China’s cotton purchases just starting?

Flutes of champagne clinked at the Peabody Hotel in Memphis on Friday morning, May 18, to toast a ceremonial signing of contracts for China to purchase 360,000 tons of U.S. cotton worth over $500 million.

While members of the U.S. cotton industry acknowledged that most of the sales have already been figured into the U.S./China trade balance sheet, there was undoubtedly an air of anticipation that future sales are forthcoming.

Wang Chao, China’s assistant minister of commerce, noted that China’s cotton purchase is 30 percent higher in value and tonnage than a purchase made this time last year in Memphis. He added that in 2006, “the United States accounted for 47 percent of China’s total cotton imports, a figure which is 37 percent of total U.S. output. To further develop the bilateral trade agreements between the United States and China has important economic benefits for both countries.”

“Today was really a special day,” said Joe Nicosia, CEO of Allenberg Cotton Co., Memphis, “not just for the signing ceremony, but what it means to our relationship. Everybody in the cotton business knows that China is the world’s largest cotton producer, consumer and importer, and our most important customer.

“This establishes a base by which our exports can grow and cooperation can continue. That’s what we have to do — grow, get more marketshare and try to establish the benefits of U.S. cotton, from both quality and dependability standpoints.”

U.S. cotton exports have picked up in the last few weeks, and with the closest export competition, India, out of the market, Nicosia expects Chinese imports from the United States will pick up from now until the new year. “The United States has a window of about four months when we are going to get the lion’s share of the business — not only out of China, but from other export markets from around the world. There is still a little cotton to be sold out of West Africa and Uzbekistan.”

Nicosia doesn’t believe China has exhausted its domestic supply of cotton, however. “Their crop was exceptionally large, a record crop for them. That’s the bad news. The good news is that China’s consumption continues to grow. Their domestic supplies will start to dwindle a bit and China will come back to the export market. We’re very hopeful we will see additional quotas and continued exports out of the United States.”

U.S. cotton has become a market of last resort in recent months because of the difficulty of moving cotton out of the loan and due to surpluses of cheap cotton in other exporting countries around the world.

Nicosia said some countries are taking advantage of the U.S. ability to store and finance cotton. But to solve the problem long term, the cotton industry “must compromise on provisions of the current loan program to address the U.S. role as residual supplier. It’s great to have the loan as a safety net, to have the government programs of price support there to provide financial security for our growers, but at the same time we cannot allow cotton to sit in the loan while we lose marketshare.

“That doesn’t benefit the grower, the merchant or our customer. And when we lose our customers, it’s that much harder to get them back. This year, India took about 5 million bales of our export business and now we’re going to have to stand up and fight to get that business back.

“I think the compromises we’re looking for on a new farm bill are going to make cotton more accessible in the marketplace and make it more attractive in the marketplace.”

Larry McClendon, a ginner and cotton producer from Marianna, Ark., hopes the signing is the “tip of the iceberg. We need a continuation of this. One thing I’ve seen here today is that we have fostered a lot of good will on both sides. Both countries and both economies are more comfortable trading.”

McClendon says at least some of the blame for the slow pace of exports this marketing year are due to production increases around the world. “World production is obviously going up faster than the numbers have indicated. There is more production overseas than what our numbers have shown and all of that is on the market. So some of the reason we are a residual supplier is simply because there is cotton appearing out there that no one had taken account of.

“For U.S. cotton acreage to come back to pre-ethanol levels will require some price inversions, with grain softening and cotton going up, and I’m certain the farm bill could have a lot to do with all that.”

The sale of cotton through Memphis firms makes Tennessee the largest state supplier of goods to China. Tennessee Governor Phil Bredesen said he will lead a trade mission to China this fall and plans to open a trade development office in Beijing.

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