The Transmission Effect Test of China’s Rotation Mechanism on the Cotton Reserve Market

Abstract

As an important strategic material in China, cotton policy has positive significance in stabilizing the safety of domestic cotton, ensuring cotton income, and stabilizing cotton output. At the same time, affected by the future market price, the cotton industry supply chain cost management is particularly important. Based on the data of China’s cotton price, consumption, yield, and wheeling-in and wheeling-out from 1978 to 2016, the simultaneous equation model is used to empirically analyze the transmission effect of the rotation mechanism of reserve cotton (RMRC) on cotton supply and demand. Studies have shown that China’s cotton reserve policy and the RMRC play a positive role in balancing the supply and demand of the domestic cotton market and preventing excessive fluctuations in cotton prices. The transmission effect of the RMRC on domestic cotton yield and consumption is significant and there are certain differences. The transmission effect of domestic cotton yield is stronger than the transmission effect on domestic cotton consumption. The difference is owing to the transfer path of the RMRC being different. We should improve the regulation and control effect of the RMRC on cotton demand, realize the normalization of the RMRC, and clarify the policy objectives of the RMRC.

1. Introduction

Cotton plays a key role in the economic development of China and the whole world [1]. Accurate monitoring of the changes in the cotton market volatility is crucial for decision-makers. A cotton control policy is of positive significance in stabilizing domestic cotton security, ensuring cotton income, and stabilizing cotton yield, so as to improve social welfare and ensure the smooth operation of the cotton market. From the founding of New China in 1949 to the reform and opening up, the further liberalization of the cotton market, to China’s accession to the WTO in 2002, to promoting China’s cotton to participate in international trade competition, the international and domestic market linkage has been strengthened. At the same time, the constant adjustment and change of China’s reserve cotton policy have a certain impact on the supply and demand structure, price fluctuations, and the safety of the cotton industry in China’s cotton market.

The stability of cotton prices and cotton support policies affect the stability of supply and demand in China’s cotton market [2]. For instance, Wang et al. (2021) [3] have shown that US cotton futures prices have a one-way guiding effect on China’s cotton futures prices. However, Singh and Soni (2021) [4] empirically examined the price transmission between cotton prices in U.S., Indian, and Chinese futures markets, and indicated there is a duality of the direction of price transmission for U.S and Chinese commodity markets and the cotton prices in India also impacts the cotton prices in China but it is a uni-directional relationship. Baranidharan and Sutha (2021) [5] indicate that the positive correlation between cotton futures prices and spot prices is low, and there is no causal relationship. The price transmission in the cotton market has not reached a consensus. Qian and Li (2020) [6] show that subsidy policy increases the sensitivity of cotton sowing areas to price changes and the implementation of the target price policy of cotton plays a positive role in stabilizing cotton production. The above research results are also verified by the Turkish cotton economic policy [7]. At the same time, technology efficiency [8] and climate change [9,10] is also a challenge of guaranteeing the security of the cotton market.

The marginal contribution of this study mainly includes the following two aspects. First, from the perspective of the rotation mechanism of reserve cotton, studying the application of macro-control policies to the cotton market. Second, based on the synchronous equation model, the supply side and demand side of the cotton market are included in the unified analysis framework, and the impact of the cotton rotation mechanism on market fluctuations is systematically investigated to avoid endogenous problems. The remainder of this article proceeds as follows. Section 2 summarizes the implementation of China’s rotation mechanism. Section 3 presents the theoretical analysis of the relationship between China’s rotation mechanism and China’s cotton reserve market. Section 4 describes the data and estimation framework. Section 5 presents the empirical results and Section 6 discusses the findings and policy implications.

2. Analysis of the Transfer Effect of Reserve Cotton Rounding in and out Systems

As a strategic crop for agricultural, economic, and political strategies around the world, reserve cotton plays a positive role in regulating the cotton market and ensuring the safety of cotton in the country. The RMRC rotates the national reserve cotton according to the characteristics of market price fluctuations, supply and demand balance, and reserve cotton stocks, mainly in the case of wheeling-out when the cotton market price is high, and wheeling-in when the price is low; according to the quantity of new and old reserve cotton, to reverse the price of cotton, to stabilize cotton prices, to achieve a balance between cotton supply and demand, and to improve the quality of reserve cotton. In 2001, the State Council issued the “Opinions on Further Deepening the Reform of Cotton Circulation System”, proposing to deepen the reform of the cotton system, marking the separation of national cotton reserves and operations, and opening up the cotton market in an all-around way. The policy of reserve cotton regulation was shifted from the government to the operation according to the market mechanism. Since then, China’s cotton reserve system has experienced small-scale intermittent storage and dumping.

Three-year temporary storage, normalization, and reserve cotton rotation happened from 2015 to the present. Intermittent, small-scale reserve cotton regulation has a significant effect on the stability of cotton prices over a certain period of time. The three-year cotton temporary storage and storage policy played a certain role in calming prices and stabilizing the income of cotton farmers. However, in the implementation process, the law of supply and demand in the cotton market was neglected, resulting in a serious backlog of reserve cotton stocks and large spreads of cotton prices at home and abroad. Since then, the main goal of the regulation of reserve cotton has been to rationally and orderly digest national stocks. For example, in 2015/2016, the accumulated reserves of reserve cotton will be 2.659 million tons, and in 2016/2017, 2.6 million tons will be rotated to ease the pressure on stocks of reserve cotton, ensure market supply, stabilize market prices, regulate supply and demand in the cotton market, and ensure the normal operation of the textile industry.

2.1. The Number and Timing of Reserve Cotton Rounding in and out

Table 1. Reserve cotton wheeling-in execution.

