planting area to higher profit, alternative crops drops MY13/14 domestic cotton production forecast to 7 million tons despite government incentives to provide income and stabilize cotton acreage. Government purchases of cotton, funneled into state reserves, have resulted in a record level of domestic stocks, which coupled with tariff rate quota restrictions on additional supplies, will impact China’s import demand. U.S. cotton export volume fell to second place behind India in MY11/12 and face competition for imports projected to fall to 2 million tons in MY13/14. Cotton consumption is expected to rise to 8.7 million tons as China’s domestic and emerging markets stimulate demand.
China has no official cotton market information collection system. The lack of transparent and reliable data (production, consumption, and stocks) has been more pronounced in recent years due to the rapid expansion and diversified scales of production. The numerous players continue to diversify ownership in the industry chain, including the large number of cotton farmers, gins, merchants and mills. All these entities contribute to making the collection of reliable production statistics in China an extremely difficult task.
MY13/14 production of 7 million tons is less than the 7.6 million tons in the previous year on reduced planted area. The government continues to provide income protection to cotton farmers through a minimum purchase price which exceeds the world price. In MY12/13, farmers with qualified cotton received RMB20,400/ton, up from RMB19,800/ton MY11/12. The elevated price is pulling a majority of the crop into government held reserves estimated to have reached a historic level of almost 10 million tons. China’s ability to release state reserve for domestic use and control additional cotton supplies through the tariff rate quota will impact the demand for imports. Total imports are likely to fall to 2 million tons in MY13/14.
MY13/14 cotton planted area is forecast to decline to 5.03 MHa, down from the estimated 5.25 MHa in the previous year, as farmers in the Yellow River region plant more acreage in alternative crops than is added to cotton in Xinjiang. In its 2013 Crop Production Work Plan released in late February, the Ministry of Agriculture (MOA) targeted MY13/14 cotton planted area at 70 million Mu (4.67MHa) with stable area in the Yellow River and the Yangtze River regions and moderate expansion in Xinjiang’s cotton area. MY13/14 planted area in Xinjiang is forecast to rise to 2.17 MHa, up from an estimated 2.15 MHa in the previous year. Xinjiang cotton planted area has expanded rapidly since MY11/12 in response to favorable market prices offered by the government which insured cotton remains a competitive crop in this region.
Chart 2 shows that cotton profit peaked in MY10/11 due to a world price surge and remained strong at RMB8,550/Ha in MY11/12 in Xinjiang due to a high purchase price paid by the government. Industry sources indicate that a majority of Xinjiang’s MY 12/13 crop (4.06 million tons from a total 4.5 million tons) was purchased by the government at RMB20,400 and reportedly added to state reserves.
In the Yellow River region, however, farmers planting “wheat+corn” had a profit of RMB8,550/Ha and RMB7,770/Ha in Shandong and Henan, respectively, compared to the negative cotton profit reported in these two provinces in MY11/12. Low yield in the Yellow River region further eroded cotton profits in MY12/13, which is expected to intensify the planting decline in MY13/14. Low profits and labor shortages, as workers choose urban employment over rural, in the Yangtze River region attributed to the planting intention decline.
In mid-January, CNCE forecast MY13/14 cotton area would fall by 5 percent, with losses in the Yellow River (-13 percent) and Yangtze River regions (-6 percent) canceling area gains in Xinjiang (+ 2 percent) and Gansu (+ 1 percent) provinces. The area decline drops CNCE’s production estimate to 6.69 million tons, down from its estimated MY12/13 production of 7.22 million tons.
In February, CCA shared survey results indicating a MY13/14 cotton planting intention slide to 4.54 MHa, a 6.8 percent dip over the previous year, with Yangtze River region down 6.1 percent, Yellow River region down 17.2 percent, but the northwest region was up 0.3 percent.
Based on its mid-March survey, the China Academy of Agricultural Science Cotton Research Institute (CRI) reported an 8.5 percent fall in MY13/14 cotton planting intentions to 4.67 MHa, a slump from its estimated area of 5.1 MHa in MY12/13, with the Yangtze River region down 9.1 percent, the Yellow River region down 10.5 percent, and the northwest region down 6.9 percent (north Xinjiang down 10 percent, south Xinjiang down 4.3 percent).
Likewise, NCMMN’s mid-March survey results showed that MY13/14 cotton planting intentions were down 2.9 percent from the previous year to 4.84 MHa. Specifically, the Yellow River region will decline 9.3 percent to 1.48 MHa with the biggest drop of 12.4 percent and 13.3 percent in Henan and Hebei, respectively, followed by the Yangtze River region down 5.4 percent to 1.12 MHa. Planting intentions in the northwest region, though, were up by 2.3 percent to 2.21 MHa.
