Beginning in 1999, my country liberalized cotton purchase prices, and the direct intervention in cotton prices through administrative orders came to an end. At that time, the Premier of the State Council pointed out regarding the cotton market: “It is by no means completely liberalizing, let alone letting it go.” Therefore, when analyzing cotton price trends, the market will also pay attention to policy factors. At present, the main policies in the cotton market include: planting subsidies, issuance of import quotas, and rotation in and out of reserves. This article focuses on cotton reserves. Different from the administrative measures of planting subsidies and import quotas, the regulation of state cotton reserves is more market-oriented and has a more direct impact on supply and demand. Zhongchu Cotton Company, the management manager of the State Reserve Cotton Company, is different from other operators in the market. It purchases and sells goods by predicting future operating conditions. Instead, it uses long-term trading methods to allocate resources to achieve stable cotton. price and reasonable distribution of interests upstream and downstream of the industry chain.
A The past and present life of the national cotton reserve system
strategic reserve stage
In the early days of the founding of New China, domestic cotton resources were very tight, and cotton and cloth products were always in short supply. In order to prepare for war and famine, adjust the harvest and harvest, and ensure civilian use for military supplies, the State Council decided to build a batch of cotton reserve warehouses to reserve a portion of cotton in a planned and step-by-step manner. In accordance with the principles of “backing, dispersion, concealment, and mobility” proposed by the Central Committee of the Communist Party of China, a total of 92 cotton reserve warehouses have been established in Hubei, Hunan, Shanxi, Shaanxi, Sichuan, Liaoning, Hebei and other places since 1965, with a storage capacity of 750,000 tons. .
The national cotton reserves at this stage were reserved in order to reduce the production of textile industry and supply limited cotton cotton for civilian use when cotton resources were seriously insufficient. They were mainly reserved for the special needs of preparing for war and famine, and did not have a market regulation role.
Passive storage stage
After the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China in 1978, the household contract responsibility system was fully implemented. Chinese farmers gained great autonomy in production, and the textile industry also began market-oriented reforms and explorations. In the early 1980s, domestic cotton harvests continued to be bumper, and the amount of cotton stored in production areas increased, occupying space and funds, and the original reserve warehouse could no longer meet the reserve demand. From 1982 to 1985, the national reserve cotton was arranged to be stored in the production area, and the excess balance purchased in that year was directly transferred to the national reserve. The reserve cotton funds were changed from state fiscal appropriations to bank loans, and the central government paid the interest. In addition, most of the reserves built in the 1960s were in mountainous areas, with inconvenient transportation and difficult transportation. In order to ensure the safety of cotton reserves during the period, after the 1980s, the State Council decided to build a number of cotton reserve transfer warehouses along railway lines with convenient transportation and in major cotton producing areas. With the deepening of reform and opening up, the role of the market mechanism gradually increased. Until 1998, the government directly controlled cotton prices mainly through administrative intervention. At this stage, the national cotton reserve was implemented to solve the problem of relative overproduction of cotton when domestic cotton production and cotton prices fluctuated sharply. It was the result of market fluctuations.
indirect control stage
Since 1999, my country has liberalized cotton purchase prices, ending the direct intervention in cotton prices through administrative orders. The national cotton reserve has become one of the important means for the government to indirectly regulate the cotton market through economic leverage. In 2001, according to the requirements of the State Council, the former State Planning Commission used budgetary funds to build a new batch of cotton reserves directly under the central government. The total investment of the project is 750 million yuan, with a storage capacity of 800,000 tons. The layout is to be built in areas with convenient transportation and suitable climate conditions for cotton storage, such as along railway lines and near ports, and the design standards have been improved. These cotton reserves directly under the central government are managed by the China Cotton Reserve Management Corporation, which was established in March 2003. At the current stage, the government uses national cotton reserves and other means to successively regulate the market based on changes in the cotton market situation.
B Changes in national reserves and inventories under the new circulation system
The table shows the state reserve cotton inventory cycle based on public data.
Based on relevant information and past data, the author divided the inventory cycles of national cotton reserves under the market economy system.
The picture shows the evolution of the domestic cotton production and sales gap during the first destocking cycle.