Year	Actual Volume	Average Transaction Price	Date of Launch
2004/2005	0.8	16,656	26 October 2004
2006/2007	5.6	11,037	22 August 2006–28 September 2006
2006/2007	1.5	8284	20 December 2006–22 December 2006
2007/2008	29.6	13,200–14,000	16 July 2007–22 August 2007
2009/2010	153.4	12,900–13,500	22 May 2009–1 September 2009
2009/2010 2010/2011	60.0	14,200–14,600	2 September 2009–30 October 2009
	50.8	15,100–15,400	20 November 2009–25 December 2009
	100.0	21,146	10 August 2010–20 October 2010
2011/2012	0.0
2012/2013	49.4	18,640	3 September 2012–29 September 2012
2012/2013	371.6	19,218	14 January 2013–31 July 2013
2013/2014	71.8	19,500	28 December 2013–31 March 2103
2013/2014	193.6	17,250	1 April 2014–31 August 2014
2014/2015	6.3	13,200	10 July 2015–31 August 2015
2015/2016	265.9	13,324	3 May 2016–31 September 2016
2016/2017	322.0	14,754	6 March 2017–9 September 2107

The actual volume is “0.0”, which indicates that there is a reserve cotton round-out quantity, but no volume.

and

Table 2. Reserve cotton wheeling-out implementation.

Year	Actual Volume	Average Transaction Price	Date of Launch
2004/2005	11	—	23 August 2004–18 October 2004
	32	—	9 September 2004–10 April 2005
2006/2007	30	—	First half of 2006
	30.08	—	26 December 2006–26 January 2007
2007/2008	8.13	—	21 August 2008–31 August 2008
2008/2009	21.91	12,600	21 October 2008–31 October 2008
	99.975	12,600	3 December 2008–23 December 2008
	155.7	12,600	23 December 2008–10 April 2009
2011/2012	313.03	19,800	8 September 2011–31 March 2012
2012/2013	650.64	20,400	1 September 2012–29 March 2013
2013/2014	650.64	20,400	1 September 2013–31 March 2014

Data source: http://www.cncotton.com (accessed on 20 December 2022).

show the changes in the rotation time, volume, and price of the reserve cotton from 2002–2016. From the date of delivery, most of the reserve cotton rotation time is selected from August to December. For example, the temporary storage for three consecutive years is scheduled from September to the end of March of the following year. During this period, the new cotton market was mainly considered in order to alleviate the fluctuations caused by the sudden increase in supply to the cotton market. In the latter stage, it was mainly based on the cotton consumption situation this year to choose whether to carry out the rounding and the number of rounds. Most of the time the rotation is from July to September, and the reserve cotton for 2016–2017 is selected from the beginning of March to the end of August. Judging from the characteristics of the reserve cotton rotation time, this time period is approaching the new cotton market, and the market is in a state of short supply. The reserve cotton rounds effectively compensate for the market supply and demand gap and ensure an effective cotton supply. In addition, in order to ensure the quality of the reserve cotton and reduce the financial burden of the national reserve, in some years (such as 2004/2005–2007/2008 and temporary storage period), the reserve cotton will be reversed to optimize the inventory structure. The reserve round of reserve cotton is determined based on the supply and demand gap and inventory in the previous year.

2.2. Determination of the Price of Reserve Cotton Wheeling-In and Wheeling-Out

According to the literature, the reserve price of reserve cotton from 2015/2016 to date is determined by the average of the spot price of cotton at home and abroad. The reserve price is determined on a weekly basis, and the specific round-off price per day is based on market fluctuations. The reserve cotton rotation price during the temporary storage period is determined by considering the previous year’s lint storage price, market cottonseed price, and relevant reasonable parameters. In other years, the calculation of the reserve price of reserve cotton is relatively vague, but according to the existing formula, the price of the reserve wheel, and the price and relationship of domestic and foreign cotton (shown in

Table 3. The relationship between reserve volume and price of reserve cotton of China and internationally.

Year	Chinese Price (Yuan per Ton)	International Price (Yuan per Ton)	Quantality of Turnout (Ten Thousand Tons)	Quantality of Wheeling-In (Ten Thousand Tons)	Price of Turnout (Yuan per Ton)	Price of Wheeling-In (Yuan per Ton)	Gap between Supply and Demand (Ten Thousand Tons)
2002/2003	10,140						−111.34
2003/2004	12,008		1.4		14,000		7.65
2004/2005	16,100		0.8	73	16,656		−74.24
2005/2006	12,432	9776.45					−50.74
2006/2007	14,103	10,237.53	7.08	30.08	11,037		−130.43
2007/2008	13,300	10,477.13	183	8.13	13,400		−80.06
2008/2009	13,767	12,524.29		121.89		12,600	−47.53
2009/2010	12,162	9381.31	110.8		14,825		−122.94
2010/2011	15,752	12,433.40	0		21,146		−59.46
2011/2012	25,654	25,378.59	100	313.03		19,800	537.95
2012/2013	19,192	14,411.61	49.4	650.64	18,640	20,400	398.96
2013/2014	19,141	12,468.05	421	650.64	19,500	20,400	228.37
2014/2015	18,581	12,396.18	6.34		13,200		50.37
2015/2016	13,751	9756.09	265.92		13,324		−143.9
2016/2017	15,683	9786.26	322		14,754		−179.84

Data source: http://www.cncotton.com (accessed on 20 December 2022). “National Statistical Yearbook”. Note: cotton prices are the annual average price; the gap between supply and demand is based on the annual supply and demand balance formula of cotton.

