China offers loans to help support cotton prices

Nov. 10, 2004, (Bloomberg) -- CropChoice.com: China, the world's top cotton grower and consumer, will double lending to buyers to encourage purchases of the fiber as the harvest is expected to rise 32 percent to a record this year, reducing prices and farm incomes.

The Agricultural Development Bank, a state-owned policy lender, will loan 20 billion yuan ($2.4 billion) this year to millers and state-owned buyers, said Martin Liu, a cotton analyst at Beijing Orient Agribusiness Consultant Ltd., an agriculture ministry affiliate.

``Lending is rising because of the bigger harvest this year and concern prices will decline, which would hurt farmers' incomes,'' Liu said in a telephone interview in Beijing. Cotton is the worst-performing global commodity this year, falling 41 percent, according to Bloomberg data.

Chinese Premier Wen Jiabao made a recovery in rural incomes one of his priorities to ensure social stability. About 800 million of China's 1.3 billion people rely on agriculture for their livelihoods and the government wants to ensure farmers don't miss out on the country's economic growth of more than 9 percent over the past two years.

Chinese farmers may gather 6.42 million metric tons of cotton this year after improved weather and increased plantings boosted the crop, the National Bureau of Statistics said last month. The harvest would be the biggest since the bureau started publishing the figures in 1978.

Cotton traded on the New York Board of Trade for December delivery last traded at 44.04 U.S. cents a pound yesterday compared with 75.07 cents on Dec. 31 last year.

The fiber for January delivery dropped 145 yuan a ton to 12,235 yuan a ton on the Zhengzhou Commodity Exchange, according to the exchange's Web site as of 2:21 p.m. Beijing time. The contract has fallen 20 percent since the exchange began trading cotton futures on June 1.

``The bigger loans would ensure farmers are able to sell their crop in exchange for immediate cash income and allow them to continue to plant cotton next year,'' said Cao Heping, vice- dean of Peking University's School of Economics. ``This would prevent price volatility and stabilize the cycle.''

Bales

The cotton crop in China dropped for a second year to 4.86 million tons in 2003, driving up prices of the fiber. The shortage, along with expectations of increased demand because of textile quotas removal, contributed to a 47 percent surge in cotton prices on the New York Board of Trade last year, Cao said.

The Chinese government responded by setting up the China National Cotton Reserves Corp. in March 2003 to buy and stockpile cotton and help stabilize prices.

China's textile exports may rise by at least 24 percent to $100 billion next year from 2003, the agriculture ministry said last month, after quotas on textile trade expire on Jan. 1 under World Trade Organization rules.

Last month, six industry organizations in the U.S. and the textile workers' union UNITE said they'd petition the U.S. Commerce Department to prevent surges in imports of 15 product categories including woolen trousers, polyester shirts, cotton sheets and underwear.

``Cotton prices last year were too high,'' Cao said. ``The expectations of an increase in exports are reasonable though prices were over-speculative. Everybody didn't expect other countries to resort to alternative trade restrictions.''

Cotton Reserve

China National Cotton Reserve said it planned to buy 300,000 tons starting Nov. 9 at a price of as much as 11,500 yuan a ton, Liu said. No year-earlier comparative figures were provided.

China on May 14 restricted credit to textile industry as part of efforts to slow growth and stem inflation. Lending curbs helped rein in economic growth to 9.1 percent in the third quarter against 9.6 percent in the previous three months.

Rising raw material and grain prices contributed to the seven-year high inflation rate of 5.3 percent in July and August in China. Inflation slowed to 5.2 percent in September.