The Xinjiang Development and Reform Commission, however, reported a 2 percent decline in cotton planting intention in MY13/14. Reportedly, the local government is planning to re-structure industry with a plan to “curb cotton expansion, maintain grain area, regulate fruits and promote animal production.” In addition, the continuing rise in the cost of agricultural inputs has also impacted cotton planting intentions.
Overall, MY13/14 cotton yield is forecast moderately above average at 1,392Kg/Ha. China’s average cotton yield by individual province/autonomous region varies significantly, ranging from 971Kg/Ha in Anhui to 1,747Kg/Ha in Xinjiang (see Chart 3). MY12/13 average cotton yield was 1,455 Kg/Ha (NSB total production divided by planted area), while the yield for Xinjiang hit a record at 2,056Kg/Ha (per Xinjiang Statistics Bureau) due to good weather conditions.
One factor contributing to yield improvements is Bt cotton use which is expected to continue in MY13/14. Bt varieties could potentially reach 100 percent of the crop in the Yellow River provinces of Henan, Hebei, Shandong, and Anhui Provinces. However, yield in the Yangtze River and Yellow River regions remains volatile and low due to weather uncertainties.
In Xinjiang’s dry climate, Bt cotton is less prevalent due to a lower risk of diseases and pests. Conventional varieties with specific traits, such as dwarf plant size and early maturity, continue to raise yields in Xinjiang. The Xinjiang Production and Construction Corp (PCC) farms, which are organized on a larger scale than other typical cotton farms, incorporate particular agronomic practices, such as high density sowing, plastic sheet covering, and drip irrigation technology, to improve yields.
Government purchases of up to 6.46 million tons of cotton from the MY12/13 crop (85 percent of the total crop as of March 25) have expanded state reserves to a record level approaching 10 million tons through the first quarter. CCA reported that mills purchased 490,000 tons of cotton at state reserve auctions in September 2012 and between January 14 and March 25, 2013, bought another 910,000 tons (about 30 percent of the amount available) at a base price of RMB 19,000 per ton.
The lackluster interest in purchasing cotton reflects a stagnation in cotton demand. Nevertheless, NDRC plans to offer 4.5 million tons for sale by the end of July, 2013. Given the high price for state reserve cotton and slow recovery of demand, the government will have to hold stocks in preparation for potential future mill demand.
Post forecasts ending stocks will remain high at 9.2 million tons for MY12/13, and hit 9.5 million tons at the end of MY13/14. This forecast will be impacted by many factors including the consumption recovery and the price gap between the domestic and world market. The stock to use ratio remains high at above 110 percent in MY12/13 and 13/14.
Note: Annual import volume is controlled by the government through a tariff rate quota (TRQ) system. This policy facilitates the government ability to protect domestic production and regulate supply of cotton imports.
For MY12/13, the government authorized 894,000 million tons of cotton import TRQ (subject to one percent import tariff). In late March 2013, the government allocated additional TRQ subject to a variable tariff rate in response to industry requests. Industry sources indicate that the supplemental quota was allocated in a 1 to 3 volume ratio (to receive 1 ton of TRQ, mills must purchase 3 to 4 tons of state reserve). The widely rumored additional TRQ for “processing trade” has not been distributed as of this report.
The interaction between low world market price, limited import quota and tight domestic cotton supply, stimulated over quota, full duty (40 percent) cotton imports. Industry experts believe that, so long as the price gap between domestic and international markets remains around RMB5,000/ton ($800/ton), Chinese cotton buyers will continue to import cotton outside the TRQ (by paying the 40 percent duty).
MY 13/14 cotton imports are forecast at 2 million tons, down from the estimated 3.1 million tons in MY12/13. Imports will depend on the balance between many factors, including the size of domestic
production, strength of cotton consumption, level of governmental reserves and extent of market intervention measures, and the price gap between domestic and world prices.
Due to its high stocks and finite warehouse storage capacity, the government is less likely to purchase extensive amounts of the MY13/14 domestic crop. If this occurs, textile mills access to domestic supply will improve thereby reducing their reliance on imports to meet demand.
Cotton imports are also affected by yarn imports. Yarn imports face no volume import restrictions. In 2012, China imported a record 1.4 million tons of yarn, up from 806,000 tons in 2011. High net yarn imports in part reduced cotton imports in 2012 and will continue to impact cotton imports in 2013.
China’s cotton exports average about 10,000 tons annually, insignificant compared to total cotton use. Cotton exports in 2013 may increase slightly due to huge stocks, but significant export growth is unlikely due to its high domestic price. Yarn exports remain stable at about 300,000 tons, making net yarn imports 1.15 million tons, significantly higher than the 500,000 tons in 2011.
MY13/14 cotton consumption is forecast at 8.7 million tons, up from an estimated 8 million tons in MY12/13. Although demand from developed markets, like the US and EU, remains sluggish due to recovering economic performance, consumption of apparel and textile products in China’s domestic and other developing economies is on the rise.
