China lifts cotton purchase price 3% to boost sowings

China has lifted the purchase price of cotton in what is being viewed as an attempt to support domestic production of the fibre, in a country which is the world's top consumer and importer, besides supporting farm incomes.

The National Development and Reform Commission revealed that China will buy 2012-13 cotton for state reserves at 20,400 yuan ($3,240) a tonne, a rise of 600 yuan, or 3.0%.

The price is the equivalent of more than 145 cents a pound, far more than US growers can expect to receive.

New York cotton futures for May delivery, the best-traded lot, stood at 91.26 cents a pound on Thursday, with this year's crop priced nearly exactly the same, at 91.48 cents a pound, as measured by the December 2012 contract.

Profits, but falling

Indeed, the move surprised some observers, coming only hours after US Department of Agriculture attaches in Beijing had forecast that China would stick with its 2011-12 rate, of 19,800 yuan a tonne.

"Plentiful stocks, a sluggish textile industry, slowing consumption and a profit [for growers] last year aren't conditions which favour a government increase of the floor price," the attaches said, forecasting that the price would "likely remain unchanged".

However, they acknowledged the potential for an increase to 20,400 yuan "to minimise planting area reductions and encourage farmers to plant cotton".

Chinese farmers' profits for 2011-12 have more than halved, to $1,134 per hectare, sapped by lower prices and a 21% jump in costs, more than reversing an increase in earnings the season before.

'Stabilise production'

A string of surveys have revealed the threat of lower cotton sowings this year, with the Cotton Research Institute at the China Academy of Agriculture science last week forecasting a 6.1% drop, to 4.85m hectares, following a farm survey.

The National Cotton Market Monitoring Network has forecast an 8.2% drop and the China Cotton Association a 10.5% decline, albeit both ending up with figures above 4.85m hectares.

Chinese cotton data are the subject of some dispute, as are many other agricultural statistics, thanks to the difficulty of keeping tabs on such a huge and populous country, and incentives to massage data created by some subsidy regimes.

But the NDRC said that the release of the "high price before the cotton planting season", combined with a stockpiling programme restarted late last year, "will be beneficial to stabilise this year's cotton production".

'Token gesture'

Nonetheless, many analysts had doubts that the raised floor price would act as much of an extra incentive to growers, given the extent of rises in producers' bills, especially for labour.

Han Changfu, China's minister of agriculture, warned of earlier this week, that "China's agricultural production is entering a phase of high cost".

"It looks a bit of a token gesture. You can't see 3% rise [in minimum price] tipping the balance much, and making farmers think 'oh, I'll grow cotton after all'," a London soft commodities trader told Agrimoney.com.

China in early 2009, before prices began to rise towards their 2010-11 spike, was purchasing domestic cotton crop at 12,600 yuan a tonne, making the latest rise small by historical comparison.