The first destocking of the State Reserve: the establishment of a new circulation system – in 2003, the State Reserve sold approximately 3.38 million tons. The corresponding background is that due to the impact of the 1998 financial crisis, the government lowered the purchase price of new flowers and liberalized the purchase price in response to the weak global cotton demand and inventory backlog. As a result, the cotton planting area dropped by 17% in 1999, and in the second half of 1999 , the global textile market has recovered, and after China’s accession to the WTO, domestic demand has increased and the gap between production and sales has expanded. Before 2003, the import volume did not exceed 1 million tons, and the state cotton reserve shouldered the important task of making up for the gap. Since April 2000, relevant departments have effectively controlled domestic cotton prices through sufficient reserves. By the end of 2003, the State Reserve had sold a total of 3.38 million tons. However, in 2002, the government further expanded the supply chain after judging that supply exceeded demand.Domestic production factors are more stable. Although it is also faced with planting changes and weather speculation caused by planting profits, with the continuation of Xinjiang’s cotton direct subsidy policy, cotton planting area, output and quality will be relatively stable in 2021. According to public inspection standards, although the output of new flowers has decreased to a certain extent year-on-year, the decrease is not significant. It currently lags behind the same period in 2020 by about 2.41%, but is higher than the average level of 3.74% for the same period in the previous three years. In addition, cotton quality has improved significantly compared with the same period in 2020. Looking back on 2003, although the planting area expanded significantly, due to frequent weather disasters, the yield per unit area dropped by approximately 19.8% year-on-year, and the final total output dropped by approximately 5.5%. Similarly, in 2010, bad weather caused a yield loss of approximately 3.8% and a total production loss of approximately 4.7%.
However, the inflection point in this round of reserve cotton stocks cannot replicate the highlight moments of inflection points in the previous two rounds of stocks. Although downstream textile production capacity is ushering in a new round of expansion cycle stimulated by profits, the status quo of huge profits is difficult to last. First, the recovery of global textile and apparel consumption is facing further overdraft. Comprehensive tracking of the apparel markets in the EU, China and the United States shows that the growth rate of apparel consumption is peaking after the epidemic. In mainstream consumer markets such as the EU, the contradiction between supply and demand is not large. The increase in price index lags behind the overall CPI for goods and services. Clothing imports are within the normal range. The negative impact of the epidemic on clothing consumption has been basically eliminated. The growth rate of social retail sales of clothing in the Chinese market has dropped from its high level and has fallen below the lowest level in five years in the past two months. There is a bottleneck in the growth of clothing consumption. Affected by the supply chain crisis in the U.S. market, clothing prices are high, further prompting wholesalers to increase orders. The replenishment speed is faster than the sales speed. Inventory indicators will turn to accumulation in September 2021. Secondly, the trend of textile production capacity transfer remains unchanged, and it is difficult to find dividends from reshoring orders. In the past 10 years, domestic textile production capacity has gradually transferred to Southeast Asian countries, which is an important reason for the weakening of domestic cotton consumption. On the one hand, domestic labor costs are rising irreversibly, cotton planting costs are high, and tariff controls are imposed on imported cotton; on the other hand, the textile production capacity that consumes cotton itself has a significant processing nature, and at the same time as the transfer trend, there are also Domestic import thresholds for cotton yarn are gradually lowered.
This round of textile production capacity expansion is based on profit growth, and the underlying reason is the overall recovery of consumption after the epidemic and the increased dependence of global textile consumption on my country after Southeast Asia’s production capacity was affected by the epidemic. However, recently, Southeast Asia’s textile production capacity has recovered rapidly, and Vietnam has increased its purchase of US cotton. my country’s textile industry may face the risk of future orders falling short of expectations.
To sum up, the current round of changes in state reserve inventories will complete the transition in a relatively gentle manner. On the one hand, with the gap between production and sales expected to shrink further, the pressure on the state reserve to replenish its inventory has significantly weakened. Although the inventory itself is already at a low level, considering the purchase of foreign cotton in the past three years, it is expected that the current state reserve still has about 1.4 million tons of inventory. Removing cotton that is of low quality and cannot be used can make up for the gap to a large extent. On the other hand, to prepare for a rainy day, the purchase of reserve cotton may be quietly underway. Under the relatively high price difference between domestic and foreign products, high-quality and low-priced foreign cotton has become the first choice. Therefore, in the face of a volatile market, the State Reserve still has the confidence to respond to changes by remaining unchanged. At present, the price difference between domestic and foreign prices is still high, and the possibility of the State Reserve taking control again is increasing.
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