In making those products, depending on the price difference between cotton and synthetic fibers, and on the market demands at the time of production, mills can adjust the cotton content in yarn production. Historically, the price of cotton fiber runs approximately 20 percent higher than that of synthetic fiber. When cotton prices are high for a sustained period, for example in 2011, the share of “pure cotton” in yarn reportedly declined by 5.5 percent while “synthetic yarn” rose 7.2 percent, respectively, over 2008. Of concern to the cotton industry is that even when cotton prices recovered, the substitution of synthetic for cotton fiber trend continued. According to NSB, total chemical fiber production in 2012
was 38 million tons, up 12.1 percent over the previous year. Industry experts anticipate that the share of synthetic fibers in yarn production may continue in 2013 due to high domestic cotton prices.
Textile Industry Faces New Challenges
The textile industry in China employs over 23 million people and is considered an economic pillar industry. In China’s 12th Five Year (2011-2015) Plan, the government confirmed its support to upgrade this sector. According to NSB, fixed asset investment in the textile industry in 2012 reached $65.5 billion, up 12 percent over 2011, but significantly lower than the 30.9 percent in 2011. Despite this financial influx, the textile industry faces significant challenges, including rising production costs for key inputs such raw materials and labor.
Industry statistics show that in 2012 mills paid more than RMB 4,000 to 5,000/ton ($640 to $800) above the world price for domestic cotton. Price inflation is expected to continue in 2013 as the government has not provided signals that it will reduce its minimum purchase price paid for the MY13/14 domestic crop. In addition to high prices for raw materials, Chinese industry leaders estimate that the general labor cost rose more than 10 percent in 2012 over the previous year and a general labor shortage is unlikely to provide relief from this rising expense. Electricity costs have also increased by 2 to 4 percent in 2012 from the previous year.
To address these factors which jeopardize the competitiveness of Chinese mills, textile industry leaders are using different options. Some mills are improving efficiency and productivity to maintain profits. Others have moved operations towards China’s central and western regions in search of lower labor inputs and a favorable investment climate. For example, industry insiders believe Xinjiang’s yarn production, which reached 402,000 tons in 2012, will increase in the next few years once potential spinning capacity is fully operational.
Other operators have relocated spinning facilities to southeast Asian countries in search of lower production costs while others have increased yarn imports, instead of cotton, to ease price operating expenses.
Domestic Consumption to Increase:
According to the China Textile Industry Association (CTIA), the domestic market accounted for more than 83 percent of the sector’s total sales value in 2012. With GDP growth at 7.8 percent in 2012 and expected at 7.5 percent in 2013, higher disposable income and rising living standards of Chinese consumers are driving retail consumption to the benefit of cotton products. For example, as indicated in Chart 6, the 2011 per capita expenditures on clothing increased for both urban and rural residents, up 16 percent for urban and 30 percent for rural over the previous year, with urban residents far outspending their rural counterparts. The market potential for China’s 674.1 million rural residents to increase textile related purchases is expected to rise as their incomes grow as well. This will support continued demand for domestic cotton products.
Misreporting of Yarn Categories and Volume Continue
A long standing problem in consumption forecasting is the lack of reliable data to connect cotton consumption data with finished product numbers. For example, according to NSB, total yarn production for 2011 was reported at 29 million tons, of which 22 million tons (accounting for 75.4 percent) was reported as pure cotton yarn, with the remainder as blended yarn and synthetic yarn. These figures are problematic when compared to China’s average cotton consumption, averaging 10 million tons annually in recent years, and other fibers available for spinning, which cumulatively cannot produce the reported volume of yarn. Over-reporting of total yarn and pure cotton yarn production and under-reporting of synthetic fiber ratios and cotton consumption, or some combination thereof, distorts accurate analysis. China’s industry insiders acknowledge misreporting of yarn categories and volume by mills is the basis of the problem.
Textile and apparel exports expected moderate growth in 2013
According to NSB, China’s textile and apparel export growth peaked at $254.9 billion in 2012, up slightly from the $247.9 billion in the previous year. This export gain pales, though, when compared to the 20 percent leap in 2011 (over 2010) and reflects continuing weakness in overseas market demand. Industry sources, though, expect exports to strengthen in 2013 on anticipation of a moderate recovery in the global economy. In fact, exports improved in the first two months of 2013 with total exports valued at $41.2 billion, up 32 percent over the $31.2 billion in the same period of 2012. Any gains from a significant export rebound, however, will be hard won given a declining competitiveness of the sector as a result of high production costs.
