The impact of much-anticipated reforms to China's cotton industry might not be as negative as prices as some investors fear, Macquarie said, standing by a forecast that futures could return to 90 cents a pound.

China is reviewing its agriculture subsidies - a process holding a "substantial" threat to crop prices, according to Deutsche Bank, with cotton markets viewed as likely to see particular impact, given the huge stockpile that the current regime has encouraged.

China has built up stockpiles equivalent to about one-and-a-half year's use by guaranteeing farmers a price well above the global market rate.

However, while details of China's fresh regime are not yet clear, the country "is unlikely to flood the market with its cotton stocks, nor move to a policy that entails a collapse in domestic prices", Macquarie analyst Kona Haque said.

While acknowledging reforms are likely "psychologically to introduce a bearish tone to the cotton market", the bank stuck with a forecast that prices will stock within a range of 75-90 cents a pound in 2013-14.

New York's spot March contract stood at 82.59 cents a pound in early deals on Wednesday, down 0.4% on the day.

'Drip feeding'

Although China's reserves are likely to end the season at nearly 12m tonnes (55m bales), well over half the world total, officials will opt to shrink them in a "measured" fashion, "slowly drip feeding into the market".

China would not welcome a collapse in values which, besides realising large losses, "would undermine all the past three seasons' stockpiling policies/price support for growers".

The country requires hefty supplies of cotton to support its textile industry, the world's biggest, and an important employer, securing some 23m jobs, and often in relatively remote areas without significant alternative industries.

Indeed, the country will anyway likely not run down it inventories beyond 6-8 months' supplies, equivalent to about 18m-24m bales, the bank said.

"China will want to avoid a repeat of the 2009-11 period of record high prices that led to mills having to pay in excess of 250 cents a pound to secure cotton from abroad just to carry on spinning, as their own domestic stock cover had been sharply diminished back then."

Stockpiling and sales

Some observers see changes in China's regime have already become apparent in behaviour such as a reluctance to buy cotton when it fell below 80 cents a pound from late October, and a tightening in quality standards which got the 2013-14 state purchasing programme off to a slow start.

The rate of state stockpiling has since recovered to stand at 3.54m tonnes (16.3m bales) in the first three months of the programme, which runs from September to March, not far behind the 3.67m tonnes (16.9m bales) purchased as of early December last year.

The country has begun a programme of sales from stockpiles too, although at a floor price of 18,000 yuan ($2,964) a tonne, equivalent to more than 130 cents a pound, and well above global market values.

The state sold only half the 24,000 bales on offer at the first auction, in late November.

Import forecasts

Nonetheless, China's cotton imports, one of the key inputs into world cotton prices, have shown a sharp decline, tumbling 43% year on year in November to 173,100 tonnes.

Imports fell 23% to 3.54m tonnes in the first 11 months of 2013, and from January will be subject to an increased levy, with the benchmark rate lifted by the government by 1,000 yuan a tonne to 15,000 yuan ($2,470) a tonne.

Macquarie forecast China's imports at about 14m bales (3m tonnes) in 2013-14, down some 30% year on year, but above figures expected by many other analysts.

China's imports next season will drop potentially to about 9m bales, the bank said, which would be the lowest since 2008-09.