Cotton Balls Go Rotten; Bale of a Tale of State Planning

Two years ago China amassed half the global supply of Cotton with huge price supports in an effort to encourage more cotton production. China "succeeded".

Farmers produced, and the state paid more for cotton than farmers could get elsewhere. Worldwide supplies soared, but the cotton was withheld from the market.

China's Cotton Policy "Success" Story



Bale of a Tale of State Planning

Please consider China Cotton: Bale of a Tale

It is never easy to put a positive spin on buying high and then selling low. Then again, the cotton that China plans to start selling from its vast state reserves this week, at a price below what it paid for this year’s harvest, might be rather hard actually to spin, period. Cotton can go brittle if stored for a long time. The China National Cotton Reserve will be auctioning bales that came off farms in 2011.

Still, what a marvellous monument to state planning has been created, even if the buying programme might finally end overall next year. China started its stockpiling to encourage farmers to plant cotton when prices looked set to go south two years ago (price volatility threatened a crisis for the nation’s cotton industry). But it has ended holding about 10m tons, or more than half of global inventory. It is now considering direct subsidies to cotton farmers instead.

Australia took a decade to get rid of every last thread of its wool reserves after ending its own farmer support policy in 1991. In the process, the farming industry suffered plenty of damage. But free-market innovation won out over state control in the end. The Australians probably made the fine merino wool in your suit. Not to spin a tale, but perhaps a similar process can work for the Chinese.

State Central Planning

In autumn of 2011, a clothing importer told me the price of clothes was about to soar because of a huge shortage of cotton. Clothing prices rose a few percent, but nothing like what many expected.

But there never was a cotton shortage. Rather there was huge accumulation of cotton by China at ridiculous prices. So now, what to do with it?

If China holds on to the cotton long enough, the matter will take care of itself as the "cotton balls go rotten".

Money does not go rotten in the same way, but rotten results from Fed and central bank money manipulation policies are eventually headed this way. Centralized state planning of anything never works over the long haul.

Huge boom-bust bubbles in housing and the stock market are proof enough.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com