U.S. Competes with India for China’s Market
In MY11/12, India topped the United States as China’s largest cotton supplier with total export volume of 1.98 million tons, compared to 1.31 million tons, respectively. While the quality and reliability of U.S. cotton appeals to China’s end-users, India’s price and transportation advantages provide serious competition. India’s cotton production is expected to increase as it incorporates new technology, expands Bt cotton dissemination and actively promotes its product. Competition from India and other suppliers, coupled with expected low demand for imports, is expected to reduce US cotton imports to China in MY13/14.
Due to strong demand for alternatives to high-priced domestic cotton since late 2011, consignment trade has been gaining ground. China’s small to medium-sized mills choose consignment purchases due to the flexibility they offer, including short delivery time, convenient quality verification and lower financial commitment. However, due to the lack of import TRQ, most mills pay the full duty to take delivery of the cotton held in bonded warehouses. Consignment trade is expected to remain a viable source until the world cotton price changes making the cost of import plus full duty unattractive for Chinese mills.
Purchase floor price policy continues
The State Purchase of Domestic Cotton Program, which establishes the floor price for purchase of domestic cotton for state reserves and the cotton TRQ regime, are government programs enacted to maintain “the domestic cotton supply/demand balance.” When the domestic cotton price is above production costs, for example, during the MY 09/10 and 10/11, the program is suspended. When the price falls below, for example as in MY 11/12, the program is revived. A minimum floor price for qualified cotton is established and extended to an unlimited volume of cotton marketed between September and March.
In MY11/12, the government set a floor price of rmb19,800/ton for grade 328 cotton. In MY12/13, it set an even higher price of RMB20,400/ton. Reportedly, the government purchased 85 percent of the MY12/13 crop and added 6.46 million tons of cotton to state reserves. The MY 13/14 floor price has not been announced but speculation is that it is likely to remain at RMB20,400/ton.
Large seed producers/traders currently compete for the $34/Ha subsidy provided for selected “high quality variety” seeds to improve quality cotton coverage. Total expenditure in 2012, though unpublished, is believed to exceed $180 million (if based on the NSB’s 5.04 MHa planted area for MY12/13).
Registration System for Overseas Cotton Suppliers
Overseas cotton suppliers must be registered with China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) to export cotton to China (CH8075 and CH9004). On January 18, 2013, AQSIQ published Decree No.151 on "Supervision and Administration Measures for Inspection of Import Cotton." The measures took effect on February 1, 2013. A draft version was published for comment on December 8, 2011 (CH11064), and notified to the World Trade Organization (WTO) on July 23, 2012 as G/TBT/N/CHN/925. Preliminary comparison between the draft and final versions shows only slight modifications in Article 26 (CH13003). The impact of the Measures on cotton trade is expected to be limited. Traders are also recommended to register with AQSIQ to export cotton to China based on these requirements.
USDA continues to work with AQSIQ on industry concerns related to the registration system and to enhance mutual understanding and provide a solid foundation for both sides to carry out additional cooperation for cotton import inspections.
MY13/14 official classified cotton hit record of 7.1 million tons
China’s cotton classification reform moved forward in MY12/13. According to CFIB, as of March 24, 2013, total cotton baled and classed on the new classification system reached 7.11 million tons, accounting for 93.5 percent of the total production (estimated at 7.6 million tons) in MY12/13. The increase in officially classified volume (from the 5.56 million tons in MY11/12) is mainly driven by the state reserve purchase requirement that cotton be classified. More than 1,801 gins participated in cotton HVI classification, up from the 1,738 in the previous year.
The new classing system is expected to help facilitate domestic cotton production estimates and upgrade the quality levels of China’s ginning sector. CFIB MY12/13 classing data (as of March 24) shows 4.46 million tons of Xinjiang cotton was classified, already much higher than the NSB released MY12/13 Xinjiang production of 3.45 million tons, indicating continuing underestimation of Xinjiang cotton production.
In MY12/13, the Agriculture Development Bank of China (ADBC) continued to provide targeted loans with favorable terms for the purchase of seed cotton. This program facilitated the marketing of seed cotton when market prices remained weak and demand for cotton was stagnant. Xinjiang government information indicated that total loans exceeded RMB60 billion in My12/13, up 17.6 percent over the previous year. ADBC will continue to provide financial assistance for domestic cotton marketing in MY13/14.
Transporting Cotton from Xinjiang Province
The government continues to provide a transportation subsidy of RMB500/ton ($80) in MY12/13 (up from the RMB 400/ton in MY11/12) for Xinjiang origin cotton shipped to mills in coastal and southern cities. Xinjiang province provides 40 percent of China’s domestic cotton production yet there is only one rail line to move the raw product cross-country to the textile production areas. Harvest time can be a bottleneck. The shipping congestion improved slightly in MY12/13 when the government purchased most of the Xinjiang cotton for reserve and stored it locally, thus reducing the pressure on rail transportation