Is there a method to the madness of China’s cotton policy? Kelli Merritt, cotton farmer, broker and merchant from Lamesa, Texas, thinks so.

And it’s given her reason to believe China may hold on to its huge reserve of cotton for a while.

Merritt, speaking at the Ag Market Network’s March conference call, says her thoughts are based on analysis by Fred Gale, a senior economist with USDA’s Economic Research Service. Gale, who lived in Beijing for two years, believes a number of factors rule Chinese agricultural decisions, even its latest to build its share of world cotton supplies to over 40 million bales.

• China wants to keep those in the rural economy self-sufficient. When China believes a crop needs to be produced, they provide farmers with incentives to produce them.

• China’s cotton policy is cognizant of social stability. They want to control rioting in the Xinjiang province, where most of the cotton is grown. Price supports are designed to keep groups there happy.

• China fixes cotton prices to growers based on production costs plus a profit. China also wants to maintain an adequate cotton-to-grain price ratio. China isn’t concerned about whether their prices compete internationally. It all depends on what they do want to do on the domestic front.

• Since 2008, China has been raising support prices not only for cotton but for corn, soybeans, rapeseed and hogs. “Those are the areas where they are really trying to increase price supports,” Merritt said.

• Traditionally, China tries to keep the wheat-to-cotton price ratio at 8.4 to 1. But this year, the cotton price floor was set at 10 to 1. It doesn’t necessarily mean that they’re trying to encourage cotton planting.

• When China purchased domestic cotton at very high prices in 2011-12, they believed that cotton prices were going to stay high, or higher, and not fall back under a dollar a pound. That prices have fallen is not a big concern, however, because what they paid for the reserve cotton is a small amount of their overall budget. They won’t mind holding it for years.

According to Merritt, the latter “provides a fundamental reason to see cotton prices where they are and possibly move even higher. “But we still need pullbacks. Hopefully were going to get a pullback from where we are right now. But as far as a huge fall, I really don’t see a reason for it.”