), it is known that the reserve cotton is in turn. The price is strongly correlated with cotton prices at home and abroad. As can be seen in Table 3, under normal circumstances, the price of reserve cotton wheeling-in and wheeling-out has fluctuated around the domestic cotton market in the current period. However, considering the cost of stockpiles, inventory, quality inspection, etc., the reserve price of reserve cotton is sometimes higher than the price of cotton in the market, resulting in lower actual transaction volume and weaker regulation of the market (such as in 2010/2011). Moreover, due to the spot price difference between domestic and foreign cotton and the domestic cotton yield and reserves, the cost is slightly higher than that of foreign countries. In the statistical year, the reserve price of reserve cotton is higher than the international cotton price.

China’s current main cotton control policy mainly including trade policy, subsidy policy, and temporary storage policy. The regulation of policies has a positive effect on decreasing the linkage between China and foreign markets [11,12]. MacDonald et al. (2018) [13] pointed out that cotton price volatility varied widely and is largely correlated with macroeconomic instability. When volatility was unusually low, it likely reduced by China’s large sales from its national reserve. Muhammad el al. (2019) [14] found that the U.S.–China trade dispute led to lower prices and lost market opportunities in the American market. Sharma et al. (2020) [15] found that WTO restrictions on the excessive flexibility of the United States in the cotton trade will help poor cotton farmers in developing countries to improve their income and subsidy rights. Ding and Zheng (2020) [16], by comparing the futures price fluctuation before the temporary cotton purchase and storage policy, the temporary cotton purchase and storage policy, and the target price policy period, found that the stages of China’s cotton futures price fluctuation from small to large are the temporary purchase and storage period, the stage of implementing the target price policy and the stage before the temporary purchase and storage. Pu and Zheng (2020) [17] found that canceling MPP and lowering MPP and PSS would threaten market stability, farmers’ income, and food security to some degree; and MPP + PS policies could achieve a considerable increase in production and income by the cost within the WTO amber box constraint. However, excessive government intervention could also lead to abnormal price volatility, disruption of market order [18], and even an impact on the global cotton market [19]. Wang (2021) [20] found that the target price subsidy policy had a positive impact on the cotton production technical efficiency of farmers in the Xinjiang Uygur Autonomous Region, while the impact of the areas based on subsidy policy in Hebei Province, Shandong Province, and Anhui Province was not significant.

In view of the current situation of China’s cotton regulatory policy control mechanism, some scholars believed that cotton reserves, subsidy policy operation mechanisms, and market control measures also have certain problems and need to be further adjusted, such as the target price subsidy system design loopholes to produce “turning cotton” phenomenon [21]. The problems of low subsidy efficiency, imperfect subsidy mechanism, and unreasonable subsidy structure in the implementation of target price subsidy policy are apparent [22,23,24]. Temporary storage policy seriously distorts the market pricing law while stabilizing cotton prices. The government has borne a heavy economic burden [25]. Robinson (2016) [26] point out that the price of reserve cotton wheels-in is artificially higher than the world’s cotton price. The U.S. has eliminated direct payments, counter-cyclical subsidies, and income support in its 2014 agriculture bill, and elevated the role of agricultural insurance in cotton subsidy policies [27]. Zhu and Li (2017) [28] measured the support level of China’s cotton price subsidy policy for the past six years and the remaining policy space of non-specific agricultural product “yellow box” subsidies through the AMS system and pointed out that the future cotton price subsidy policy should speed up the “turning box” and reduce the yellow box subsidy policy, which should become the focus of policy adjustment. Agricultural domestic support in the United States diversified from green, yellow, and blue box support to green boxes, supplemented by yellow boxes, from 781.2208 in 1995 to 9730 in 2016 [29]. Munu and Shinyekwa (2018) [30] indicates that the removal of subsidies would reduce cotton production among the top-producing countries, reducing their export earnings while increasing both production and export earnings in the EAC.

The above literature has carried out effective research on the fluctuation of cotton prices and the linkage of cotton prices at home and abroad under the background of cotton subsidy policy, temporary storage, and so on, and the conclusion of the research provides a good theoretical reference and reference for this paper. This paper mainly takes the RMRC as the main starting point, on the basis of analyzing the effect of a specific policy on cotton market elements, analyzing the mechanism of policy function, and further clarifying the problem.

The rest of the article is organized as follows. Firstly, an analysis of the historical change process of the ration mechanism of the reserve cotton and the associated lines with the market is performed. Secondly, the theoretical framework and model selection analyzed in this paper is built. Thirdly, using the annual data of cotton supply and demand and reserve cotton from 1978 to 2016, the joint equation model is used to analyze the degree of influence of the reserve cotton wheel incoming, rounding out on cotton supply and demand. Lastly, we put forward the corresponding policy recommendations according to the conclusions.

3. Theoretical Framework and Model Construction

3.1. Theoretical Framework

In analyzing the influence of domestic cotton regulation policy on the cotton market, price, supply and demand quantity, and the balance between supply and demand are key factors. Singh and Soni (2021) [4] examine the price transmission between cotton prices in U.S., Indian, and Chinese futures markets, found that cotton price volatility has varied widely and largely correlated with macroeconomic instability. The empirical results indicate the U.S. cotton futures market continues to be the most dominant market which leads to price changes in India and China. The long-term relationship between the three markets has seen a significant shift, as documented by the absence of cointegration, which may be due to changes in government policy, especially in India and China, specifically after 2014. China’s cotton price (CCP) fluctuations are mainly reflected in the domestic and foreign cotton market linkage impact, such as cotton imports, exchange rates, and international cotton prices (ICP). CCP fluctuations have an impact [31]. Zhao et al. (2021) [32] analyzed the spatial transmission mechanism and law among Xinjiang cotton prices, national cotton prices, and international cotton prices, and found there was an equilibrium relationship between international cotton prices and Xinjiang cotton prices, as well as the national cotton price series. A 1% change in international cotton prices causes a 1.103% change in Xinjiang cotton prices and a 1.065% change in domestic cotton prices.

