CHINA COTTON: MORE BAD NEWS

Byline: Joanna Ramey

WASHINGTON--News out of China has heightened fears of further price hikes and worldwide shortages for cotton--and was a big factor in sending current prices to record levels.
Cotton watchers recently confirmed that the Chinese government six months ago cut off cotton supplies to foreign-owned textile mills in China, forcing these companies to source outside.
In the wake of this development, world cotton prices rose to a modern-day record of $1 a pound last Friday on the New York Cotton Exchange, exceeding the previous peak of 99 cents set in September 1973. Cotton this week is being quoted at around $1.02 a pound.
Cotton prices have never been above $1 before, except during the Civil War.
China, the largest consumer of cotton, is very secretive about its cotton policies, and thus never announced its strategic change in August toward domestic foreign-owned textile mills. World cotton watchers, like the International Cotton Advisory Committee, only confirmed within the past several weeks its suspicions about the Chinese action after noting a steady surge in Chinese cotton imports during the first six months into the 1994-1995 crop year, which began in August.
The ICAC originally estimated China would import 300,000 tons of cotton for the crop year. Imports now register up to 750,000 tons.
"The policy change has been a big factor in raising prices," said Terry Townsend, statistician with the Washington, D.C.-based ICAC, a consortium of countries that produce and use cotton.
China's cotton production has suffered during the last three crop years largely due to bollworm infestation caused by the pests becoming resistant to chemicals, which have been overapplied. Previously, China led the world in cotton production, raising upward of 28 million bales a year.
For the first time, the U.S.--the long-standing number two producer--is expected to surpass China with a record crop of 19.7 million bales. China's crop is forecast at 19.5 million bales.
Consequently, with Chinese cotton consumption pegged at 22 million bales a year, and with China's strategic cotton reserve dwindling under 1 million bales and unable to make up for production shortfalls, the government decided to reserve domestic cotton supplies for its state-owned factories, Townsend said. The foreign-operated mills that are now turning to the world market for supplies would usually account for roughly 25 percent of China's cotton consumption.
In better days, China's government-run cotton cooperative, Chinatex, was a dependable supplier of cotton to all Chinese mills at 30-40 percent below the cost of cotton available on the world market, Townsend said, noting how disastrous crops among the other leading cotton producers--India, Pakistan and the former Soviet Union--are also dealing a blow to world cotton prices and supplies.
Price increases in the last six months have clearly become more acute, said Mark Lange, director, economic services, the National Cotton Council, Memphis. Prices had seemed to reach an 80-cent-a-pound plateau into late 1994, after a year-long gradual increase from 55 cents in December 1993, but then continued their climb in December 1994.
It appears that pressure on the world cotton supply, and thus the continued upward pressure on prices, will remain unabated at least for the rest of this crop year, said Russ Barlowe, a fiber analyst with the World Agricultural Outlook Board, an adjunct of the USDA.
Barlowe said the board is now analyzing the effect on the Chinese cutting off supplies to its foreign-owned factories and will account for the impact in the board's March cotton forecasts, to be released next Thursday.
Cotton watchers do anticipate that by August, at the start of the 1995-1996 cotton harvest, textile mills and cotton exporters worldwide will be scraping the bottom of their cotton inventories. In the U.S., cotton inventories used as a cushion between crop years are expected to be a lean 2.7 million bales, equal to only 13 percent of total cotton use for the year, Barlowe said.
"The supplies are going to be very tight this fall," Barlowe said. And while the U.S. is expected to again exceed its cotton production record in the 1995-1996 crop year, Barlowe said it's difficult to gauge the outcome of crops of its beleaguered world cotton competitors.--Fairchild News Service

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