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USDA GAIN: Oilseeds, Cotton, Sugar, Grain and Feed


10 May 2012

USDA GAIN: China Cotton and Products Annual 2012USDA GAIN: China Cotton and Products Annual 2012

MY12/13 domestic cotton production is forecast to drop to 6.85 million metric ton (MMT) on lower forecast planted area of 5.05 million hectares (MHa), while cotton consumption is expected to increase to 10 MMT. High domestic stock levels could weaken import demand in MY12/13, depending on the level of China’s market intervention measures. The U.S. remains China’s largest cotton supplier with MY10/11 sales of 1.2 MMT.
USDA GAIN Report - Oilseeds, Cotton, Sugar, Grain and Feed

Production

Recently, the National Development and Reform Commission (NDRC) issued a notice regarding indigenous development where cotton was characterized as a crop of economic significance with a targeted minimum production. China’s textile industry is the world’s largest consumer of cotton and depends on Chinese farmers to produce up to 70 percent of its demand. Domestic production, however, has not kept pace with the rapid growth and increasing sophistication of the textile industry. Economic factors, including preferential government support to grain crops, volatile price signals and low technological adaptation, have slowed industry advancement. Nevertheless, governmental policies are targeted at maintaining cotton production through measures that provide income support, encourage production stability and minimize price volatility.

Post forecasts MY11/12 domestic production at 7.2 MMT, reflecting yield losses from pre-harvest weather issues in the Yangtze River and the Yellow River regions and Xinjiang cotton production in excess of 3.5MMT. [Note: In late 2011, the Xinjiang Statistics Bureau reported MY11/12 Xinjiang cotton production of 2.9 MMT. China Fiber Inspection Bureau (CFIB), as of the end of March, reported total classified MY11/12 Xinjiang cotton at 3.32 MMT. As we’ve reported before, inconsistencies in Xinjiang’s reported planted area frequently distorts total production figures (GAIN CH10033).] China’s National Statistics Bureau (NSB) puts MY11/12 production at 6.6 MMT.

MY11/12

Due to a 21 percent rise in production costs, including labor, and a 30 percent drop in world seed cotton prices in MY 11/12, profits fell by 58.5 percent to $1,134/Ha (chart 1), except for Xinjiang where cotton profits fared better. [For Comparison of Cotton Production Output Value and Profit in MY10/11 and MY11/12, please download the document]

To boost farmer’s income, the Government purchased large amounts of the MY11/12 crop for state reserves at a set floor price of RMB19,800/MT, a price well above world market price. Despite this financial influx, however, cotton farmers will be considering the higher $1,410/Ha profit from the production of “wheat plus corn” last year (in Dongping, Shandong, for example), plus subsidies of $34/Ha for cotton, compared to an estimated $230/Ha for wheat, in making this year’s planting decisions.

MY12/13

In light of last year’s depressed profits and more lucrative alternative cash crops, MY12/13 cotton production is expected to fall 4.9% to 6.85MMT, due to a reduction in planted acreage with average yield of 1,356kg/ha. (See Chart 2). (See Table 10 for planted area and production by province).

Planted Area

Despite the government’s early confirmation of an increase in the floor price to RMB20,400/MT to encourage a minimum production of 7MMT, Post forecasts MY12/13 planted area will fall 6.1 percent from 5.38 MHa in MY11/12 to 5.05MHa due to the financial lure of competing crops.

The 2011 spike in planted area, in response to historically high cotton prices in 2010 is an anomaly which distracts from the trend that cotton planting area has been declining over time.

For the future, planting intention forecasts signal a continuing decline. The Ministry of Agriculture (MOA) forecasts a five percent decline in MY12/13, with a drop in a majority of cotton-producing regions, including Shandong (down 100,000 Ha) Xinjiang (down 53,000 Ha), then Hunan, Hubei, Anhui and Henan, with combined planting intentions down by 53,000 Ha.

The China Academy of Agricultural Science’s Cotton Research Institute reports a 6.1 percent fall in MY12/13 cotton planting intentions to 5,085,000 Ha, a dip from its estimated area of 5,416,000 Ha in MY11/12, with the Yangtze River Region down 4.1%, Yellow River Region down 8%, and the Northwest Region down 3.4% (North Xinjiang down 2.7%, South Xinjiang down 3.3%).

China Cotton Association (CCA), in December, forecast MY12/13 cotton planting intention down to 5.2MHa, a 10.5 percent drop over the previous year, with the Yangtze River region down 10.8%, the Yellow River region down 16.5%,and the Northwest region down 5%.

The National Cotton Market Monitoring Network showed MY12/13 cotton planting intention down 8.2 percent from the previous year to 4.8MHa. [For China Cotton Area and Production by Major Sources, please download the document]

Yield

In general, China’s average cotton yield by individual province/autonomous region varies significantly, ranging from 971Kg/Ha in Anhui to 1,747Kg/Ha in Xinjiang. MY11/12 average cotton yield was 1,310kg/Ha (NSB total production divided by planted area). MY12/13 average cotton yield is forecast at 1,356Kg per hectare.