There are three main control targets for the RMRC: the first is to coordinate the cotton supply and demand balance to stabilize the cotton market; the other is to stabilize China’s cotton price to improve the competitiveness of domestic cotton; and the third is to stabilize the income of cotton farmers to enhance social welfare. In the implementation process, the transmission effect of RMRC on cotton price mainly affect the cotton price at home and abroad by changing the supply and demand of cotton. The transfer process of reserve cotton rounds to cotton prices is shown in Figure 1. From the perspective of the periphery, cotton prices and cotton supply and demand are the main economic factors of the cotton market. They have a mutual influence and build a market operation transfer chain. From the internal correlation analysis of various details, the cotton market at home and abroad has a linkage effect through the economic fundamental mechanism and the market infection mechanism [33], which makes the cotton price changes at home and abroad interact and tend to be synchronized. The reserve cotton round-in and turn-off mechanisms operate when the cotton price deviates from the normal pricing mechanism and decides to take a round or round according to the principle of “high price rotation and low price rotation”. In addition, in order to adjust the cotton inventory structure, reduce the stockpile of cotton stocks, and stabilize China’s cotton prices need to adopt the round-robin policy, such as the reserve cotton round-in and round-out arrangements from 2014/2015 to the present. The RMRC mainly affects the supply by affecting cotton imports, yield, and stocks, and indirectly affects cotton demand through the law of supply and demand. The adjusted supply and demand situation has a guiding effect on the volume and price of the reserve cotton through the price law and the law of supply and demand. Therefore, we propose two hypotheses to be tested:

H1. 

China’s rotation mechanism has a significant positive transmission effect on domestic cotton production.

H2. 

China’s rotation mechanism has a significant positive transmission effect on domestic cotton consumption.

3.2. Model Construction

In this study, the transmission effect of the rotation mechanism on the cotton market is considered from both the supply and demand aspects. When setting the model, it must be considered that supply and demand are mutually determined. Market demand stimulates supply and supply stability will also smooth out demand fluctuations. Ignoring the correlation between supply and demand would underestimate the transmission effect of the reserve cotton mechanism on the market. The simultaneous equation can solve the endogenous problem; therefore, this paper using the simultaneous equation model for empirical testing.

Through the transmission mechanism of the above-mentioned reserve cotton round-in and turnout policy, it can be concluded that cotton supply, domestic and international cotton price difference (ICP), and the rotation mechanism of reserve cotton (RMRC) are the main factors affecting domestic cotton consumption, and the cotton supply is mainly from domestic cotton. The output (YIELD) and cotton imports (IM) are composed, and the consumption level of the whole cotton industry is also affected by macroeconomic conditions. According to the study of Yeh (2006) [34], the per capita GNP GDPPC represents the domestic macroeconomic situation, and the general equation for domestic cotton demand is:

$$D=a_{11}\mathrm{YIELD}+a_{11}\mathrm{IM}+a_{13}\mathrm{ICP}+a_{14}\mathrm{RMRC}+a_{15}{\mathrm{GDP}}_{\mathrm{PC}}+u_1$$

(1)

Similarly, it can be seen that domestic cotton price (CCP), the rotation mechanism (RMRC), and cotton demand are the main influencing factors for cotton supply. Due to the lagging relationship between market changes and yield, in actuality, the previous domestic cotton price (CCP_t−1) and the previous reserve cotton round-in price (RMRC_t−1) have a significant impact on the current cotton supply. Due to the small proportion of China’s cotton exports, the impact on market supply and demand is limited, so the supply of cotton in the face of the main consideration of the impact of domestic cotton consumption on cotton supply is:

$$S=b_{11}{\mathrm{CCP}}_{t-1}+b_{12}{\mathrm{RMRC}}_{t-1}\_b_{13}{\mathrm{DC}}_{t-1}+u_2$$

(2)

4. Data Index Selection and Description Analysis

4.1. Data

This study uses stata.17 to estimate Equations (1) and (2). The data of domestic cotton yield, consumption, and natural disaster rate variables in this paper are derived from the data of China’s cotton network, China’s yield materials and revenue compilation, and China’s statistical yearbook. The natural disaster rate is derived from the area affected by crops except for the total planting area of crops. Considering the economic significance and the availability of data, the reserve price index of reserve cotton is used to represent the reserve cotton rotation mechanism. Cotton import volume, export volume, and cotton import price were obtained through the compilation of the Customs Statistical Yearbook and the China Customs Administration. The cotton import price was calculated by weighting the average import price of China’s major cotton-importing countries. The exchange rate data comes from the exchange rate statistics of the China Foreign Exchange Administration for each year. The domestic cotton price selects the CCIndex 3128B and the cotton price index. The data comes from China’s cotton network and China’s cotton association.

4.2. Variable Selection and Descriptive Statistics

4.2.1. Endogenous Explanatory Variables

Because this paper focuses on the transfer effect of the reserve cotton round-in and turn-off policy on the supply and demand side of the partial equilibrium of the cotton market, and from the perspective of the way in which the policy plays its role and the scope of transmission, the RMRC passes the price-conducting signal. It mainly plays a regulatory role in the domestic market and has significant interaction with China’s cotton demand and supply. Therefore, in the model analysis, the domestic cotton consumption (DC) is used as the endogenous explanatory variable to represent the demand surface D, and the domestic cotton yield (YIELD) is used as the endogenous explanatory variable to represent the supply surface S.

