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China’s cotton stock piling problems on the rise

A recent Bloomberg report suggests, China, in order to aid its own cotton farmers by supporting cotton prices, has been buying up excess production into government stockpiles. The world’s biggest producer and user of cotton will have 12.7 million metric tons in inventory by July 31, 2014, 62 per cent of the global total and enough to make about 71 billion T-shirts. But while growers in the US and Brazil cut output, to deal with the price drops related to excess production, Chinese farmers boosted production, having been guaranteed both a minimum price and a buyer.

Even, Moody’s Investors Service has moved its outlook for the Asian steel and coal sectors to negative, highlighting the severe overcapacity problem that China is facing as it strives to resolve its production worries. China’s steel industry had a total profit of 1.58 billion yuan in 2012, a 98 per cent year-on-year drop, caused by rising iron ore prices and a weak market.

Overproduction woes continue, and have spread throughout the Chinese economy, as government interference through subsidising markets has only made the problems worse by encouraging more of the bad behaviour they wish to change. For example, by buying cotton in order to stabilise cotton prices, so as to avoid the embarrassment of having to go through a ‘cotton crisis’ in front of the world, the Chinese government only exacerbated the problem. Instead of curbing production, the policy ended up encouraging farmers to plant even more cotton. The farmers have taken advantage of a guaranteed government price by expanding their operations in the face of a guaranteed level of income and profit. Now the Chinese government has more cotton than it can know what to do with. Cotton that it must eventually put up for sale in the market, undermining the very prices it was trying to stabilise. Instead of stability, wild price swings will result, as uncertainty about government intentions will lead to overreacting.