Cotton Prices Seen Declining as China Poised to End Stockpiling

Dec 30, 2013 3:03 am ET

Dec. 30 (Bloomberg) -- Cotton, the third-best performing commodity this year, may drop as China, the world’s biggest consumer, is poised to end a policy of stockpiling domestic crops, according to Chinese researchers.

The government will start a trial next year subsidizing growers of cotton and soybeans and changing previous policies that support prices by stockpiling domestic harvest, the official Xinhua News Agency reported on Dec. 27, citing Finance Minister Lou Jiwei.

The policy change by China, estimated by the U.S. Department of Agriculture to hold more than half the global cotton inventory, may weigh on futures in New York that climbed 12 percent this year, the third-biggest gain on the S&P GSCI Index of 24 commodities. The nation began buying domestic cotton in 2011 as flagging prices made it difficult for local farmers to sell crops, said Cheng Jie, an analyst at Cncotton.com.

“The stockpiling policy has carried the global cotton market for three years, so changing it will return the market to supply and demand,” Cheng said today.

China will probably hold 12.5 million metric tons of cotton in inventory in the 2013-14, or 59 percent of the global total, the U.S. Department of Agriculture estimated on Dec. 10. Purchases for stockpiling totaled 4.7 million tons this year, Cncotton.com’s Cheng said.

“This will pressure global cotton prices given the huge state stockpiles and subsidies could spur local production,” Li Qiang, chairman of Shanghai JC Intelligence Co., said today in a telephone interview from Shanghai.

Cotton for March delivery was little changed at 84 cents a pound on ICE Futures U.S. at 3:48 p.m. Beijing time.

Soybeans

The new policy “won’t affect soybeans much” as the domestic crop is small relative to imports, Shanghai JC’s Li said. Imports may total 69 million tons in the 2013-14, compared with a domestic crop of 12.2 million tons, USDA data show.

Soybeans for March delivery on the Chicago Board of Trade lost 0.4 percent to $13.085 a pound, down 7.1 percent this year.

Possible changes to Chinese farm subsidy programs may “substantially” reduce state stockpiling and “weigh on global agricultural prices over the next two to three years,” Capital Economics Ltd. said this month.

China, which also stockpiles rapeseed, corn, sugar, rubber, wheat and rice, will probably wait until it sees the result of the trial on cotton and soybeans before making any policy changes for other crops, Li of Shanghai JC said.

--William Bi. Editors: Sungwoo Park, Brett Miller