Global Markets: Cotton – China’s State Reserve Stocks Down; When Will Imports Pick Up?

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China’s State Reserve (SR) stocks of cotton reached an estimated 60 million bales in the spring of 2014, after 3 years of massive buildup. SR stocks are currently estimated at just under 13 million bales. This dramatic reduction was accomplished by 3 years of aggressive selling, with 11.5 million bales sold in the latest annual round of selling which ended in September. China was able to accomplish this due to two factors: first, price reform increased the gap between consumption and production; and second, import access was limited to the WTO TRQ.

From 2011/12 thru 2014/15, the gap between cotton consumption and production in China was less than 5 million bales, which meant that the WTO TRQ provided more access than the shortfall. China was able to increase reserves dramatically as additional imports were allowed to offset the SR purchases from the domestic crop.

In 2015/16, China’s shift away from a price support program for cotton caused internal prices to fall, which helped to boost consumption but also helped to lower production. The gap between the two grew to nearly 15 million bales. At the same time, China stopped issuing additional TRQ import licenses under its sliding-scale quota category.

With imports effectively limited to the WTO TRQ of just under 5 million bales, the SR was able to sell large quantities from reserves to fill the remaining gap.

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How low the SR is willing to draw down its stocks remains one of the major unknowns for the 2018/19 marketing year. Recent statements from government officials and trade representatives have led many to believe that the SR wishes to maintain around 11.5 million bales (2.5 million tons).

The release of an additional 3.6-million bales of sliding-scale import licenses supports the idea that net sales from the SR in the 2019 cycle will be lower than in recent years. However, the impact on 2018/19 is expected to be limited as indicated by USDA’s current import forecast of 7 million bales, in part because of the very high level of free stocks available in China.

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