4.2.2. Exogenous Variables

Per people GDP (GDP_PC), cotton import (IM), the reserve cotton round-in price index (RMRC), and domestic and international cotton spread (ICP) are exogenous variables of the cotton consumption equation. The development of trade and the continuous expansion of imports make imported cotton an important source of supply for the domestic cotton market. Therefore, in addition to the main effect of domestic cotton yield and demand interaction, the demand equation should also pay attention to cotton imports (IM) to cotton consumption. The impact of the international cotton market, the domestic and international cotton prices on the supply and demand of China’s cotton, and the domestic and international cotton price difference (ICP) are exogenous variables in the price analysis of cotton consumption; which is the country’s overall economic development status of the reserve cotton. The implementation effect of the wheel-in and turnout mechanism and the demand for cotton have an impact, so the per capita GDP (GDP_PC) is also used as an exogenous variable of the demand equation.

The previous domestic cotton price (CNP_t−1), the previous reserve cotton round-in price index (RMRC_t−1), and the previous domestic cotton consumption (DC_t−1) were selected as the exogenous variables of the cotton supply equation. On the cotton supply side, the reserve cotton round-in and turn-off mechanisms have a guiding effect on domestic cotton yield while stabilizing cotton prices and stabilizing the balance between the supply and demand of cotton. In addition, domestic cotton yield is affected by the cotton price of the reserve cotton and the domestic cotton consumption of the previous period.

4.2.3. Control Variables

In addition to the above-mentioned major exogenous variables, there are still many factors affecting cotton supply and demand. Tan (2014) [35] pointed out that textile consumption accounts for 90% of China’s domestic cotton consumption, and textile consumption has a significant impact on future cotton demand. Changes in exchange rates have an impact on domestic and international cotton prices, and rising exchange rates will raise cotton prices and reduce imports of cotton. To this end, based on the partial equilibrium model of agricultural products constructed from relevant literature, the exchange rate (RATE), domestic cotton textile yield (TXPC), domestic cotton yield (CCPC), cotton export volume (EX), per capita cotton occupancy (YIELDPC) were used as control variables for the cotton consumption equation. The natural disaster rate (DISASTER), cotton yield (VYIELD), and cotton export volume (EX) were used as control variables for the domestic cotton yield equation. The statistical results of the description of each variable are shown in

Table 4. A statistical description of major variables.

Function	Variable	Variable Symbol	Unit	Average Value	Minimum Value	Maximum Value	Standard Error
Demand Equation	Domestic cotton consumption	DC	Ton	−6.0748	−5.1094	−5.5278	0.2255
	Domestic cotton yield	YIELD	Ton	14.4704	17.3808	15.4905	0.9082
	Cotton imports	IM	Ton	5.9532	10.8955	8.5023	1.5885
	Domestic and international cotton spreads	ICP	Yuan/ton	22.6706	24.3937	23.4314	0.5593
	Reserve cotton round-in and out price index	RMRC	%	−0.4127	0.4207	-0.0057	0.2020
	Per person GDP	GDPPC	Yuan	8.6995	15.4448	13.0308	1.7485
	Domestic cotton cloth production	CCPC	Ten thousand meters	14.5889	15.8468	15.3728	0.3103
	Domestic cotton textile production	TXPC	Ten thousand meters ton	0.3365	5.5832	4.4740	1.0143
	Rate	RATE	%	0.4044	2.1539	1.6252	0.5707
Supply Equation	Domestic cotton price in the previous period	CNPt−1	Yuan/ton	8.9859	10.1172	7.7854	0.6461
	Last season reserve cotton wheeled round-off price index	RMRCt−1	%	0.3365	5.5832	4.4656	1.0312
	Domestic cotton consumption in the previous period	DCt−1	Ton	14.8313	16.2722	15.5100	0.4200
	Cotton exports	EX	Ton	6.9017	13.5278	10.4599	1.7677
	Natural disaster rate	DISASTER	%	−0.8089	0.3891	−0.0575	0.3199
	Cotton yield	VYIELD	Tons/ha	7.7854	10.1172	8.9859	0.6461
Control Variable	Per person cotton possession	YIELDPC	People/ton	1.7432	3.2557	2.6375	0.3994
	Cotton exports	EX	Ton	6.9017	13.5278	10.4599	1.7677

Data source: calculated according to the Stata 17.0 software.

.

4.3. Volatility Analysis of Major Variables

Before the model was constructed, the fluctuation trends and laws of the main variables during the study period were analyzed. Figure 2 shows the fluctuations in domestic cotton yield, domestic cotton consumption, and cotton imports, respectively. As can be seen in Figure 3, domestic cotton yield and demand were relatively stable before China’s accession to the WTO. Except for 1985, most of them are maintained between 200 × 10⁴ tons and 400 × 10⁴ tons. It was also in a low-level stable operation. This aspect was affected by cotton trade policy and market openness. On the other hand, domestic production and consumption levels were relatively low at this stage. Domestic cotton supply and demand were generally flat, and the imports were limited. After 2002, domestic cotton yield and consumption showed a rapid upward trend and fluctuated frequently. At this stage, China’s cotton productivity and consumption levels increased step by step. With the deepening of the cotton circulation system reform and the acceleration of the marketization process, the impact of the international cotton market on the domestic market has been significantly enhanced. From the trend of supply and demand fluctuations, the fluctuation trend of domestic cotton yield and reserve cotton rotation price index is similar, but there was hysteresis at the highest point and the lowest point (domestic cotton yield is in 1991, 1995, and 2008, respectively). At the highest point, the reserve price index of reserve cotton was high in 1990 and 1994, indicating that there was a lag in the transmission effect of the RMRC on domestic cotton yield. The fluctuation trend of cotton import volume and domestic cotton consumption was similar, and both showed a sharp increase in 2002, but the similarity with the fluctuation of the reserve cotton round-in price index was not significant, and the reserve cotton rotation and rotation mechanism passed the consumption. The effect still needs to be empirically analyzed.

