China’s current policy, while supporting prices received by farmers, acts as a tax on textile mills and has furthered the shift to manmade fiber. Over the 2009 through 2012 marketing years, mill use in China declined by almost 15 million bales. Over that same period, China’s use of man-made fiber grew by 40 million bales, dropping cotton’s market share from 30 percent to 19 percent.

Continuing to operate the program in a manner similar to the past year will maintain pressure on China’s cotton spinning mills. As a result, China’s mill use for the 2013 marketing year is expected to decline further, falling to 34.3 million bales.

With the support price well above world market prices, the vast majority of China’s domestic production will enter government reserves.

According to Adams, “Both in the current marketing year and the year to come, the most important unknown is the extent to which China releases cotton from the reserves.”

In the current marketing year, the government has commenced sales from the reserves. For the 2013 marketing year, China’s decision regarding sales from the reserves and the allocation of import quotas/licenses is the key uncertainty.

Should they choose to be a more active seller in the coming year, China’s imports could fall to the required World Trade Organization (WTO) quota of 4.1 million bales.  However, China could also go to the other extreme and choose to sell very little of their reserves. Under that scenario, imports could increase to levels comparable to the current marketing year.

According to Adams, “Such an outcome is more bullish for U.S. exports in the short term, but the scenario only delays the inevitable outcome of working the cotton reserves back onto the market.”

“The coming year is shaping up to be a challenging year where uncertainties regarding the market are magnified by the 40-million bale gorilla that is China’s government reserves,”  Adams said.