Cotton harvest's mixed fortunes
By Zhang Jin (China Daily)
Updated: 2004-03-02 11:16

Xia Zhiyong, 53, a cotton farmer from the remote Quzhou County in North China's Hebei Province, is basking in this rather unusual good fortune.

Xia is reeling in cash despite a bad harvest, thanks to the continually rising price of cotton in China since last September.

"This season's harvest was only half that of the year before," says a smiling Xia.

"But," he laughs, "the price has more than doubled."

"We came out ahead," explains the fortunate farmer.

Cotton prices have jumped to 3.4 yuan (41 US cents) for half a kilogram from less than 1.5 yuan (18 US cents) over the past five months or so. Supplies have been severely cut by poor harvests in nearly all of the nation's cotton-growing regions, but demand has remained strong.

Farmers pick cotton in Shihezi, in the Xinjiang Uygur Autonomous Region. Rising cotton prices have prompted farmers to increase their output. But this has also dealt a big blow to the nation's cotton spinners and garment manufacturers. [newsphoto]

Although farmers like Xia are laughing all the way to the bank, suffering spinners and garment manufacturers have had the smiles wiped from their faces.

They are urging the government to immediately lift all import controls in order to alleviate the serious supply shortage.

Yang Chao, the material supply manager of the Tongyu Cotton Spinning, based in Yangzhou in East China's Jiangsu Province starkly warns that his factory is quite literally "dying" due to the price increase.

"We have more than 3,000 workers to feed and the price hike has devoured all our profits," Yang says.

And urban consumers are beginning to feel the impact too. A young mother in Beijing says she is shocked by the 30 per cent increase in the price of her 7-year-old son's cotton undershirt.

"It used to be much cheaper," she exclaims.

Escalating cotton prices have warmed up the debate over whether China should increase cotton supplies by lifting import quotas, mainly from the United States. This debate is pitting domestic growers, many of whom are inefficient small-scale farmers, against textile manufacturers, especially small- to medium-sized factories lacking in the resources and expertise required to protect them from volatile prices on the international commodity markets.

The cotton price surged by roughly 5,000 yuan (US$605) per ton last October to hit 18,300 yuan (US$2,213). It then slid a little in the following months to stay at 17,500 yuan (US$2,118), more than 2,000 yuan (US$242) higher than international prices.

Hovering prices have eaten into textile companies' profits, weakening their international competitiveness, and are likely to lead to a slowdown of world's fourth trading nation's exports in 2004, enterprises cautioned.

Cotton usually accounts for 60-70 per cent of the export-oriented industry's costs.

China Cotton Textile Association Secretary-General Zhu Beina told China Daily that increasing cotton prices will spell the end for many textile companies.

"Textile companies are calling on the Chinese Government to lift the cotton import tariff rate quota system and grant them the right to import freely and directly from the international market," she said.

According to its World Trade Organization (WTO) commitments, China, the world's biggest cotton consumer, has allocated an import quota of 8,90,000 tons of cotton to its enterprises in 2004, 33 per cent of which are granted to State-owned firms.

But the quota, even with the addition of 50,0000 tons that was allocated late last year, is unable to remedy the situation, companies warn.

Some industry insiders have warned that the cotton shortage could reach 1.5 to 2 million tons this year.

Yang Chao is unhappy with this situation.

"We got a quota of 1,400 tons this year, 400 tons more than in 2003," said Yang.

"But compared to our factory's annual consumption of 30,000 tons, this is too small."

"Our fortunes would improve if the quota allocated to us rises to 4,000-5,000 tons," Yang said.

His company mainly uses domestic cotton, but it wants to import less expensive international cotton in order to cut costs.

Tongyu has to buy cotton from other companies such as China Cotton Import and Export Co at a price 1,000-1,500 yuan (US$120.48-180.72) higher than the market value in order to overcome the huge shortage.

"We would not be so helpless if the quota was lifted," Yang said.