As China’s cotton imports continue to increase, the linkage between domestic and international cotton prices has significantly increased. If domestic cotton prices or foreign cotton prices (FCP) are analyzed separately, the internal conduction between the two will be isolated. This paper focused on the fluctuations of the cotton price gap at home and abroad (domestic and foreign cotton price difference = domestic cotton price − international cotton price). As shown in Figure 3, according to the fluctuation characteristics of the price and the cotton market reform process, the fluctuations can be roughly divided into three stages: 1978–1989, 1990–1999, and 2000–2016. In 1978–1989, the fluctuation of the cotton price difference between domestic and foreign countries was relatively stable, and the domestic cotton price was lower than that of international cotton prices. In 1990–1999, the domestic and international cotton price fluctuations fluctuated frequently, and the fluctuation range was large. Domestic cotton prices are relatively stable, and international cotton price fluctuations are the main reason for the sharp fluctuations in domestic and international cotton prices. From 2000 to 2016, domestic and international cotton price fluctuations fluctuated sharply, mainly due to cyclical fluctuations in domestic and foreign economies and China’s accession. The international cotton market has become more and more influential, making the fluctuations of “two markets” and “two prices” more intense than before. After 2014, due to the implementation of a series of domestic cotton price support policies, domestic cotton prices have declined, and domestic and international cotton prices have become more consistent.

5. The Analysis of Empirical Results

It can be seen from the above analysis that there are many factors affecting the supply and demand of cotton, and the correlation between the factors is high. If the regression estimation is performed by a single OLS equation, there will be endogenous problems; therefore, the three-stage least squares method is used to reserve cotton. The wheel-in and turnout mechanism analyzes the transmission effect of the supply and demand system.

5.1. Stationarity Test

In order to reduce the uncertainty caused by heteroscedasticity and related biases, the paper first takes all the variables as natural logarithms. In order to avoid the pseudo-regression or false regression of the constructed model, the ADF test method is used to smooth the time series data. Stationary test as shown in

Table 5. ADF Stationarity test.

Variable Symbol	ADF Test Value	Threshold	p-Value	Conclusion
LTXPC	−0.279	−2.966	0.9284	Unstable
LGDPPC	−1.021	−2.966	0.7455	Unstable
LCCPC	0.015	−2.966	0.9597	Unstable
LICP	−2.307	−2.966	0.1698	Unstable
LIM	−2.136	−2.966	0.2303	Unstable
LRMRC	−1.054	−3.000	0.7331	Unstable
LRATE	−2.341	−2.966	0.159	Unstable
LDC	−2.616	−2.966	0.156	Unstable
LEX	−0.529	−2.966	0.8862	Unstable
LCNPt−1	−1.751	−2.969	0.4050	Unstable
LRMRCt−1	−1	−3.000	0.7531	Unstable
LDCt−1	−0.132	−2.969	0.9461	Unstable
LDISASTER	−1.698	−2.966	0.4320	Unstable
LVYIELD	0.176	−2.966	0.9709	Unstable
LYIELD	−0.488	−2.966	0.8943	Unstable
LYIELDPC	−1.770	−2.966	0.3954	Unstable
LEX	0.8862	−2.966	−0.529	Unstable
DLTXPC	−6.917 ***	−2.969	0.000	Stable
DLGDPPC	−3.357 **	−2.969	0.0125	Stable
DLCCPC	−3.941 ***	−2.969	0.0018	Stable
DLICP	−5.021 ***	−2.969	0.000	Stable
DLIM	−4.724 ***	−2.969	0.0001	Stable
DLRMRC	−6.048 ***	−2.969	0.000	Stable
DLRATE	−3.411 **	−2.969	0.0106	Stable
DLDC	−5.679 ***	−2.969	0.000	Stable
DLEX	−5.169 ***	−2.969	0.000	Stable
DLCNPt−1	−4.619 ***	−2.972	0.0001	Stable
DLRMRCt−1	−4.072 ***	−3.000	0.0011	Stable
DLDCt−1	−5.579 ***	−2.972	0.000	Stable
DLDISASTER	−6.669 ***	−2.969	0.000	Stable
DLVYIELD	−5.031 ***	−2.969	0.000	Stable
DLYIELD	−6.092 ***	−2.969	0.0000	Stable
DLYIELDPC	−5.945 ***	−2.969	0.0000	Stable
DLEX	−5.169 ***	−2.969	0.0000	Stable

Note: ***, ** indicate significance levels at 1%, 5% respectively. The same is below.

, the ADF test results show that all variables pass the first-order difference and strongly reject the null hypothesis that the variable contains the unit root at the 5% significance level. All variables are first-order monotonic, so the data are considered to be a stationary process and Pass the ADF test.

