Return Of The Dragon
June 4, 2009
After expanding at an unrelenting pace over recent years, China’s cotton and textile market is likely headed for its first contraction in a decade, but signs point to a rebound in the sector in the next marketing year. Already, China is the largest producer, consumer and importer of cotton in the world. But the global contraction in the world economy, coupled with lower cotton prices, dented growth in each area in 2008/09, with ripple effects felt around the world. On the supply side, Chinese farmers are believed to be planting between 6-12% less land to cotton than last year, owing to a slump in seed cotton prices and increased production costs across the country. From Xinjiang in the Far West to provinces along the coast, China’s largest cotton-producing provinces all are planting less cotton this spring.
A key reason is a policy that continues to favor grains over fiber. Chinese cotton producers receive a subsidy for planting better qualities of seed, amounting to $13 per acre (15 Yuan/mu). Meanwhile, grain producers can receive a direct subsidy, an agriculture input subsidy of $55 per acre (64 Yuan/mu), and subsidies for buying large agricultural machinery. There seems little doubt that cotton plantings will decline precipitously as a consequence of lower prices, higher input costs and fewer subsidies, relative to other crops.
Another piece of the production puzzle is anticipated yields. The United States Department of Agriculture forecasts yields next year may improve modestly from the 1,156 pounds per acre (1,299 kgs per hectare) recorded this season, owing to ongoing technological improvements and favorable moisture prospects. The wider dissemination of genetically modified seed varieties in the east and improved agronomic practices in Xinjiang are likely to drive the increases for the sixth straight year. While estimates of transgenic seed penetration on cotton acreage vary, they generally are around 80%. Some analysts believe that Bt variety coverage has reached 100% saturation in Henan, Hebei, Shandong, and Anhui provinces. Penetration in Xinjiang is still much lower, as there are fewer outbreaks of pests and diseases that would warrant the need for Bt seeds. The subsidy to encourage plantings of better seed varieties is widely expected to promote adoption of transgenic varieties, suggesting this share could go even higher in coming years, boosting yield prospects.
On balance, with plantings falling and yields expected to rise modestly, production is forecast to decline for the second straight year. At 34 million bales (7.4 million metric tons), the anticipated 2009/10 crop size is likely to be the smallest in four years, and well below the level of mill demand.
The global economic contagion severely curtailed mill demand for cotton around the world in 2008/09, including in China. With foreign demand for Chinese textiles and apparel plummeting, cotton use by China’s mills collapsed an unprecedented 6 million bales (1.3 million tons) to less than 45 million bales. This plunge prompted Beijing to recently announce a comprehensive stimulus plan for the domestic textile industry, with the goal of boosting exports in the sector by 8% each of the next three years. While we have reservations about the likelihood of reaching such a lofty target in 2009, we look for Chinese exports to re-accelerate rapidly in coming years, boosting prospects for resurgent mill demand for cotton. We expect Chinese mills to expand cotton use by 7% next year, rebounding to 48.7 million bales.
With cotton consumption likely to outpace production in China for the 11th straight year, imports are likely to rebound in the coming marketing year. The dramatic contraction in mill demand curtailed the need for imports in 2008/09, but soon-to-be-depleted stock levels are likely to boost imports. The latest forecast from the USDA’s agricultural Attaché in Beijing pegs imports next year at a lofty 13.8 million bales, the second-highest level on record. While we are not that optimistic, we do feel confident that imports will rebound substantially from this season’s disappointing 7 million bales, reaching over 10 million bales in 2009/10.
Prospects for higher mill demand and imports in the coming marketing year are likely to have repercussions in trade patterns and retail trends around the world. The anticipated growth in Chinese textile exports is faster than the historic annual growth in global textile trade, implying that higher Chinese share may crowd out smaller suppliers to key import markets around the world, and re-apply deflationary pressure to retail textile and apparel prices in these markets. And the projected jump in cotton demand likely will easily outpace the average annual growth in world cotton supply, suggesting hungry Chinese mills may take excess cotton off the world market at a rapid rate, driving lint prices higher. The combination of higher fiber prices and possibly lower retail prices implies tighter margins for participants along the supply chain from yarn mill to retailer. While this outlook may be great news for shoppers, it suggests a ripple-effect of continued belt-tightening for mills, manufacturers and importers in the new marketing year as the dragon reawakens.