(Updates with price reaction, market commentary in paragraphs 8,9)
By Dominique Patton
NINGBO, China, June 11 (Reuters) - China said on Thursday it will start to sell down its massive cotton stockpile this year, in a move likely to depress demand as the country’s mills hold off buying in anticipation of sales of discounted fiber.
Market rumors have swirled for weeks that Beijing was preparing to release some of its holdings, which have swelled to around 10 million tonnes - more than 40 percent of world stocks - under a now-abandoned state buying scheme to support farmers.
China, the world’s top consumer of the fiber, would issue detailed sale plans in the next 10 days, Yin Jian, an official at state planner the National Development and Reform Commission (NDRC) told an industry conference.
Yin added to China’s repeated indications that it does not want to pressure the market, saying the conditions for the stockpile release were stable market prices and a stable market.
“We will not pressure market prices,” he told Reuters on the conference sidelines.
However, industry participants have said old crop fiber from reserves would have to be heavily discounted to attract buyers.
Expectations of a stockpile selldown have already exacerbated sluggish demand for cotton in China as mills have kept inventory to a minimum ahead of anticipated state auctions.
December cotton on ICE Futures U.S. fell as much as 1.8 percent on the news to a session low at 64.59 cents a lb, and were trading down 1.6 percent at 64.77 cents a lb as of 10:03 a.m. EDT (1403 GMT).
“On the initial release, the market puked,” said Ron Lawson, a partner at commodity investment firm Logic Advisors in Sonoma, California. “The tricky part’s going to be how do they gradually reduce their inventory without killing the price of cotton.”
Global cotton prices have been tracking around five-year lows for the past 10 months, under pressure from weak demand and large stocks.
Yin told the conference that it would take several years for the market to digest China’s state-held cotton reserves.
While Beijing is under pressure to release stocks to recover part of its stockpiling costs, big discounts could risk pushing down market prices, and lead to increased costs for the government under its subsidy scheme to farmers.
China currently sets a target price for cotton and pays farmers the difference between the target price and the average market price.
The subsidy scheme replaced the previous stockpiling scheme, but is likely to face further changes.
China is under pressure to find new ways of supporting farmers, with farmer groups in the United States and other markets recently complaining that China has gone beyond what is allowed under World Trade Organization (WTO) rules.
The NDRC has said that it needs time to perfect the new subsidy policy currently covering cotton and soybeans before extending it to other crops.
Dai Gongxing of the China Cotton Association, told the conference the country could explore new forms of subsidizing its farmers, including insurance, subsidies for technology and infrastructure construction and sales promotion.
Cotton output in China, the world’s second biggest producer after India, is widely expected to drop after the overhaul of support policies.
Yin said China’s northwestern region of Xinjiang would continue to be the country’s main cotton producing area, while farmers in other regions are expected to reduce their cotton acreage. (Reporting by Dominique Patton; Additional Reporting by Luc Cohen in New York; Editing by Richard Pullin and Meredith Mazzilli)