AWAT, China -- Chewing on mutton and sipping baiju -- a typical meal in China's Xinjiang Uighur Autonomous Region -- a group of weathered farmers eagerly discusses a familiar topic: the size of this season's cotton subsidy.
"If there is no subsidy, it won't be possible to grow cotton," said Cheng Jinyu, who has been farming cotton for more than two decades. The neighboring farmers nodded.
Each year, the Chinese government sets a target price for cotton, and pays farmers the difference if the market price falls short. Rising labor costs, bad weather and a lack of water to irrigate the crop have turned the 2016-2017 harvest into a particularly hard one.
Even with the subsidy, it is hard for the farmers to make a living most years. "After deducting the labor cost for the cotton pickers, we farmers can hardly make a profit," Cheng said. Xinjiang accounts for about 60% of the total 4.9 million tons forecast by the U.S. Department of Agriculture for China's current harvest. The vast majority is destined for China's coastal fabric and clothing factories, though exports are expected to rise 20.4% this season to 65,000 tons.
The size of the 2016-2017 subsidy will depend on the difference between the target price of 18,600 yuan ($2,704) per ton and the average market price, which farmers said they expected to amount to about 7,300 yuan per ton. Cheng and the other farmers said the target price was the lowest it has been since the policy was introduced in 2014-2015.
In that year, the government needed to replace a disastrous price support program, which had been introduced with the aim of stabilizing the world market. As farmers sold their cotton to state reserves for more than the market price, China's textile mills imported cheaper cotton from abroad, leaving the government with a stockpile that peaked at 11 million tons.
The government opted for a direct subsidy to farmers instead, and set the first target price at 19,800 yuan per ton. It was then lowered to 19,200 yuan for 2015-2016. Analysts have estimated that the subsidy accounted for more than a third of the farmers' gross revenue in that year.
The International Cotton Advisory Committee, which groups cotton producing, consuming and trading countries, estimates that the subsidy cost the Chinese government $4 billion in direct payments to Xinjiang cotton farmers in 2014-2015 alone. In addition, hundreds of millions of dollars are spent each year in subsidies for high quality seeds, and for transporting the crop from China's far northwest to the mills and factories in the east.
However, the subsidy regime was established as a three-year pilot scheme, and the government has not yet announced if it will be continued, adapted or abolished after this year. "My understanding is that the Chinese policy is changing," said Pete Johnson, managing director of Cotton Compass, a cotton marketing news service in Australia. Johnson said any adjustment was likely to have "a huge impact on the world market" because China is one of the largest producers and consumers of cotton.
Fred Gale, senior China economist for the USDA's Economic Research Service, said the Chinese government has been secretive about the future of the subsidy, but is expected to make an announcement before the spring planting season starts. So far, evaluations have been mixed. Official commentary on the subsidy regime is overwhelmingly positive, but pressure from the outside could play a role.
China's cotton subsidy is far higher than the maximum 8.5% of production value it agreed to when it joined the World Trade Organization in 2001. In January, the U.S. launched a complaint at the WTO over China's subsidies for the aluminum industry, following similar complaints in 2016 about China's corn, rice and wheat subsidies, which Washington said were distorting global markets. Moves against the cotton subsidy could follow, but Chinese domestic considerations will weigh heavily on Beijing's reaction.
Decades of unsustainable land management have increased pressure on farmers in the restive region. When Cheng first started growing cotton in the early 1990s, he was one of a handful of pioneers in the area. Today, cotton accounts for 50% of Xinjiang's farm output. In the past 20 years, Xinjiang has doubled the size of its cotton production. "Planting cotton is more and more difficult because the water shortage is so intense," Cheng said.
Water resources are now being managed, and drip irrigation systems have been installed, but still there is not enough. Xinjiang is one of the driest regions in China, heavily affected by the desertification that is slowly making large areas of land uninhabitable. The salinity level of the soil is so high that a thin crust of salt covers the sandy ground.
These conditions have always been a hurdle for the government's plan to develop the area, strategically located along Chinese President Xi Jinping's prestigious Belt and Road Initiative, intended as a strategic link with Central Asia and Europe.
In addition, separatist violence has long rattled the region, where Muslim Uighurs form a majority of the population. Chinese police, heavily armed with machine guns, are around every corner. In a move to stabilize and develop the restive region, farmers from across the country were promised land in remote Xinjiang, and many of today's cotton growers are not Uighurs.
Market prices are unlikely to improve much in the near future. Around 8.4 million tons of cotton remain stockpiled in warehouses across the country, making it unlikely that the market will stabilize, said Darshini Kansar, a research analyst at Care Ratings in India, which overtook China as the world's largest cotton producer in 2016. "They will have to offload this, and that's pretty hard," she said, estimating that the process could take another two years, during which prices would remain low.
In the long run, water scarcity and accelerated desertification have made cotton farming in Xinjiang so unsustainable that an alternative is needed. Already, there is a cap on the number of cotton farms, and about 1,000 sq. km of cotton farmland was converted to other crops last year, China's government said. The USDA has forecast that China's cotton acreage will shrink to its lowest in 12 years in 2016-2017.
But with no viable alternatives, the Chinese government is expected to continue spending billions of dollars to support Xinjiang's cotton industry. "Cotton is an industry with at least some potential to increase wealth and the income of farmers. Other industries simply don't hold any promise," said Bjorn Alpermann, a professor of contemporary Chinese studies at Wurzburg University in Germany.
"At any rate, the government would have to come up with an alternative to keep the farmers occupied," Alpermann said, citing the potential for conflict if poverty and unemployment increase in the region. "Otherwise it would just heighten tensions that you already have there," he said. "It's a political consideration."
With additional reporting by contributing writer Li You.