China’s purchases of domestic cotton for as much as $1.25 a pound may have been good for its farmers, but it’s crippling China’s domestic textile industry’s competitiveness and hurting global demand, according to Joe Nicosia, executive vice-president, Louis Dreyfus Commodities, speaking at the 2013 Beltwide Cotton Conferences in San Antonio.

Restoring the economic health of Chinese textile mills is complicated, but could go a long way to getting world fundamentals back in balance, possibly by the 2014-15 marketing year, Nicosia said.

Nicosia said the Chinese have built a huge reserve of cotton stocks, around 46 million bales, including cotton imported from the United States and other countries and purchased from its own farmers at inflated rates.

China’s in a bit of a pickle, according to Nicosia. If they sell the high-priced cotton in the reserve to domestic mills at $1.25, it would put their mills at a competitive disadvantage to other mills around the world, and encourage higher blends of polyester. If they sell the cotton at more competitive prices, the losses would exceed $10 billion.

Meanwhile, China’s holding stocks off the market has lessened the impact of an estimated 80 million bales in world ending stocks, an all time high.

 “Normally, this would put cotton prices in the 50s,” Nicosia said. “We’re in the 70s because cotton is being held off the market by China. But the longer China holds on to its policy of increasing stocks, the worse and more dire the situation is going to become.

“We’re stuck between two opposing forces. China has decided to support prices at extremely high levels. The problem is we need lower prices to encourage textile mills to use cotton again instead of polyester and provide an incentive to move acreage out of cotton, reduce our supply and bring us back into balance.

“For a ginner, that may not sound good, but we need our supply and demand back in balance so we can have some long-term growth and success. But today, these false high prices are encouraging over-production. As long as China continues to support the world market and soak up the extra supplies, we’re going have difficulty finding equilibrium in the world.”