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2019: The Costs of Continued Frustration for Cotton

By Jim Steadman
 
No one can say we weren’t warned.
 
Roll back to the 2019 Mid-South Farm and Gin Show in early March. In his annual Ag Update presentation, Joe Nicosia of Louis Dreyfus Company bemoaned eight months of the U.S.-China trade dispute, noting that “There’s plenty of pain to go around – a little bit everywhere.”
 
Fast forward to now. Hopes of a quick resolution to the trade dispute have, to date, been buried in increased tariffs, broken promises, trade disruptions and shrinking demand. Add untimely rainfall, delayed planting, drought and extreme heat, and unseasonably cold harvest conditions to the mix, and 2019 has defined the U.S. cotton industry and its growers as – according to a recent Bloomberg article – “the unsung victims of the tit-for-tat tariff battle.”
 
Although word of a pending phase one agreement in December offers some hope for lowered tariffs and greater agricultural trade, Nicosia’s March prognostications still seem prophetic. “We’re going to end up with a price of about 55 to 65 cents, and that might be optimistic,” he stated. “If that happens with China, they’ll get half of nothing, we’ll get half of nothing and – as Foghorn Leghorn once said – two halves of nothing equals a whole nothing.”
 
How Did We Get Here?
 
Dr. Jody Campiche, vice president, Economics & Policy Analysis for the National Cotton Council, said the application of the 25% retaliatory tariff on U.S. cotton has significantly affected the U.S. cotton market over the last year.
 
“For more than a decade, China has been a key market for U.S. cotton fiber exports, and currently ranks as U.S. cotton’s second largest export destination,” she said. “For the 2018 and 2019 crop years, U.S.-origin cotton has been less competitive relative to growths from countries such as Australia, Brazil and India due to the tariff’s imposition.
 
“The current trade dispute with China and the resulting retaliatory tariffs on U.S. cotton and cotton yarn are increasingly harming the U.S. cotton industry and our long-term market share in China,” she continued. “The immediate impact has been a decline in market share of China’s cotton imports from 45% in 2017 to 18% percent in 2018, while Brazil’s market share increased from 7% in 2017 to 23% in 2018.
 
“This lost market share has reduced overall export sales and shipments, further depressing U.S. cotton prices.”
 
U.S. cotton’s uncompetitive position in the Chinese market has led to direct impacts on trade flows and market prices, with U.S. cotton growers feeling the impact in terms of lower prices. Before the U.S.-China trade dispute began in June 2018, producers could price cotton off a futures market trading in a range between 85-95 cents. Prices now sit in the low 60s – a direct result of the U.S.-China trade tensions.
 
Put simply, explained Campiche, “The retaliatory tariffs and the uncertainty facing the textile supply chain have reduced expectations for global cotton demand.”
 
U.S. cotton merchandising firms also faced increased cancellations of sales to international customers during the 2018 marketing year. And, without a resolution to the U.S.-China trade dispute soon, merchants could be facing additional cancellations and defaults for the 2019 marketing year, pointed out Campiche.
 
Certainly, as Chinese mills continue to source from other cotton-exporting countries, U.S. cotton will have an opportunity to gain some traction in other markets. However, that shifting of trade comes with additional costs, and those sales likely will be secured at lower prices.
 
“For U.S. merchandisers, that likely means increased transportation and storage costs as they seek new markets,” said Campiche. “In addition, financing costs for export sales to key markets such as Bangladesh and Pakistan can be greater than those for sales to Chinese mills.”
 
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