The People's Republic of China could increase its cotton imports by a factor of five to 2.25 million bales or 7.5 percent of the world's total in the 2002/2003 marketing year, USDA forecasts.

If the forecast comes to pass, which is a big if, according to USDA analysts, those purchases could have a major impact on world cotton stocks, which are expected to continue to decline in spite of projected increases in world cotton production.

Chinese imports of this magnitude would represent a remarkable turnaround in China's cotton industry, says Stephen MacDonald, an agricultural economist who gave the World Agricultural Outlook Board's U.S. and world cotton outlook at USDA's annual Agricultural Outlook Forum in Arlington, Va.

“The end of the 2002/2003 season will mark the first time in eight years that China has not carried surplus stocks,” said MacDonald.

He noted that China's stocks rose to a peak of 23 million bales at the end of the 1998/99 marketing year, which helped set off a long, slow decline in world cotton prices that did not bottom out until the fall of 2001.

“Beginning in September 1999, China instituted a series of reforms to liberalize prices and privatize distribution,” MacDonald said. “While the success of these reforms has been mixed, they have brought internal Chinese prices closer to world prices, stimulating consumption and limiting incentives to overproduce.”

The growth in domestic use allowed the Chinese government to unload excess stocks at auction with the China National Cotton Exchange selling 13.6 million bales of mostly old-crop cotton between October 1999 and the end of January 2003.

Because of its internal distribution problems, China is believed to have purchased 1.2 million bales from all sources this marketing year (began Aug. 1), or more than half of its total projected imports.

“Substantial additional purchases are deemed likely during the second half of the season due to strong consumption and limited domestic supplies, but will also depend on the government's import policies,” said MacDonald, who works for USDA's Economic Research Service.

“China joined the WTO at the end of calendar 2001, but has issued import licenses in a more restrictive and less transparent manner than anticipated by the international cotton trade. USDA's 2002/03 import forecast assumes that the government will distribute sufficient quotas to maintain an adequate an adequate pipeline to China's textile mills.”

The combination of lower production in China and in the United States and the increase in consumption is expected to reduce world stocks nearly 20 percent to fewer than 38 million bales, according to USDA. The stocks-to-use ratio of 39 percent would be the lowest since 1994/95.

MacDonald says USDA expects world cotton production to reach 95 million bales in 2003/04, an 8.5-percent increase from the current season. Most of the upsurge, including a 2-million-bale jump in China's production, will occur outside the United States.

“The largest gain is expected in China, where production could easily rise 2 million bales,” he noted. “A recent Ministry of Agriculture survey reported farmers intended to increase cotton area by 17 percent in 2003.”

According to preliminary data for 2002/03, prices received by farmers rose 25 percent from the previous year when the Chinese government was deliberately trying to suppress production. “This, and other less robust reports of planting intentions, suggests China's output could be about 24 million bales in 2003/04.”

U.S. production is expected to remain close to 2002's 17.1 million bales due to market and farm program factors.

“As planting time for the 2003 crop approaches, U.S. cotton prices are stronger than a year ago, but so are prices for competing crops,” says MacDonald. “The weighted upland cotton farm price has averaged 40.5 cents per pound during the first five months of 2002/03, but remains below the loan rate of 52 cents.

“As cotton prices have risen in recent months, higher market returns are being offset by lower marketing loan benefits. In contrast, prices for competing crops — like corn, sorghum and soybeans — are higher than their loan rates and suggest that planting incentives for these alternatives are stronger than a year ago.”

Nonetheless, USDA expects U.S. cotton plantings to range between last season's 14.0 million and 14.5 million acres “due to greater uncertainty about farm program benefits relative to a year ago and to the role of the farm program in reducing price risk.

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