5.2. Analysis of Empirical Results

Through the unit root test and the three-stage least squares method, the simultaneous equation model of domestic cotton supply and demand regarding the reserve and rotation mechanism of reserve cotton is as follows:

$${\{}_{\mathrm{DLYIELD}=0.0603{\mathrm{DLCNP}}_{t-1}+0.0214{\mathrm{DLRMRC}}_{t-1}+0.0325{\mathrm{DLDC}}_{t-1}+u_{12}}^{\mathrm{DLDC}=-3.484\mathrm{DYIELD}-0.4417\mathrm{DLIM}+0.3396\mathrm{DLICP}+0.013\mathrm{DLRMRC}+0.4664{\mathrm{DLGDP}}_{\mathrm{pc}}+u_{11}}$$

(3)

The reserve cotton round-in and turn-off mechanism have a balanced effect on supply and demand. According to the transmission effect of the reserve cotton wheel-in and turnout mechanism in Figure 1, there is a mutual influence between domestic demand and the supply of cotton, as shown in

Table 6. Supply and demand equation estimation results.

	Variable	DLDC (Equation (1))	DLYIELD (Equation (2))
The exogenous variable of the demand equation	DLYIELD	−3.484 ** (2.32)	-
	DLIM	−0.0417 *** (5.01)	-
	DLICP	0.3396 *** (2.84)	-
	DLRMRC	0.013 *** (2.64)	-
	DLGDPPC	0.4664 * (1.7)	-
Demand equation control variable	DLCCPC	−0.6171 *** (5.73)
	DLTXPC	0.2976 *** (−2.95)
	DLRATE	−0.6780 *** (5.04)
The exogenous variable of the supply equation	DLCNPt−1	-	0.0603 *** (3.02)
	DTRMRCt−1	-	0.0214 *** (5.19)
	DLDCt−1	-	0.0325 ** (2.14)
Supply equation control variable	DLDISASTER		0.0313 *** (3.36)
	DLVYIELD		0.1777 *** (6.66)
Public control variables	DEX	−0.0238 (1.04)	0.0047 (1.12)
	DLYIELDPC	4.1308 *** (1.04)	0.9169 ** (−2.34)
	Estimation method	3SLS	3SLS

Note: ***, **, and * indicate significance levels at 1%, 5%, and 10%, respectively.

. The current domestic cotton yield has a significant negative impact on current consumption (−3.484 ***). For every 1 unit increase in domestic cotton yield, cotton consumption will fall by 3.4841 units. Domestic cotton consumption is affected by the expected price of cotton. The increase in domestic cotton yield will lower the expected price of consumers, thus reducing the current cotton consumption. The domestic cotton consumption in the first phase has a significant positive impact on domestic cotton yield (0.0324 ***). The increase in domestic cotton consumption in the previous period will result in an increase of 0.0325 units in domestic cotton yield. Due to the long cotton yield cycle and the lag in yield decisions, the impact of cotton demand on domestic cotton yield is lagging; the impact of cotton demand on domestic cotton yield reflects the cotton farmers’ pursuit of cotton yield.

In the cotton consumption equation, the main exogenous variable cotton imports, such as domestic and international cotton spreads, reserve cotton round-in and turn-off price indices, and per capita GDP, have significant effects on cotton consumption, which is in line with the reserve cotton rounds mentioned above. The round-out mechanism passes the logic. The reserve price index of reserve cotton has a positive correlation with domestic cotton consumption at a significant level of 1%. The equation coefficient shows that for every 1 unit increase in the reserve price of the reserve cotton, domestic cotton consumption will increase by 1.3%. According to the above theoretical analysis, the reserve cotton round-in and turnout mechanisms are divided into two methods: round-in and round-out. When the reserve cotton is rounded, the government purchases cotton in the market and directly increases the demand of the cotton market. At that time, the government generally rotates reserve cotton at a price lower than the market price. In this case, it will stimulate the current market demand and encourage the cotton textile industry to purchase cotton, thereby increasing market demand. Therefore, on the whole, the reserve cotton rotation mechanism has a positive impact on cotton demand. Cotton imports have a significant negative impact on domestic cotton consumption. At a significance level of 1%, domestic cotton consumption will be significantly reduced by 4.17% for each additional unit of imports. China’s cotton imports will increase the price of imported cotton. The stimulating effect, through the domestic and foreign cotton price transmission mechanisms, led to an increase in domestic cotton prices, resulting in a decrease in domestic cotton consumption. Domestic and international cotton spreads have a positive impact on domestic cotton consumption at a significance level of 1%. The spread of cotton at home and abroad has highlighted the advantages of imported cotton, and the “selling psychology” generated from comparative benefits may lead to an increase in demand. The per capita GNP has a positive effect on the demand for cotton at a significance level of 10%, indicating that the improvement of the overall economic development level of the country has a positive impact on the development of the cotton textile industry.

In the domestic cotton yield equation, the exogenous variable domestic cotton price, the previous reserve cotton rotation price index, and the previous domestic cotton consumption have significant effects on domestic cotton yield. The domestic cotton price in the previous period has a significant positive impact on domestic cotton yield at a significance level of 1%. For every 1% increase in price, the domestic cotton yield will increase by 6.03% in the current period; the reserve cotton round-in price will increase by 1% domestically. Cotton yield will increase by 2.14%, indicating that the reserve cotton rotation mechanism is positive for stabilizing cotton yield; every 1% increase in domestic cotton consumption in the previous period will lead to a 3.25% increase in domestic cotton yield. In summary, hypotheses H1 and H2 are true.

5.3. Robustness Test

The three-stage least squares method (3SLS) using simultaneous equations can solve the endogenous problem that may exist in the model to some extent. In order to verify the validity of the estimation method used in this paper, we performed an endogeneity test on the benchmark model and re-estimated the model using the generalized moment estimation method (GMM). The results are shown in

Table 7. Simultaneous equation regression under GMM.