Yield improvements as a result of Bt cotton use is expected to remain strong in MY12/13, potentially reaching 100 percent in Henan, Hebei, Shandong, and Anhui Provinces. The MOA plans to encourage usage of domestically developed “3-line Cross-bred Bt Cotton Varieties” which reportedly increases yield by 25 percent compared to conventional varieties. According to the China Academy of Agriculture Science (CAAS), this domestic variety has been planted on 300,000Ha as of MY11/12 and will be expanded in MY12/13.

In Xinjiang’s dry climate, Bt cotton is less prevalent due to a lower risk of diseases/pests. More applicable are the conventional varieties with specific traits, such as dwarf plant size and early maturity, which continue to raise yields in Xinjiang. The Xinjiang Production and Construction Corp (PCC) farms, which are organized over a larger area, incorporate particular agronomic practices, such as high density sowing, plastic sheet covering, and drip irrigation technology to improve yields. However, increased mechanized harvesting in MY 11/12, which offsets growing labor costs, reportedly had lower harvesting accuracy, compared to hand picking, which reduced overall per hectare yield in Xinjiang.

Additional Supply Considerations

The State Purchase of Domestic Cotton Program, which establishes a floor price for the purchase of domestic cotton for state reserves and the cotton TRQ regime are government programs enacted to maintain “the domestic cotton supply/demand balance.” The State Purchase Program had been suspended for the past two marketing years due to high market prices but was revived in MY11/12 when cotton prices fell below the established floor price of rmb19,800/MT for grade 328 cotton. The Government has already announced an increase in the MY 12/13 floor price to rmb20,400/MT.

Stocks

The GOC’s current stock reserve is likely to exceed 4 MMT, based on combined purchases of up to 3.13MMT from the MY11/12 crop, (surpassing the 2.89 MMT purchased in MY08/09), an estimated 800,000 MT of imports for reserve and approximately 300,000 MT of carry-in stocks. Given the forecast decline in planting area, the government will likely hold a higher level of stocks in preparation for potential mill demand. Many industry insiders believe the GOC will reserve any state stock release until after the MY12/13 crop is planted to avoid increasing supply at the same time farmers are making planting decisions.

Post forecasts MY12/13 ending stocks will remain high at 3.9 MMT, but this forecast will be impacted by many factors including consumption recovery and the price gap between domestic and international marketplaces. The stock to use ratio remains high at about 40 percent in MY11/12 and 12/13.

Imports

Annual import volume is controlled by the Government of China through a tariff rate quota system. This policy is in place to protect domestic production and regulate supply for textile demand.

For MY 11/12, the government authorized 894,000MT of cotton imports (subject to one percent import tariff) and in response to textile industry requests, distributed an additional 1.32 MMT of TRQ subject to a variable tariff rate. This heavy import demand was stimulated by a combination of lower domestic supply due to large government purchases for state reserve and favorable international cotton prices, which in turn partly attributed to the early release of additional TRQ (See table 12).

The impact for MY 12/13 imports of high domestic stocks will depend on the balance between many factors, including the health 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 price.

Due to its high stock levels and finite warehouse storage capacity, the government is less likely to purchase significant amounts of the MY12/13 domestic crop. This will give mills greater access to domestic supply making them less reliant on imports. (See chart 3-Production: Post’s estimate or forecast; Imports: Global Trade Atlas). Mills will be able to access imported cotton through TRQ’s, but still look to the government to release additional stocks if market constraints dictate. The significant reserve levels remain an uncertainty for cotton trade, especially if the GOC decides to release inventory but restrict additional import TRQ.

Depending on the level of government reserves released to mills, cotton imports could decline up to 20 percent in MY12/13, falling to 3.1 MMT from an estimated 3.9 MMT in MY11/12.

Consumption

Moderate growth of 4.2 percent to 10MMT is expected in China’s cotton consumption in MY12/13. Rising domestic and emerging market demands for apparel and textile products will be counterbalanced by sluggish economic performance in developed markets and an end to China’s economic stimulus package, both of which will slow consumer spending and weaken demand. Depending on the price ratio changes between cotton and synthetic fibers, and depending on the ratio the market demands at the time of production, mills can be expected to adjust the cotton percentage in yarn production more often in 2012. Historically, the price of cotton fiber is approximately 20 percent higher than that of synthetic fibers. Industry experts anticipate that the share of synthetic fibers in yarn production may increase in 2012 due to higher domestic cotton prices. According to NSB, total chemical fiber production in 2011 was 33.8 MMT, up 8.9 percent over the previous year. Due to a period of sustained high cotton prices, the share of “pure cotton” reportedly declined by 5.5 percent while “synthetic yarn” rose 7.2 percent in 2011, respectively, over 2008.

