What is in this article?:
The announcement of China's new target price subsidy is most important for what it doesn't say.
Chinese cotton acreage could decline significantly over the next few years on the heels of China’s new target price subsidy program, according to Ed Jernigan, president and CEO, Jernigan Global Commodities.
Speaking by phone at the 2014 Cotton Roundtable in New York City, Jernigan said information on the target price model is sketchy, but appears to resemble the target price previously used by the U.S. farm program.
Jernigan says China is “moving to free its domestic cotton market from state domination, just like it did in soybeans many years ago. This is a great development for the United States and the world cotton industry.”
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Jernigan said the announcement included a “vision statement” that China was switching its focus to food crops and was ending cotton as a state-controlled commodity.
Jernigan said the target price announcement “is just as important for what was not said, as there was no mention of a subsidy for areas outside Xinjiang Province. In 2013-14, Xinjiang produced over one third of the Chinese crop, 11.578 million bales.”
“The new Chinese leadership was bold enough to realize it was simply uneconomical to grow cotton in the small farm plots of eastern China where scale and mechanization is impossible,” Jernigan said. “However the announcement has been lacking in detail and we are still waiting for full detail.”
In Xinjiang, the government subsidy will be the difference between the target price, announced at $1.44, and the average market price. “The details of how this will work have yet to be announced and the market is full of rumors.”
One of those rumors, according to Jernigan, is that there may be limitations on the subsidy, which may lower payments. There was also a rumor that eastern Chinese cotton producers may receive a flat subsidy.
Jernigan told listeners that China’s textile mills will be needing cotton in September, but may not be able to get it from domestic sources, which could lead to some short-term volatility in the cotton market.
China cannot fill the need with its state reserve stocks, estimated at 61 million bales, because the stockpile has apparently deteriorated significantly, according to Jernigan. “Cotton is not a commodity suited for long periods of storage. It suffers weight loss, reduction in color grade and deterioration in spinning quality. This means that each day, the quality of the reserve stocks is declining.”