China's cotton purchase policy faces dilemma

30 Aug '12

2 min read

A dilemma exists in Chinese cotton purchase policy as the Government’s procurement of cotton for state reserves would increase prices of cotton in domestic market, while the Government’s issuance of additional import quotas would lead to a decrease in prices of domestic cotton.

Since July 4, when the Chinese cotton 328 price index hit a bottom, the index has continuously increased by 274 Yuan/ton to reach 18,430 Yuan/ton at present. However, this price is about 2,000 Yuan/ton less than the price of 20,400 Yuan/ton announced by the Government for its cotton purchase for state reserves beginning next month.

Cotton futures prices have also risen gradually and currently the most active contract CF1301 is at 19,500 Yuan/ton. This price is about 900 Yuan/ton lower than the price finalized for state purchase and storage of cotton.

Since there is no upper limit for quantity of cotton for state purchase, the price gap between spot price of cotton in domestic market and the state reserve price will narrow down, once the Government starts procurement for state reserves early next month.

In the first seven months of cotton season 2011-12, the price gap between state purchase price and cotton 328 price index was lower than 800 Yuan/ton. Normally, the price difference was in the range of 200-600 Yuan/ton.

In 2011-12 cotton season, the Government purchased large amount of cotton for state reserves and hence, the availability of high quality cotton in domestic market is low.

On the other hand, there is large pile up of imported cotton at warehouses near ports. Owing to limited import quota, these stocks are unable to reach the market, thus creating a situation of tight supply in domestic market.

Hence, to ease the situation of tight supply, China may issue additional quota for cotton imports, which would dent cotton prices in spot market.

Fibre2fashion News Desk - China

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