Michael Edwards is Editor-in-Chief of the weekly Cotton Outlook, the independent source of information and analysis on the international cotton market. Based in Liverpool, United Kingdom, Cotton Outlook publishes the daily A Index, the acknowledged barometer of international cotton price movements.
Q: Chinese policy over the past 2 years has kept the cotton market stable and prices high relative to market fundamentals. What are the main features of this policy?
The core elements of the system are simple. The government has given a commitment to purchase the national crop at a predetermined price. No limits on quantity are imposed, but there are some quality requirements.
I think the main objective is equally clear-cut: to support cotton growing in areas where rising production costs and competition from other more profitable and less demanding crops appeared to threaten its future – in the east of the country especially, as cotton growing seems to be prospering in the Xinjiang Autonomous Region. And you often hear people say that China’s younger generation is looking beyond the land. To them, farming in general, and cotton production in particular, seems far too hard a way to make a living.
But we also need to look at the context – the state of the market at the time the system was designed. The policy was announced in March 2011, just as world markets peaked – the A Index had climbed to unprecedented levels, reaching well over 2US$/lb, and China had failed to halt the rise in prices despite virtually exhausting its reserve stocks. When the announcement came in March 2011, the intervention price was well below world levels, since the downturn hadn't started then. But 6 months later, when purchasing began, the situation had turned on its head, and the intervention price was now considerably higher than the world price.
Q: The policy has provided support for cotton producers, but it has also affected the textile industry. Do you view the increase in Chinese yarn imports as a structural trend or a cyclical one?
The widening gap between the world price and the Chinese price has totally undermined the competitiveness of China's spinning industry – or to be precise cotton-spinning, as neither the wider textile industry nor spinning in general is affected. In addition, synthetic fibres have increased their market share at cotton's expense. Don't forget that China has a high production capacity, probably an over-capacity, in polyester, and that's had a considerable impact on cotton consumption.
Is this cyclical or structural? Chinese imports of cotton yarn between January and September 2013 stood at over 1.36 million tonnes, higher than the total volume of imports in 2012, so I would tend to argue that it's a structural trend. However, I can't predict how long the trend will last, because it's one of the consequences, no doubt unintentional, of a policy adopted at a time when conditions in the global market were exceptional. And also the policy is currently the subject of considerable debate in China and may be amended or even abandoned completely, perhaps as soon as 2014/15.
Q: How has all this affected African cotton growers?
The repercussions of Chinese policy – as for any producer country largely dependent on the international market – have been varied and to some extent contradictory. In principle, the stabilisation of cotton production and the reduction in output since China implemented its policy have come closer to making the country self-sufficient in cotton than for several years. At the same time – however paradoxical this may seem – 2011/12 and 2012/13 have also been marked by record levels of imports.
Chinese policy has clearly worked to stabilise the market over the last 2 years because the country has been able to absorb the world's surplus cotton. But this policy is also the main source of uncertainty with regard to future market trends because it has resulted in a huge stockpile of cotton controlled by the Chinese government. Even if segregated from the world market to some extent, this cotton hasn't disappeared and it could still be offered to the market if Beijing so wishes. Let's hope those in charge will be guided by the concern for stability mentioned so often in their public statements.
Africa exported nearly 460,000 tonnes of cotton to China in 2012/13, almost a third of the continent's total output. So it's difficult to exaggerate the importance to Africa of decisions taken in Beijing. Any reduction in Chinese demand for imports would deprive Africa of a segment of its major market and at the same threaten a slump in world prices.
Q: The new centres of the global textile industry seem to be Pakistan, Bangladesh, India, and also Vietnam – none of them traditional customers for African cotton. What consequences does this have for Africa?
Pakistan, India and Vietnam are the major exporters of cotton yarn to China. They've been able to take advantage of something of a shift in Chinese consumption patterns. Indian and Pakistani spinners can source their cotton on their own home market, while the growth of Bangladesh's spinning industry has been underpinned by an increase in garment exports. It's also true that, Vietnam apart, these countries don't consume much African cotton.
Q: India has become something of a force on the world cotton scene over recent years and is starting to offer some serious competition. With a record harvest expected there this year and the rupee currently falling in value, Indian cotton is/will be particularly competitive. How might this impact on African cotton?
The combination of a record harvest, resulting from an unusually heavy monsoon, and the weakness of the rupee, are certainly having a substantial impact on the market outlook. Indian cotton already ranks among the most competitive cottons offered for shipping in the next few months and I'm sure it will continue to be a formidable competitor for African cotton, especially on the Chinese market.
Q: Why do we hear so little about India's support programme? Does it have an impact on the market?
The Indian support programme is based around a Minimum Support Price (MSP) set each year by the government for several crops, including seed cotton. The Cotton Corporation of India then intervenes on the market to support the producer price. We don't hear much about it at the moment because the price of seed cotton is higher than the MSP. However, you can think of it as a kind of safety net should prices fall.
Q: What would happen to the market if China changed its policy and paid subsidies directly to its producers?
The benefits and drawbacks of such a change have apparently already been raised in discussions over the programme's future, but as far as I know no decision has been reached yet. It's impossible to say anything definitive about the possible consequences when we know so little about what is proposed. Any such change would undoubtedly aim to protect the incomes of Chinese cotton growers while bringing Chinese prices into line with world prices. Reintegrating China into the world cotton market without provoking a new period of instability is still the main challenge. We also need to know more about China's plans for the stocks built up over the the last 3 years, 2011/12 to 2013/14.
Q: What changes do you foresee between now and the end of the year?
I don't have a crystal ball, and cotton always manages to surprise us. That's why Cotton Outlook never issues price forecasts. However, we think market sentiment is turning bearish. Prices have been falling on the New York futures market since mid October; the northern hemisphere harvest is starting to have an impact on the physical market; and the spinners in general lack confidence. But by far the most important factor is China – its import policy and the future of the stocks accumulated since 2011.