By Cheng Guoqiang

Research Report Vol.18 No.3, 2016

Recently, we conducted a field study of the two-year pilot project of cotton target-price reform in Xinjiang cotton-producing region. The study covers the achievements, experience and problems of the reform. It shows the pilot project has brought about results beyond expectation, which is not only valuable experience for reforming the pricing mechanism of and subsidy for China’s major agricultural products, but also significant in the critical period of reforming agricultural supply front. Here are the results of the field study and the suggestions on how to further improve cotton subsidy policies.

I. Major Achievements of the Pilot Project

According to the field study, Xinjiang has chalked up remarkable results beyond what is expected since the initiation of the pilot project. First, a market-oriented cotton pricing mechanism has been established. Since the cotton target-price reform in 2014, cotton price is determined by market supply and demand, eliminating problems caused by temporary storage policies, like market distortion, price inversion, and industry-wide loss. In particular, the reform has helped domestic prices be in line with their international counterparts, prevented the surge of cotton imports, and cushioned the impacts of imports on the domestic market. According to www.cottonchina.org, website of China cotton information, CCindex3128B, barometer of China’s cotton prices, fell from 20,002 yuan/ton on Sept 27, 2011 to the current 12,200 yuan/ton, and the difference between cotton prices at home and abroad reduced from 5,962 yuan/ton to 1,070 yuan/ton during the same period. Customs statistics show that China’s cotton imports have plummeted, from the peak 5.14 million tons in 2012 to 1.47 million tons in 2015, which solved the problem that cotton produced at home was stored while its international counterpart seized the market in China. Besides, the upstream and downstream of the industry chain are coordinated, and cotton spinning enterprises are reinvigorated. Second, efforts have been made to effectively protect farmers’ basic benefits and maintain the stable production of cotton in Xinjiang. The target-price based subsidy mainly aims to reform the pricing mechanism, and compensate farmers for loss caused by the reform, so as to effectively maintain their enthusiasm for production. Based on relevant studies, in 2014, if the actual average purchase price of seed cotton was 6.2 yuan/kg and the average yield per mu (a unit of area = 0.0667 hectares) was 300 kilograms, farmers’ income was 1,863 yuan/mu, and the loss was 280 yuan/mu after the cost was excluded. According to the measures implemented in the target-price reform, cotton farmers can be subsidized with 444 yuan/mu, the difference between target price and market price, thus 163 yuan of net income per mu for farmers. According to cottonchina.org, between 2013 and 2015, cotton area in Xinjiang was 33 million mu, 36.82 million mu and 32.82 million mu respectively, while that in China’s hinterland was 36.45 million mu, 24.32 million mu and 14.47 million mu respectively, with a drop larger than the former. Moreover, Xinjiang’s proportion of cotton yield in China’s total rose from 64% in 2013 to more than 76% in 2015. Third, work has been done to transform the mode and structure of cotton production. On the one hand, the reform has spawned a mechanism of reversed transmission of pressure for improving cotton quality. Since target-price policies are implemented, farmers sell quality cotton at market prices with high price for high quality. And many farmers turn to produce quality cotton from high-yield cotton. According to cotton farmers in Manasi County, the price of quality cotton is one yuan per kilogram higher than that of common cotton, meaning over 300 yuan of income per mu. So they all decide to buy quality cotton seeds. Cotton ginning enterprises used to earn the difference between the purchase price of seed cotton and the price of cotton handed to the government, and they tend to mix in inferior or fake as long as they hand in something. Now having to bear market risks, they realize the fundamental way to boost competitiveness lies in improving the quality of cotton. According to these enterprises, the quality of cotton in Xinjiang has been greatly enhanced in 2015, compared with the past several years, and the trend is also obvious in the quality and competitiveness of domestic cotton. On the other hand, progress has been made to promote large-scaled and intensive operation of cotton, through new ways and mechanisms like land transfer and joint stock partnership. Some cotton ginning enterprises cooperate with farmers in new ways, such as placing orders and land contract, so as to have contracted farmers produce the same cotton variety, promote quality, reduce cost and increase efficiency, creating a new intensive operation model of cotton. Fourth, fiscal subsidy policies have become more effective to reduce the loss of social welfare. By the end of temporary storage in late 2013, China has stored over 11.2 million tons of cotton, a book cost of more than 260 billion yuan, which means a potential loss of over 130 billion yuan, calculated with the current market price plus factors like natural degradation. The annual subsidy for storing cotton is some 16 billion yuan, calculated with the annual storage fee of 200 yuan/ton (Ministry of Finance appropriates storage fee of 180 yuan/ton to the substitute depots and 220 yuan/ton to those directly subordinate to China National Cotton Reserves Corporation) and the 1,200 yuan loan interest of subsidies. If temporary storage policies are not changed, the cotton stock will further increase. What’s worse, the distorted market will cause price inversion and the fact that imported cotton will largely replace domestic counterpart, which will lead to huge losses in the industry as well as social welfare. Since the target-price reform, compared with the temporary storage system, 6.3 billion yuan of storage fee and loan interest was saved the very year, calculated with the actual yield of 4.5 million tons and the subsidy for storage fee and loan interest of 1,400 yuan/ton in Xinjiang in 2014). In particular, as there is no distorted market and price inversion between domestic and international markets, all market players in the industry chain are invigorated, which provide a free, fair and reasonable market environment for a more internationally-competitive cotton industry with sound development.

II. Experience and Inspirations

Involving various parties and with plenty of difficulties, cotton price reform, whether feasible and effective, determines its success or failure, as well as the confidence in comprehensively pushing forward the reform. Some effective practices and experience should be highly valued and repeated. First, suitable top-level design and leadership are premises for the success of the pilot project of the reform. Xinjiang Uygur Autonomous Region and Xinjiang Production and Construction Corps attached great importance to the pilot project of cotton reform, strengthened leadership for the reform, and established a mechanism with overall coordination, clear division of labor and responsibility, strong supervision, and cooperation among all parties. It is important to have a proper top-level design, and optimize measures in the process of reform. Some of the measures include formulating Implementation Plan and supportive measures; multi-level training; timely publishing the list of qualified processing enterprises and professional depots; specifying their responsibilities, rights and obligations; regulating charges; collecting market prices of cotton; timely upgrading national tax and bill system; preparing cotton purchasing funds in advance; actively responding to the hotpot issues in the society; and verifying the cotton area nationwide in order to lay a solid foundation for subsequent work like offering subsidy funds. In addition, attention should be paid to publicizing relevant policies in such ways as Outlines of Publicizing the Pilot Project of Cotton Target-Price Reform and A Letter to Cotton Farmers. Therefore, general understanding and common consensus of government departments, enterprises and cotton farmers, have effectively guided policy expectations and promoted the implementation of policies and measures. ...

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