China Cotton Market and Reserve Policy

There are several ways to think about the massive buying of 2011, 2012, and 2013 cotton by the Chinese government. One predictable effect of this stockpiling was that domestic cotton prices in China were higher than they would have been otherwise. As the graph above shows, Chinese cotton futures prices (the blue line) before mid-2015 were certainly at an un-realistically wide premium to world prices (in red).  World prices themselves were acting like there are fifty something million bales of ending stocks instead of one hundred something million. In other words, supply/demand forces were acting on an artificially tight world supply. This, in turn, has kept cotton prices from adjusting lower to become more competitive with polyester prices.  Artificially higher prices also keep growers around the world planting more cotton than otherwise would have been planted.  However, as seen in the graph above, Chinese cotton futures prices were trending lower since late 2015 with the increasing expectation of the reserves entering circulation.  This coincided with a decrease in Chinese imports of cotton as presumably the lower prices made domestic cotton increasingly affordable.  Chinese Chinese reserve cotton began being sold in earnest in early May 2016  (part of a longer history of this policy). The Chinese reserve sale period was extended through September 2016, and  hefty 12+ million bales were reportedly sold, i.e., between one fifth and one fourth of the reserve inventory in 2016.  Coincidentally, Chinese cotton futures prices began rising in mid-2016.  USDA interpreted this rise in Chinese prices as evidence of greater demand.  That may have been true, but some of it may have been speculative demand.  Since late-2016 the pattern of Chinese prices has been sideways, and the reserve has been whittled down to less than 15 million bales.  The big remaining fundamental questions are 1) what sized reserve will China maintain for the long-term, and 2) what is their policy for rotating that reserve inventory?  For what it’s worth, there have been expectations, with some supporting rumors, that China will buy domestic and foreign cotton for their reserve during 2019.

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