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China’s stock reductions could provide new opportunities

China's surprising reduction of its cotton reserve stocks could lead to more opportunities for U.S. cotton exports.

China still has huge stocks of cotton, American women are still flocking to polyester-rich yoga pants and U.S. producers still don’t have a viable cotton program in the current farm bill.

But cotton producers, industry members and marketing experts attending the Cotton Economic Symposium at the Beltwide Cotton Conferences in Dallas did get some good news for the first time in a while.

Although China’s reserves remain quite high, the government sold a surprising amount of cotton at auction last summer. That and the possibility it could expand its spinning capacity in western China could mean more cotton imports – and potentially higher prices – for U.S. growers.

China’s NDRC and Ministry of Finance sold 12 million bales of cotton during last summer’s auction, a number which would have lowered its reserve stocks to around 48 million bales. If China continues on this path, it could conceivably lower its stocks, which once totaled 64 million bales, to 20 million bales by 2020.

“Based on the current production and consumption prospects, a scenario of a more balanced world supply and demand emerges,” said Leslie Meyer, an economist with USDA’s Economic Research Service and a Symposium speaker. “China primarily leads this global stocks reduction with a continuation of their policies.

“But an interesting series of questions arises when China’s stocks reach an equilibrium point. Will China’s production increase? Will consumption increase? Will imports rise? Or will there be a combination of these three? Based on the aforementioned prospects, production and mill use adjustments are likely to be modest so it’s quite plausible for imports to rise from the 4.5 million we have estimated for 2016.”

If China’s imports do expand, production outside of China will have to meet that demand. “Rising yields could take care of much of that, but increased area will also be possible. And higher world cotton prices could result.”

Although near-term cotton futures have risen in recent months after hitting a life-of-contract low last March, they have remained below what some experts have considered necessary to bring U.S. planted acres of cotton back to 10-year-ago levels.

Many are expecting U.S. acreage to increase in 2017, possibly by 8 percent above last year’s, which marked one of the larger U.S. crops in recent memory.

“It’s not that cotton prices are really attractive right now, compared to cost of production,” said Jody Campiche, vice president, economics and policy analysis for the National Cotton Council. “But when you look across other competing commodities, they are more attractive than corn or soybeans.”

The Cotton Council was still receiving responses from its 2017 Early Planting Intentions Survey when Dr. Campiche spoke at Beltwide, but she said she wouldn’t be surprised if the final results didn’t indicate an even larger acreage increase.

“In the Mid-South, I think we may see a bigger increase than the 24 percent that’s out there now,” she said. “The largest increase would be in Mississippi, and, if you look at yields in Mississippi for the past five years, they’ve had excellent yields, and that’s encouraging more production.”

Increases also could occur in Texas and Oklahoma and other states where the alternatives aren’t as good. Only Georgia may see little to no increase due to large amount of peanut base acres.

That’s part of the balancing act that will be required for cotton in the coming months, according to Dr. Meyer, who spoke on the Global Cotton Outlook at the Beltwide.

“The major challenge will be a balancing act – keeping cotton prices high enough to encourage adequate production, but also low enough to remain competitive with polyester,” he said. “While a number of different scenarios may develop over the next several years, the outlook will become a little clearer as decisions about this season’s plantings develop.

“Recent harvest prices for 2017 for cotton are more favorable, as Jody (Dr. Campiche) mentioned, than for alternatives, and the success of 2016 may also play a part in 2017 plantings. However, it’s still early and Mother Nature will get her say, as well,” said Dr. Meyer, who grew up on a Texas cotton farm not far from Dallas.

Berrye Worsham, CEO of Cotton Incorporated, said prices of polyester and other synthetic fibers remain lower than those for cotton due, in part, to the excess capacity for manmade fibers production in China.

Another factor hampering efforts to regain market share for cotton involves millennials, the group of consumers between the ages of 25 and 34 who constitute the largest group of active shoppers in the U.S.

“They continue to be much more focused on buying things like iPhones than spending money on fashion,” he said. “When they do purchase clothing, it tends to be more lightweight, polyester-rich “athleisure-wear” garments, such as yoga pants.

Speaking on Trends in U.S. Retail Use of Cotton at the Symposium, Worsham said he’s beginning to see indications shoppers may be moving back toward more heavier-weight garments containing cotton to provide a different mix of clothing than they have in the past. That could bode well for cotton producers in the long run.

On the political front, Rep. Mike Conaway, chairman of the House Agriculture Committee, said he is determined to make cotton a “covered commodity” in the next farm bill. Conaway spoke briefly to the Cotton Economic Symposium through a pre-recorded video.

“When it comes to cotton, it’s clear the STAX simply hasn’t worked,” said Conaway, referring to the shallow loss insurance coverage insurance in the 2014 farm bill. “The shortcomings of STAX are a reminder of the importance of having both sound farm policy and crop insurance.”

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