By Yuan Haiying
China began importing cotton from the United States in 2003 and over the last ten years, the level of cotton imports has greatly increased. The successful growth of U.S. cotton exports to China has coincided with the establishment of cooperation programs between cotton associations in the U.S. and China.
The strength of these relationships and the tremendous growth of ChinaΆs economy have contributed to the rapid acceleration of U.S. cotton exports to China. Based on this success, it is natural to inquire about the future direction of this trading relationship and how China will remain the most important market for U.S. cotton.
Many people wonder why China needs to import cotton as the country is a leading cotton producer. Another question that arises is how U.S. cotton maintains market share with numerous competitor countries exporting cotton to China. ChinaΆs economy continues to move forward and the country seeks a stable supply of high quality cotton. U.S. cotton has many advantages based on the quality and reliability of its supply and the extensive efforts made by U.S. stakeholders to develop trade with China.
To understand why China needs to import cotton, it is essential to appreciate the countryΆs cotton production constraints. Although China has 21% of the worldΆs population, the country only has 9% of worldΆs arable land and 6% of its fresh water resources. As a result, China faces tremendous challenges related to food security, especially as the country continues to grow and income levels rise.
To ensure national food security, the Chinese government has stipulated that domestic production should account for 100% of the countryΆs demand of wheat, corn and rice. The Chinese government also established a floor for land dedicated to food production at no less than 1.8 billion Mu (296.54 million acres).
According to a report from the China Association of Mayors, the urbanization rate in China recently surpassed 50%, reaching 51.3% in 2011 and is expected to continue growing at a rate of 0.8%/year. Urbanization further impacts the amount of land and water resources available for cotton production. Decreases in arable land have contributed to rising competition for land with other crops and recent increases in grain prices are pushing farmers away from cotton. Over the past several years, rising labor costs have also impacted the cost advantages for producing domestic cotton. All of these factors will influence the level of cotton production in China. In recent years, the area for cotton planting has been stable at 70 to 80 million Mu (11.53 to 13.18 million acres), and yearly cotton production has been around 7 million MT.
While China confronts challenges associated with its cotton supply, the growth of the countryΆs textile industry over the last ten years has been healthy. The growth of the textile industry has been an important driver of economic development in China and textiles are considered one of the pillar domestic industries. The textile industry employs around 20 million workers and the strength of the industry is both economically and politically important.
At the same time, ChinaΆs textiles have been a key export to global markets and have helped to expand consumer access to quality cotton apparel. The objective of the Chinese government is to ensure a secure supply of cotton for the countryΆs textile industry. ChinaΆs average demand for cotton, as shown in its yarn production, has increased alongside the development of the textile industry.
In this light, efforts to maintain the position of U.S. cotton as one of the largest sources of imported cotton to China is related to two comparative advantages U.S. cotton has over other market participants:
1) Joint government and industry promotional efforts play a very important role in the positioning of U.S. cotton in China;
2) U.S. cotton offers a stable and reliable supply of high-quality cotton.
The efforts made by the U.S. government through the National Export Initiative play a role in encouraging the export of key commodities. China has the size to assume a leading role in absorbing increased U.S. exports.
According to the U.S. Department of Agriculture, China bought more agricultural products from the U.S. than any other market in the world, importing about $20 billion worth of agricultural products in 2011.
The promotional campaigns initiated in China are also a key component to the position of U.S. cotton in China. Cotton Council International (CCI) is working together with its counterpart China Cotton Association (CCA) to promote cotton as an essential product for the development of the textile industry. Multiple promotional events are held throughout the year to encourage the use of cotton and communicate the advantages of U.S. cotton to the major stakeholders in the China market.
In 2011, CCI organized seven promotional events in Beijing and throughout China, inviting both central level officials and local industry leaders as participants. The promotional efforts received high praise from all attendees and clearly communicate a consistent message about U.S. cotton. Every year, CCI and CCA work together to send a senior delegation on an exchange that highlights the supply of quality U.S. cotton to China.
These efforts are greatly appreciated by the textile industry, the Chinese government and CCA. Building off many years of cooperation, CCI and its counterpart, CCA, share a solid relationship that is crucial to maintaining a leading position in ChinaΆs cotton market.
Beyond the promotional efforts, the basic driver behind the demand for U.S. cotton in China is the need for a stable supply of high quality cotton. Although other countries have positioned themselves in ChinaΆs import market, U.S. cotton is well known as a reliable partner that consistently supports ChinaΆs demand for quality products.
China is making strides in its efforts to transition to a sustainable manufacturing platform that utilizes technological advancements and focuses on higher value added products. U.S. cotton is well positioned to support these developments and find win-win opportunities for both U.S. cotton and ChinaΆs textile industry.
Although the current economy is weak, the fundamental driving forces we have discussed here will support the further development of the cotton market in China. In order to maintain market share and the momentum created from ten years of cooperation, U.S. cotton needs to continue the promotional programs and consistently position itself as a reliable supplier of high quality cotton. Reliability and quality will ensure the future market penetration of U.S. cotton into China.
China Turns to Machine Picking to Offset Rising Labor Costs
The first mechanical cotton picker was developed in 1850 by S.S. Rembert and J. Prescott of Memphis, Tennessee, but machine cotton pickers werenΆt commercialized until 1943, when International Harvester produced a dozen of them in its initial market entry.
Today, the majority of the worldΆs top cotton-producing countries utilize massive machines to harvest huge fields of cotton, and China is currently ramping up its efforts to join that group. ItΆs become a more urgent initiative in the last few years, as the increasing wealth provided by ChinaΆs rapidly growing economy has been driving labor costs up at a breakneck pace. Nearly a quarter of farmerΆs income in China is consumed by labor costs from harvesting the fiber.
Overall, labor costs for cotton picking have increased nearly 600% since 1999, increasing from 0.3 yuan/kg (about 2.25 cents/lb) to more than 2 yuan/kg (about 15 cents/lb).
To be sure, mechanization has its drawbacks as well. Mechanized picking often suffers from lower production and higher trash content, and it often results in fiber with reduced grade, length and maturity.
But thatΆs a small price to pay, given that cotton farms in the Xinjiang Autonomous Region have to hire as many as 900,000 workers during the peak harvesting period, at a cost of approximately $330 million – and thatΆs assuming the farmers are able to find 900,000 people willing to do the work.
In addition, cotton competes intensely with food crops in China, and the labor input costs of cotton production are higher than they are for many food crops. From 2004 through 2007, the average labor cost to produce wheat, corn and rice rose at a rate of about 8% per year. During that same time period, the labor costs for cotton production increased 13% per year.
Quality Picking Standards Are Needed
During the 2012 China Cotton Industry Development Summit Forum, held May 17-18 in Chengdu, China, Wei Hua, Chairman of the Shandong Swan Cotton Industrial Machinery Stock Co., called on the government to develop a quality standard system suited to cotton picking machines.
Such standards, he said, would go a long way toward realizing “the goal of reducing trash, minimizing damage to the cotton fiber and improving the grade, all of which will provide greater economic benefits to the farmer.”
One final advantage provided by machine picking is its speed. A single machine picker can harvest as much cotton as 300 laborers in the same period of time. Cotton fiber strength is at its greatest about one week after the boll cracks and begins to deteriorate in as little as 10 days, so in this case, less time equals more money.