China is the largest consumer of cotton and influences every aspect of the global market. When Beijing decided to prop up domestic cotton producers, did it overplay its hand in the global economy? Since the banner year of 2005, over 17 million bales, the United States has exported over 10 million bales (each bale is nearly 480 lbs.) of cotton, which makes the fiber one of the nation’s key export items. The US is easily the largest exporter representing nearly 40% of the total market. India at around 7.5 million bales, Australia at around 4 million bales and Brazil at 2.4 million bales annually are the other traditional market setters. However, in recent years new players have entered the business, notably African nations like Burkina Faso, Mali and Cote d’Ivoire. Other nations like Uzbekistan and Turkmenistan are new to the mix of major cotton exporters. Cotton prices in 2005 through 2010 remained relatively stable running roughly from 50-cents/lb. to 75 cents/lb. Part of the reason for the pricing stability was that the big textile manufacturing nations like the US, China, India and Pakistan were also big cotton producers. Equally, the supply and demand ratio for cotton was also subject to shifting agricultural cultivation. If soybeans or corn or other commodity crops produced a better return than the cotton then the tendency was (and still is) to alternate crops. This process was impacted as much by domestic demand as global factors. However, in 2010 a shift in the cotton market began what is still felt today. The price of cotton began rocketing upward in 2010 before peaking at 210.64 cents per pound in March of 2011. Like a rocket running out of fuel, cotton prices began to falter and tumbled downward and by the end of 2011 were below100 cents/lb. and now are around 59 cents/lb. The impact of cotton prices falling off a cliff dramatically impacted US exports. The China Factor China’s demand for cotton imports has grown spurred by both rising domestic textile production and the export economic mandate. The boom in apparel exports to mega-retailers like Wal-Mart, Target and Kohl’s, began to outrun China’s ability to produce cotton. In the 2000/01 marketing year, the gap between Chinese domestic consumption and mill usage was around 3.2 million bales. By 2003/04 the tally had risen to over 8 million bales and from 2005/06 to 2010/11 the gap averaged over 14 million bales. While the demand for cotton by textile producers was rising in China to match export demands, China’s cotton acreage fell. The combination of lower cotton acreage and production along with greater demand meant China’s mills had to buy more imported cotton resulting in increased cotton prices worldwide. The spike in prices in 2011 (210.64 cents/lbs.) prompted Beijing to introduce with its 2011 crop, a policy of buying (at a price well above the global rate) a majority of their domestic production and placing the bales into government reserves. The buying spree resulted in China stockpiling approximately 75 million bales from the 2011-2013 crops. The strategy behind the new policy was to stabilize China’s cotton acreage through prices guaranteed by the reserve system. Secondly, the cotton reserves would guarantee China’s mills access to “cheap” cotton at stable prices. Around 85%-90% of the Chinese cotton harvest was sold to government reserves. But Beijing may have over played its hand. At the time there was a strong desire in Beijing to appease farming interests, which coincided with the advancement of other domestic economic initiates. The policy was implemented at the time of the apex in cotton prices, just before the tumble. And even during the period of falling prices, Chinese growers continued to receive 140 cents/lb. despite world prices of under 90 cents/lb. There was virtually no impetus for Chinese growers to sell anywhere but to the government reserve but almost immediately the mills had the option of buying higher priced domestic cotton or cheaper foreign imports. Unlike other agricultural goods, cotton can be stored for long periods of time, influencing markets over several years. The Chinese government decision to hoard stocks over selling the stocks down didn’t produce the desired result. Worldwide cotton prices were still propped up higher than expected given the supply and demand situation. Globally there was no immediate pricing reason to shift crops as cotton acreage versus alternative plantings still favored cotton. Further alternative markets were opening up as up and coming textile exporting nations like Vietnam, Turkey, Indonesia and others began to soak up a cotton surplus supporting prices. And while overall cotton exports to China were down (2013/14, Chinese imports decreased 31%, falling to 14.1 million bales), the Chinese mills themselves were content to buying “lower” priced foreign cotton imports [against the pricing on their own domestic reserves]. The unintended consequence of Beijing’s policy was to remove a substantial amount of cotton from the global marketplace and to accidentally prop up pricing, albeit at lower prices than their domestic reserves. It also served as a reminder that the “export” first economy is still alive and well, and running as a strong counter current to Beijing’s avowed policies. East Wind Blowing The 2014/15 cotton crop year is the fifth crop year in a row where global production is estimated to out pace consumption. But there is a change in the East wind. Politically, a great deal was changing in China itself, as the policy of “cotton hoarding” was in full swing. One critical element of Beijing’s new leadership’s approach was to be deemphasizing the “export economy” and readdressing domestic economic issues. While propping up domestic demand might seem in tune with the new leadership, in relation to commodities Beijing’s new tactic is directed at securing more global sourcing. Additionally, in trying to balance domestic demand against the export oriented model that propelled growth through the 1990s to now, China is trying to move up the value chain in terms of export products, while others nations like Vietnam, Indonesia, and the Philippines move into the role as the primary producers of lower value export products like second tier textiles. What Happens Next? This year, 2014/15, will be the first year of Beijing’s revamped policies. Revamped, as opposed to reformed, as there is still a possibility that with a cotton price spike Beijing could again through the reserve purchases distort global demand. There are still props for cotton farmers, and at this writing, we don’t know what the impact will be. At the moment demand is still stifled by Beijing’s former cotton directives. The “China Balance Sheet” for November 2014 shows stocks at 62.7 million bales, production at 30 million bales and imports at 7 million bales while mill use is 37.5 million bales. The short hand shows little change from the 62 million bales in stocks a few months ago. The world demand without China tells a different story with stocks at 43.3 million bales. Overall the world has around 107 million bales in stock, coming into the end of the year. Cotton looks like a good bet to make a comeback, perhaps not as strong as the ridiculous pricing of 2011. How fast cotton recovers is a real question. Supply and demand issues and global uncertainties are ready to raise havoc with any economic forecasting, but an upturn in both cotton pricing and demand in late 2015/beginning 2016 wouldn’t be surprising as the industry digests China’s reforms.