As the world’s largest producer and consumer of raw cotton, China can have an immense impact on the world market for cotton. In years like the world market for cotton. In years like this, when Chinese consumption outpaces production, China must import cotton to close the gap between supply and demand. With that gap now the largest on record, Chinese imports are forecast to reach a record high. Import forecasts for the 2003/04 marketing year have been continually revised upward, and the anticipated record level of imports has been a primary factor underlying the strength of cotton prices over the last few months. Current USDA estimates peg Chinese production and consumption at 22.0 and 30.2 million bales, respectively. China must cover this deficit of over 10 million bales by either drawing down its domestic inventories of raw cotton or importing cotton from the rest of the world. Many analysts believe China’s cotton reserves to be less than 6.8 million bales, the lowest level in a decade—and that China must again be a large net importer of cotton this marketing year.

In years when China has been a large net importer of cotton—1979/80, 1994/95–1996/97, and last year—the United States has been its largest supplier, accounting for approximately 55% of total Chinese purchases. In the current marketing year, U.S. sales and shipments to China had by early December climbed to a record year-to-date level—in excess of 3.2 million bales—already exceeding China's imports of U.S. cotton for any entire marketing year since 1979/80. The unprecedented shortage of cotton in China and China's rapid rate of purchases since the end of September caught the market largely by surprise. In August, the USDA projected Chinese cotton imports from the United States to reach 3 million bales, comparable to last year's purchases. Now, on the strength of robust early-season sales, projected Chinese imports stand at a record 7 million bales.

When China is a large net importer of cotton, the world price (measured by the ‘A' Index) tends to rise. Accordingly, as estimates of Chinese net imports have steadily risen over the last two marketing years, price also has risen. Between August 1 and December 1, 2003, as Chinese purchases of raw cotton in the world market soared, cotton prices rose sharply, by 20.1% in the world market and 29.7% in the U.S. market (New York nearby futures contract price). The average year-to-date price is already higher than in the last several years and is poised to remain firm should forecasts for Chinese net imports rise even further in the months ahead.