	Variable	DLDC (Equation (1))	DLYIELD (Equation (2))
The exogenous variable of the demand equation	DLYIELD	−3.4742 ** (3.32)
	DLIM	−0.04 *** (5.21)
	DLICP	0.3386 *** (2.64)
	DLRMRC	0.008 *** (2.64)
	DLGDPPC	0.4664 * (1.7)
Demand equation control variable	DLCCPC	−0.5871 *** (4.73)
	DLTXPC	0.2876 *** (−2.95)
	DLRATE	−0.6487 *** (4.04)
The exogenous variable of the supply equation	DLTCNPt−1		0.0613 *** (3.22)
	DTRMRCt−1		0.0218 *** (5.19)
	DLDCt−1		0.0325 ** (2.14)
Supply equation control variable	DLDISASTER		0.0325 *** (3.36)
	DLVYIELD		0.1777 *** (6.68)
Public control variable	DEX	−0.0238 (1.04)	0.0047 (1.12)
	DLYIELDPC	4.1308 *** (1.04)	0.9169 ** (−2.34)
	Estimation method	3SLS	3SLS

Note: ***, **, and * indicate significance levels at 1%, 5%, and 10%, respectively.

. Regardless of the significance of the main explanatory variables or the sign and numerical values of the regression coefficients, the regression results of the GMM estimation method are basically consistent with the analysis results of 3SLS. Under these two estimation methods, the reserve rotation and rotation mechanism of the reserve cotton has the same influence on the coefficient of supply and demand of cotton and the interaction coefficient between supply and demand. The transfer effect of reserve cotton on cotton supply and demand and the correlation between supply and demand are stable.

6. Conclusions

6.1. Conclusions

Using the simultaneous equation model to empirically analyze the impact of the reserve cotton rotation, the rotation mechanism on domestic cotton yield and demand, and the effects of various factors on supply and demand, the following conclusions are drawn:

(1)

In general, China’s cotton reserve policy and the round-robin mechanism play a positive role in balancing the supply and demand of the domestic cotton market and preventing excessive fluctuations in cotton prices. The effect of regulation and control policies is significant. From the coefficient of the system equation, the effect of the reserve cotton wheeling mechanism on supply is stronger than the demand. On the one hand, the impact of the reserve rotation mechanism of the reserve cotton on cotton demand is transmitted through the market mechanism, while the impact on the cotton supply is directly adjusted by the round-robin rotation to adjust the supply of the cotton market, and the effect is more significant. On the other hand, because cotton supply price elasticity is greater than demand price elasticity, cotton supply has a stronger response to price changes than demand, and the reserve cotton rotation mechanism has a stronger transmission effect on the supply side than the demand side.

(2)

Under the background of the reserve cotton mechanism, the cotton import volume, the domestic and international cotton price difference, the reserve cotton round-in price index, and the per capita GDP have a significant impact on cotton consumption, but from the coefficient point of view, the reserve cotton wheel and the impact of the rotation mechanism on cotton demand is weaker than that of cotton imports, indicating that domestic cotton demand is more affected by the imported cotton market, and the adjustment effect of domestic reserve cotton rotation and the rotation mechanism on demand needs to be strengthened. In the previous period, the domestic cotton price, the previous reserve cotton rotation price index, and the previous domestic cotton consumption all had significant effects on domestic cotton yield, and the impact of the previous reserve cotton rotation mechanism on domestic cotton yield was stronger than the previous cotton price fluctuation. Under the background of the implementation of the reserve cotton rotation mechanism, the mechanism has a significant effect on the macro-control of the supply.

6.2. Policy Recommendations

(1)

Adhere to and improve the reserve and rotation mechanism of reserve cotton and realize the normalization of the reserve rotation mechanism of reserve cotton. The reserve cotton round-in and turn-off mechanism have a positive effect on regulating cotton supply and demand and stabilizing cotton prices. Under the background of cyclical fluctuations in cotton prices and the “yellow box” sanctions imposed by China’s cotton subsidy policy, adhering to and improving the reserve cotton rotation mechanism has become an important means of macroeconomic regulation and control of the cotton market. On the basis of clarifying the regulation and control objectives of the RMRC and improving the implementation process, consider the degree of influence of the reserve mechanism on different regulatory factors and determine the appropriate wheeling in volume and wheeling-in price based on the comprehensive changes of various factors. At the same time, when considering the period of the RMRC, the hysteresis of the transfer effect should be considered, and the implementation rhythm of the RMRC should be reasonably determined.

(2)

Follow the market rules and rationally implement the regulation mechanism of reserve cotton rotation. We will do a good job of effectively combining the reserve and rotation mechanism of reserve cotton with the market environment, timely adjusting the problems arising from market reactions, paying attention to the degree of response and regulation of reserve cotton to demand, and maintaining the stability of the normal rotation of reserve cotton. Under the premise of respecting the laws of the market, we should rationally exert the regulatory role of the mechanism to avoid distortion of the market caused by over-emphasizing the guiding role of the policy.

(3)

Improve the construction of the cotton market information system. With the trend of globalization and the deepening of the openness of the Chinese market, the linkage effect of the cotton market at home and abroad has become more and more obvious, and the international cotton market has a significant impact on the domestic cotton policy. Improve China’s cotton information monitoring system through advanced information technologies, such as communication satellite systems and Internet technologies, collect and publish reliable, authoritative, and valuable cotton information and control policies, and help cotton participants to grasp the domestic and international cotton yield and sales in a timely manner. Yield and marketing decisions provide accurate information services to reduce cotton price volatility.