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Puffed-up prices divide China cotton players

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The Chinese government has cultivated a market-control strategy designed to support cotton farmers. But as this year’s harvest approaches, domestic textile companies whose mills rely on the fluffy crop fear the strategy may crimp their business.

The “temporary purchase and reserve” plan for this year’s cotton harvest was issued in March by the National Development and Reform Commission (NDRC) and took effect Sept. 1. It represents a shift from previous government intervention steps that propped up prices after the 2008 global financial crisis.

The crisis was blamed for a sudden decline in export orders for China-made textiles and garments, which in turn seriously depressed domestic cotton prices.

The government responded to the price collapse by snapping up 2.7 million tons, equal to 36% of the nation’s total cotton production and more than 20% of domestic consumption, at 12,600 yuan ($1,970) per ton, at least 600 yuan higher than the market price at that time.

This year, NDRC said, the government would reserve the right to buy cotton at 19,800 yuan per ton from farmers in 13 regions, including Xinjiang Uygur Autonomous Region, as well as Hubei and Shandong provinces, and store it for later sale.

The purchase trigger — covering the plan’s period of Sept. 1 to March 31, 2012 — would be any market price for cotton that’s below the plan’s target for five, consecutive business days.

The latest NDRC market controls veer from previous strategies by failing to set tonnage targets for purchases and storage. Neither did the agency spell out a system for releasing cotton reserves.

Officials said the goal is a reasonable price for farmers. The plan “set prices, but not quantities,” said Du Min, director of the Ministry of Agriculture’s Rural Development Office. “This can protect the interests of farmers, and is beneficial for controlling cotton prices.”

Yet cotton traders and buyers, particularly textile mills, are waiting to see how they’ll be affected by the government strategy, and whether they may lose this market-control game.

Struggle to control

The day that the China Cotton Association announced that this year’s domestic crop would total about 7.5 million tons, up 25% from last year’s harvest of 5.96 million tons, spot prices on the Chinese Cotton Price Index rose, climbing 250 yuan to 19,307 yuan per ton. Estimates earlier in the summer forecast a crop of 7.4 million tons.

The latest crop estimate was released Aug. 31 — the day before the government’s market controls took effect. Thus, prospects for a bumper crop apparently had less of an influence on the index price than the pending intervention.

As the policy took effect, traders working as middlemen between farmers and textile mills started expecting to profit by selling stocks to the government at the 19,800-yuan target. This expectation pushed index prices higher.

Chen Xiaoyan, a cotton analyst at Galaxy Futures, expects prices to fluctuate narrowly around the 20,000-yuan-per-ton range through the end of 2011 if the government buys about 1 million tons.

Yet prospects for higher prices may not bode well for certain manufacturers. For example, Wan Bingzheng, import-export vice president at the Beifang Home Textile branch in Shandong, told Caixin that his company’s export sales have fallen sharply since July in reaction to cotton-price swings.

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