* Aggressive stockpiling scheme has hurt textile mills
* China sold 2.5 mln T of cotton from reserves this yr -assn
* Cotton production seen down 5 pct this year -assn
(Updating to add U.S. comment, prices in paragraphs 10, 14-18)
By Dominique Patton
QINGDAO, China, June 7 China, the world's
largest cotton importer, is considering changes to its
aggressive stockpiling program, which has driven up global
prices and forced the country's textile mills that buy fiber to
make shirts and pants into heavy losses, industry official said
In a bid to protect the rural economy, Beijing has bought
some 10 million tonnes of cotton from local farmers at
above-market prices under the stockpiling programme, keeping
domestic cotton prices as much as 40 percent higher than the
But the government, along with the country's cotton
association, has acknowledged the policy has hit domestic
textile firms hard, with expensive cotton at home pushing up
costs and eroding their competitiveness with exporters in other
countries, causing some firms to cut production or shut down.
"It was not our intention (to impact mills in this way) when
we formulated the policy ... We didn't expect it would be
implemented for so long," Gao Fang, vice president of the China
Cotton Association, said on the second day of an industry
"We have reached a consensus that we need a better policy
for the Chinese market."
The outlook for the programme is a key factor in global
cotton markets, as China at one stage held about 60 percent of
the world's cotton stocks in its reserves.
The government is considering ways to reduce the price
distortion caused by stockpiling, Liu Xiaonan, an official from
the National Development and Reform Commission, China's powerful
economic planning agency, said at the event on Thursday.
"The cotton policy has weakened the role of the market ...
We have to look at this issue. The current cotton policy has
room for improvement," Liu said, adding that the State Council
was considering the issue.
Liu did not give details on how the policy could be revised
and the government has previously said it would continue its
stockpiling policy for the 2013/14 marketing year, buying
domestic cotton at 20,400 yuan ($3,300) per tonne.
That compares with a price on U.S. ICE Futures of
84.73 cents per lb, which equates to $1,867 per tonne.
"The price pressure on textile factories is huge," said Li
Ming Ge, general manager of Henan Huapeng Group, a mid-sized
"The gap with foreign cotton is 3,000 to 4,000 yuan per
tonne. We can get import quotas; one tonne for every three
tonnes of local cotton, but it's not a big help."
Beijing restricts imports of cotton via a quota system for
While there were few details of the possible overhaul, the
chance that Beijing may rein in its years-long buying spree
spooked traders in the United States, the world's No. 1
The stockpiling contributed to cotton's months-long rally
two years ago when prices touched 2.20 per lb in March 2011 for
the first time since the U.S. Civil War. That surge damaged
textile mills and clothes manufacturers' profits.
"Clearly, they don't have a good exit strategy, which will
keep everyone nervous," one U.S. broker said.
State buying has elevated prices on the U.S. exchange, which
is used as the benchmark for global trade, to levels unjustified
by fundamentals, traders say. The hoarding also created a
perception of tightening supplies even as the market faces a
record surplus in the 2012/13 season.
Far forward prices, representing the 2013/14 crop and likely
affected by any change in policy, fell on Friday after the news.
Prices for delivery in December settled down 0.43 percent
at 85.02 cents per lb.
Industry participants said talk of a change in the cotton
policy has intensified over the past month as Beijing reflects
on what to do with its bulging stockpile, most of which contains
older fiber that mills typically shun.
"There's no way they can keep stockpiling," said Ma Jun,
cotton analyst at Founder Commodities. "There's nowhere to put
the cotton, the warehouses are full."
Industry sources said the government may give farmers
subsidies directly, instead of supporting producers through
"I think they will announce a new support mechanism for
farmers before the end of the year," said Ma.
China has sold 2.5 million tonnes of the fiber so far in the
current marketing year, the cotton association said. The
government has said it plans to sell a total of 4.5 million
tonnes by the end of July.
Although traders had feared the inflow of state stocks could
curb imports, the association said imports of the fiber that
paid full taxes had jumped by nearly seven times from a year ago
to 757,000 tonnes by April.
Meanwhile, Gao said China's production is seen at 6.5
million tonnes this year, down about 5 percent from year ago as
farmers reduce planting of the fiber on slower demand from
textile mills. Consumption is seen at about 8.5 million tonnes.
($1 = 6.1362 Chinese yuan)
(Writing by Fayen Wong; Additional reporting by Chris Prentice
and Josephine Mason in New York; Editing by Joseph Radford and