China plans to rebuild a cotton reserve this year to help encourage domestic production as farmers fret that prices could tumble from historic highs.

China is the world's top producer of cotton, but a strong local textile industry also makes the country the largest cotton consumer and importer. Demand from Chinese mills played a key role in driving New York cotton prices to a record $2.27 a pound this month, up 175 per cent over the last year.

Beijing said it would buy cotton for a ''temporary''reserve from September 1 2011 to March 31 2012, covering the fall harvest season. The minimum purchase price for cotton feeding the reserve would be Rmb19,800 per tonne, the government said. That is about $1.40 per pound, slightly more than the price of benchmark New York cotton for December delivery.

The reserve announcement comes as farmers across China are planting cotton, and in some cases deciding whether to plant cotton or another crop. The China Cotton Association estimates that cotton acreage will total 540m acres this year, an increase of 5 per cent from 2010.

''By announcing now that they will build a reserve, the government is sending a very positive signal to farmers about future cotton prices,''said Ma Wenfeng, analyst at Beijing Orient Agribusiness. After global cotton prices fell in 2008, China's cotton farmers have become sceptical that high prices can last, he added. ''Right now farmers have some fears that cotton won't do as well as they hope this year.''

ICE May cotton futures fell 0.6 per cent to $1.9367 per pound as traders awaited important US crop export and planting reports due Thursday.

Terry Townsend, executive director of the International Cotton Advisory Committee, an intergovernmental group, said China has operated a state cotton reserve since the late-1990s. While stocks were as high as 3.5m tonnes two years ago,''we believe it has now been exhausted'',he said.

The significance of Wednesday's announcement by the National Development and Reform Commission ''is the price'', Mr Townsend added.

The price previously used as the threshold for purchases for the state reserve was about Rmb12,600 per tonne. ''The new price level means that China intends to keep domestic prices high for at least another season to encourage cotton production. However, this price will also ensure that textile mills in China do everything possible to move to polyester,'' Mr Townsend said.

The NDRC offered no hint as to the potential size of the reserve. China considers grain and oil reserves to be a state secret, the disclosure of which can lead to incarceration. The China Cotton Association declined to comment.

At a recent cotton conference in Hunan province in Southern China, the mood was a little bit downbeat, said a trader who attended. Textile manufacturers are increasingly having trouble passing on the higher cost of yarn, which is causing purchases of cotton to slow down.