There has been a lot of questions and information circulating as of late regarding China and their cotton and corn commodities. Below are some of the numbers and headlines floating around inside the trade. (Sources: USDA, Wall Street Journal, DimSums, South China Post, JCI, American Farm Bureau, Reuters)
Cotton – China’s cotton market has been drawing some extra attention lately amid a trade spat with Australia and international claims of forced labor in the country’s top cotton region of Xinjiang. Both situations continue to evolve but they could potentially open the door to higher demand for U.S. cotton.
China’s Cotton Production has Shifted to the Xinjiang region in lockstep with generous government subsidies. The region accounts for 85% of Chinese cotton production at around 5 million metric tons last year, up from 3 million in 2006. Put another way, Xinjiang accounts for approximately 18% of total global cotton output, with China as a whole accounting for 22%. Xinjiang’s output gains have come at the expense of production in China’s “inland” regions, where it fell from a peak of 5 mmt in 2006 to just 1 mmt last year. Inland growers increasingly abandoned the crop as wages have gone up, but the Xinjiang region sits on China’s eastern fringes, far from cities and higher-wage job opportunities. It borders eight other countries, including Russia, India, and Afghanistan, and has been prone to unrest largely due to ethnic and religious conflicts. Supporting the region’s economically critical cotton industry is viewed by some China-watchers as a way to keep the populous pacified. That’s in spite of cotton being far from a viable crop in the region.
Chinese Cotton Subsidies Matter: Since 2014, subsidies have been based on a “target price,” which means farmers are reimbursed by the government when market prices fail to meet that goal. Full payment for the difference between the target and market price is limited to farmers in Xinjiang. Other regions only receive a percentage of the price difference. According to figures compiled by the dimsums blog, based on WTO filings, China spent $2-to-5 billion per year and between one-5th and one-4th of the value of the crop annually on the target price subsidy to maintain cotton production in Xinjiang between 2014 and 2016. China stopped reporting to the WTO in 2016 but dimsums estimates subsidies in 2017-18 in the $2-to-3 billion range. Market prices dropped about -30% during 2019 and 2020, which could put subsidies in the $4-to-5 billion range. The Xinjiang region’s cotton production is also supported with subsidies for transportation and machinery. More recently, there has been talk of developing a textile industry in Xinjiang as its currently some 2,000 miles from relevant industry. This too would be supported via generous subsidies. China also plans to purchase up to 500,000 metric tons of cotton for national reserves between December and March.
Fall out with Australia: The trade dispute with Australia most recently stems from the country’s calls for an investigation into China’s handling of the coronavirus pandemic. Australia exported about $750 million worth of cotton to China in 2019, accounting for roughly 65% of the sector’s exports. Almost all of Australia’s cotton is exported so China is obviously a critical trade partner. But we have to keep in mind, Australia only produced around 625,000 (480-pound) bales in 2019-20, versus around 20 million for the U.S., so relatively speaking, a Chinese ban on Australian cotton doesn’t really open a huge supply hole for other global producers to fill. There are rumors that the two sides are already in talks to settle the dispute which has also impacted other key Australian exports to China, including beef, barley, and coal.
Could the U.S. Place Cotton Sanctions? More consequential for U.S. producers could be the growing outcry over forced labor in Xinjiang, where China is accused of carrying out a brutal crackdown against Muslim minorities. In July, the Treasury Department sanctioned several companies that grow cotton in Xinjiang, and earlier this month, Customs and Border Protection blocked the import of cotton from a Xinjiang processor over accusations of forced labor. Remember, about 30% of U.S. apparel imports come from China, which has raised calls for an expanded ban that could potentially be far-reaching. A broad ban on Xinjiang cotton and cotton products would likely require action of some sort from Congress. Supply chains for the apparel industry are also notoriously murky so it could be extremely difficult to enforce. The apparel industry itself though is facing increasing pressure from consumers to be more transparent about their supply chains as awareness about China’s human rights abuses has grown.
Corn – Depleted stocks and high domestic prices are anticipated to increase China’s corn imports, according to a Global Agricultural Information Network (GAIN) report from the US Department of Agriculture (USDA). China’s domestic corn consumption, as estimates stand now, is outpacing production by 19 MMT, which is the largest deficit on record for corn production compared to domestic consumption. Corn prices have jumped more than 30% this year in China as hog herds recovered more quickly than expected from African swine fever, demand increased from the starch industry and typhoons flattened the crop.
Imports Will Need to Fill China Corn Demand Gap: China’s Ministry of Agriculture and Rural Affairs (MARA)’s October China Agricultural Supply and Demand Estimates (CASDE) noted the country has had a corn supply gap for the last several years, which the country has filled with auctions from reserves. MARA auctioned a total of 57 million tonnes from May to September 2020 and no further auctions are planned until spring 2021. Industry sources said corn imports will be needed to meet demand, control further price increases and maintain stocks through 2021. China already has begun using temporary wheat and rice reserves and imports of feed quality wheat in substitution of domestic corn.
U.S Corn Exports to China: According to the USDA, as of late-October, China had contracted over +10 million tonnes of US corn for delivery in the 2020-21 marketing year, with approximately 2 million tonnes shipped. Also keep in mind, Ukraine has shipped +4.5 million tonnes of corn to China so far in 2020. The USDA Ag Attache is now forecasting a jump from 7 million tonnes to 22 million tonnes of corn to be imported for the 2020-21 marketing year.
What is TRQ? China regulates corn imports with a tariff-rate quota (TRQ) that places an upper limit on how much corn can be imported at favorable tariff rates. Last month, the Chinese government announced an unchanged TRQ for corn imports for 2021. The TRQ includes a corn import quota of 7.2 million tonnes annually, which carries a duty of 1%. The duty jumps to 65% for imports above the 7.2 million-tonne quota.
Keep Your Eye on China and Ethanol: China has a mandate to roll out E10 fuel nationwide from 2020 in an effort to reduce pollution and support its agricultural sector. But adoption has only taken hold in the country’s east, and speculation swirled earlier this year about a possible suspension of the program even as the nation sought to increase ethanol import. Millions of hungry pigs in China are setting off a chain reaction in the fuel market, causing the biggest oil refiner to rethink its sales strategy. A hog herd boom amid a push to revive supplies of the nation’s favorite meat has driven up corn prices as demand for animal feed soars. That’s sent biofuel costs flying higher and now forcing some energy suppliers to scale back plans to sell E10, a mix of 10% corn-derived ethanol and gasoline. Bloomberg released an article last week that stated, “in a rare notice sent to some clients, Sinopec Group said it will reduce E10 sales in China’s east because of a “severe shortage” of ethanol supplies. Northern areas of Jiangsu province will be the most severely impacted, Sinopec said.” Ethanol supplies in parts of other provinces such as Anhui and Shandong will be also halted, China Energy News, a newspaper run by the National Energy Administration, reported. Interestingly we have been hearing that the coronavirus pandemic has driven up the consumption of ethanol as a sanitizer and adding to China’s domestic corn demand. As for importing U.S. ethanol, China used to be a major buyer of U.S. ethanol, but the trade war prompted China to hit American supplies with 70% tariffs. There might be some increasing potential to make more U.S. sales if we start to find more common ground.