Rumours have also circulated that the import quota could be eliminated in 2005 as a result of the nation's WTO commitments.

But Nie Pingxiang, from the Chinese Academy of International Trade and Co-operation, a Chinese Ministry of Commerce think tank, says that this is a "misunderstanding."

"China did not make such a promise during its WTO entry.

"The rumour possibly reflects some firms' impatience to embrace a freer import mechanism," she added.

Unlike textile companies, Gao Fang, secretary-general of China Cotton Association (CCA) believed the fluctuating cotton price is mainly the result of a market-oriented economy.

The association was established last September, just as cotton prices began to jump.

"Cotton prices are decided by the interaction of supply and demand," she said. "Bad weather decreased cotton output in 2003, so it is natural for the price to rise."

China's cotton output in 2003 stood at 4.86 million tons, 20 per cent down over previous forecasts.

This is compared to last year's cotton consumption of 7 million tons.

Pressure from the textile companies to lift the import quota has touched a nerve at the National Development and Reform Commission (NDRC), the main regulator of cotton trade policies.

Ambiguity continues to surround next year's cotton policy. But sources close to the commission said it is investigating cotton-related industries across the country in order to map out new policies on the cotton trade.

"The NDRC is in a dilemma whether to increase farmers' incomes and lift the burden from textile enterprises which are jointly pushing the commission to seek a balance," said Tu Xinquan, a researcher at the China WTO Study Centre.

Despite textile companies' strong appeals, some industry analysts said lifting the quota could have a negative impact.

"I don't think it is good to scrap the quota system without being well prepared," Tu said. "We should not consider doing so before we have finished streamlining the cotton collection and distribution systems."

Gao Fang from the CCA also believes the time is not ripe for China to eliminate import quotas, which are conducive to improving farmers' incomes, a top priority of the central government's work in 2004.

Moreover, she believed that the price hike, to some degree and in the long term, is not a bad thing to textile industry.

"The price increasing mechanism helped to restructure the sector and inhibit an overheating investment spree in 2003," she said.

The market selection process has eliminated a batch of cotton spinners that operated with low technology and poor management, according to Gao.

But large textile producers actually registered a better performance.

Shandong-based Weiqiao Textile, China's biggest textile producer, witnessed a 54 per cent increase in its exports in 2003 to reach US$400 million.

Senior trade expert Zhou Shijian maintained that governments at all levels should take bolder measures to protect farmers.

He advised the Chinese Government to grant direct subsidies and other support, in line with WTO rules, to the nation's vast rural population.

"If the quota is completely lifted, this will have a massive impact on farmers," Zhou said.

On the other hand, Beijing-based analysts also called for bolder steps to help the textile industry.

"We give our thumbs up for cotton futures," Gao Fang said, "It is good for both cotton farmers and enterprises."

And they also said the flaws in the current circulation mechanism should be mended. "Competent departments should beef up efforts to crack down on malpractice such as speculative amassing heavy stocks," Zhou said.

Gao wished that the quota application and allocation procedures could be streamlined and simplified.

She, along with some industry analysts, wanted relevant departments or associations to establish a nationwide precaution mechanism, which is capable of forecasting cotton supplies and the textile industry climate.

What seems to be good news for cotton growers and consumers is that this year is likely to see a bigger output, as "farmers are glad to have the rare chance to earn more," Gao said.

"My wife and I had planned to grow more cotton," said Xia,

"But due to a lack of labour, we have to give up this idea. It's terrible."

Xia's children are working or studying outside Quzhou.

"But many of my neighbours have decided to grow more," Xia added.

According to a survey conducted by the China Cotton Association, cotton planting areas will increase 10-15 per cent this year to stand at 5.6 million hectares.

An estimation from the International Cotton Advisory Committee puts China's cotton output at 6.2 million tons.

"Calculated on the basis of normal yields, this season, China might harvest 6 million tons of cotton," a CCA report indicated.

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