Textile Industry Faces New Challenges

According to China’s 12th Five Year (2011-2015) Plan, China will support and upgrade the development of the textile sector which employs over 23 million people and is considered a pillar industry. According to NSB, fixed asset investment in the textile industry in 2011 stood at $56.4 billion, up 30.9 percent over 2010. Additional growth is also causing some consolidation as small to medium-scale textile enterprises face multiple challenges, including higher priced raw materials and rising labor costs.

The GOC reported that the average monthly wage for the country's migrant workers rose 21 per cent in 2011 from the previous year, and this wage growth trend continued in 2012 as many coastal factories faced a serious shortage of workers in the first quarter. The increase in production costs and likely appreciation of China’s currency are forcing the industry to improve efficiency and productivity to maintain profit margins. [For China's Textile Sector Production/Investment Trends, please download the document]

Textile investments in China’s central and western regions (up by 57 percent and 49 percent, respectively over 2010) reflect movement toward lower labor inputs and a favorable investment climate. According to the following table, 2011 yarn production for central and western provinces saw double-digit growth rates (with exception of Xinjiang) while the six coastal provinces only reached seven percent. Steady growth is expected to continue assuming strong domestic and recovering developed market economic demand for China’s textile products. Xinjiang yarn production remains stable. However, industry insiders believe it will increase in the next few years if potential spinning capacity is fully implemented. [For Chart 4, please download the document]

Domestic Consumption to Increase

Domestic consumption of textiles and apparel continues to show steady growth. According to the China Textile Industry Association (CTIA), the domestic market accounted for more than 82.9 percent of the sector’s total sales value in 2011 (up 1.7 percentage points over 2010). With GDP over 9.2 percent in 2011 and expected to exceed 7.5 percent in 2012, growing incomes and rising living standards of Chinese consumers are driving retail consumption to the benefit of cotton products. For example, as indicated in Chart 5, the 2010 per capita expenditures on clothing increased for both urban and rural residents, up 12.5 percent for urban and 12.8 percent for rural over the previous year, with urban residents far outspending their rural neighbors (see Chart 5: Source: NSB and $1=RMB6.7 in 2010). Urban residents bought more, and better quality, products. China’s 674.1 million rural residents are expected to follow this pattern as their incomes rise as well. This will support continued demand for domestic cotton products. [For Chart 5, please download the document]

Misreporting of Yarn Categories and Volume Continue

A long standing problem in consumption forecasting is the difficulty in matching cotton consumption data with finished product figures due to a lack of reliable data. For example, according to NSB, total yarn production for 2011 was reported at 29 MMT, out of which a total of 22 MMT (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, which has ranged from 10 - 11 MMT annually in recent years, and other fibers available for spinning, which cannot produce this large volume of yarn. Over-reporting of total yarn and pure cotton yarn production, under-reporting of synthetic fiber ratio and cotton consumption, or some combination of these, also complicates accurate analysis. China’s industry insiders acknowledge misreporting of yarn categories and volume by mills is the basis for the problem.

Trade

China’s cotton exports average about 10,000 MT annually, insignificant compared to total cotton use. Cotton yarn and thread trade decreased in MY10/11 with total imports at 848,000 MT (down 18 percent), and exports at 347,000 MT (down 31 percent) over the previous year. The net imported volume remained constant at about 500,000 MT, compared to 537,000 MT in MY10/11.

Textile and apparel exports expected moderate growth in 2012

According to NSB, China’s textile and apparel export value surged to $247.9 billion in 2011, up 20 percent from the 206.6 billion in the previous year (See Chart 6; source: NSB) but only 0.5 percent higher by volume. Exports remained weak in the first two months of 2012 with the total export valued at $31.2 billion, slightly lower than the $32 billion in the same period of 2011. [For Chart 6, please download the document]

US Competes with India for China’s Market

In MY10/11 the United States regained its status as China’s largest cotton supplier with total export volume of 1.19 MMT, far surpassing the previous year’s top supplier India (with 631,000 MT in MY10/11). U.S. cotton quality and reliability are attractive to China’s end-users but it faces fierce competition from India’s price and transportation advantages. Indian cotton exports to China reached 829,000 MT, accounting for 38 percent of China’s total imports in the first half of MY11/12 (while the U.S. share fell to 11 percent from the 37 percent in MY10/11). India’s cotton production is expected to continue growing as it incorporates new technology, expands Bt cotton dissemination and actively promotes its product.

Consignment Trade

Due to strong demand for lower priced imported cotton since late 2011, consignment trade has seen a recovery. With bumper harvests expected from some of the major cotton producing countries, world supplies may ease somewhat and facilitate a resumption of this trade practice. 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.

Seed Subsidy

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 2011, though unpublished, is believed to exceed $175 million (if based on the NSB’s 5.04 MHa planted area for MY11/12).

May 2012

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