From Cotton Farmer to Speculator

Nation, page 15
Issue 489, October 11, 2010
Translated by Ruoji Tang
Original article: [Chinese]

Liu Guanghou began buying polyester fiber in large quantities a month ago. He bought 2,000 tons at 8,900 yuan/ton, but his goal for this year is to hoard 4,000 tons. Last year, Liu earned a huge profit through hoarding cotton.

Given the price of cotton has risen so much of late, speculating on the product will be riskier. The supply of cotton has also decreased due to natural disasters and it's become more difficult to obtain.

So Liu has now turned to polyester.

Last month, the price of polyester fiber hit bottom, a rare opportunity that Liu was eager to seize.

He predicts that in the coming months, with profit margins for cotton shrinking, many investors will switch to polyester fiber, driving up the price of the material. This month alone, the price of polyester has risen over 2,000 yuan to over 11,000 yuan/ton

Liu is holding out until prices hit 12,500 yuan/ton.

The Cotton Farmer Turned Businessman

The 47 year-old Liu Guanghou says he was born with an eye for business.

From when he was a young man of 18 through to his late thirties, Liu planted cotton near Dezhou City in Shandong's Xiayi County.

In addition to planting and harvesting, he is an old-hand at tracking the fluctuations of cotton prices and his 20 years as a farmer have served as ideal preparation for his new vocation as a speculator.

He says that when it comes down to it, the cotton business is all about instinct.

Ten years ago, in order to improve the lot of his family, Liu borrowed 60,000 yuan to go into business for himself. He explored many options including raising livestock, producing bricks, and trading garlic. He finally decided that cotton was his best bet.

He purchased equipment and began a cotton processing business in 2003. By 2007, he added a textile business.

He now owns three companies: Shandong Sanxin (Tianhong )Textile Company, Shandong Tianhong Textile Industry Company, and Shandong Tianhong Textile Equipment Management Company. The companies are listed as among the top privately-owned enterprises in Xiajin County.

Liu Guanghou's three businesses are all located in Xiajin's Dukouyi township. He says that this is where he grew up and his business can benefit the village. Also, he has access to ready labor at a relatively low cost.

Liu Guanghou says the three businesses mutually support each other. He can sell processed cotton to other plants or to his own textile company. He can also update and supply his own equipment and sell to other companies.

With only a primary school education, Liu ususally doesn't often use a computer. He gets his information from customers and friends from around the country engaged in the textile business.

He tells us that to be in the business, he has to have a basic grasp of the likely market conditions over the coming five years, including changes in domestic markets, foreign pressures on the market and the situation surrounding domestic cultivation and national cotton reserves.

Boom and Bust in the Cotton Industry

"I'm not speculating on cotton this year. I'm just buying enough for my own use, 2,000 tons. This year, I'm buying polyester," said Liu Guanghou. 

Already, the market price of cotton has set record highs of 20,000 yuan/ton. 

Liu Guanghou is proud of the 5,000 tons of Xinjiang cotton that he bought last September for 13,800 yuan/ton. He is looking at a net profit of over 5,000 yuan per ton, regardless of whether he sells it on the market or uses the cotton for his own production. 

But it's too risky to speculate on cotton this year.

Liu estimates that the price of cotton will continue to surge before falling. He expects prices will eventually drop to about 17,000 yuan/ton this year.

He lists several reasons. The flurry of natural disasters has reduced the national harvest by about 20 to 30 percent. If the quality of cotton is poor and state cotton reserves are insufficient, helped along by the rising strength of the Chinese currency, much of the cotton originally grown for export will end up being sold on the domestic market.

On September 19th, Wang Weize, a farmer who used to pick cotton for Liu Guanghou, says that in previous years, cotton farms could produce 250-300 kg/mu (a mu is equal to about 0.165 acres). But this year, the total yield is around 150 kg/mu. His family has 7 mu of land, but yields have fallen by at least 100 kg/mu this year. The neighboring farms have experienced the same problems - and anyone that can harvest 175-200 kg/mu was doing very well. He did not sell his own crop this year, but he collected cotton from Hebei.

Wang Qinyin, another farmer from Dukouyi township, now also works at Liu Guanghou's cotton processing company and earns about 70-80 yuan a day. Wang planted 10 mu of cotton this year but has not sold any. He expects prices to continue to rise, and will wait till the end of the year to sell.

"This year, due to quality issues, cotton is difficult to process so the costs are high. Last year, seed cotton sold for about 7-7.6 yuan/kilo but this year, it has risen to 8.8-9 yuan/kg, a 2 yuan per kilo increase. The quality of the cotton is not very good and the supply is limited. We can only get 10 tons a day. We could source more than 50 tons a day last year," said Xia Xingyang, director of Liu Guanghou's cotton processing factory. 

Since the local supply of cotton is limited, Xia sends workers to neighboring Qinghe County in Hebei for cotton. But only around 10 of his vehicles are permitted to enter Shandong from Hebei everyday.

"Getting a truck there is only the first step. A successful deal depends on the prices. The cottonseed there is always sold to the highest bidder. Traffickers make about 0.4 yuan/kg. Farmers from Dukouyi township buy seed cotton for about 8.2-8.6 yuan/kg from Hebei and then sell it to processing companies for 8.8-9 yuan/kg," Xia tells us.

"This year, everyone wants to trade cotton, but the market for cotton is already finished. 19,000 yuan/ton may not be the peak, but it's pretty close," said Liu Guanghou.

Polyester is the New Cotton

According to his information, Liu Guanghou explains: "Every cotton processing factory knows that the supply this year is limited and expensive. The quality of the cotton is also substandard and that affects the processing costs. How do we remedy this? What can we use instead? —Polyester fiber."

Liu is confident in his predictions. "There'll be a shortage of polyester, naturally prices will surge."

A month ago, when Liu Guanghou bought 2,000 tons of polyester fiber in four purchases for betweem 8,900 and 9,000 yuan/ton, polyester had hit its lowest price this year. This month, polyester prices surged 2,000 yuan a ton.

"11,000 yuan is still not my target price." Liu said, "Polyester will reach 12,500 yuan/ton, I will start selling then. By then, I will have made a net profit of 3,500 yuan/ton."

Liu Guanghou has sold some of his polyester to make a small profit off the price differential and he has also begun producing polyester goods.

Liu has also decided to invest 700,000 to 800,000 yuan to update his textile manufacturing equipment. He can currently produce 40,000 spindles of CVC and TC yarn, after the upgrades, production capacity will reach 60,000-70,000 spindles.

"Most speculators are still trading cotton; they haven't yet paid attention to polyester. Perhaps only 1 percent are now involved in trading polyester" Liu noted, "I'm ahead of the game."

Liu is pleased with his business decisions this year: "I will turn a decent profit this year, at least over 10 million yuan. I've already made 4 million in buying polyester fiber. And the cotton in storage is also going to sell at a profit."

"Little steps, persist at a steady pace, develop a little more every day, " this is Liu Guanghou's business philosophy, gained from his experience as a speculator on China's agricultural produce markets. 

Read more about speculation in China's agricultural produce markets here.

This article was edited by Paul Pennay