Cotton prices took a tumble when the tariff war of words blew into town earlier this month, but quickly recovered as calmer breezes set in.
The volatility, however, remains in the raw fiber of politics and trade, as uncertainly persist over whether the tariffs will be implemented amid the always unsure whims of weather and consumer demand.
“The stream of trade-related announcements flowing from the U.S. and China adds another layer of uncertainty to the cotton market,” Cotton Incorporated said in its April market analysis.
Cotton Inc. noted the ping ponging threats that saw the Trump administration release a list of potential increased tariffs on Chinese imports on April 3, not including any apparel or textile items, followed on April 4 with China including cotton on the list of U.S. goods it could hit with higher tariffs. The following day, the U.S. indicated that it is researching an even larger list of additional goods from China that could also face higher tariffs.
“Little is known about future implementation of any of these announcements,” Cotton Inc. said. “Negotiations should take place over the next several months and will determine whether or not any of the proposed tariff increases will actually be enforced. If the proposals are enforced, they will influence trade patterns.”
One outcome, according to Cotton Inc., could be that U.S. exports to China would decrease, as the additional 25 percent duty on U.S. cotton would become more expensive compared to other country’s cotton. However, the size of the decrease would be smaller than if the tariffs were imposed several years ago.
“A reason for this is that China sharply reduced its imports from all origins in recent years as it encouraged the mill-use of government-controlled reserve stocks over imports,” Cotton Inc. explained. “As a result, U.S. exports to China in the past two crop years have been 0.9 million bales and 2.3 million bales (respectively), much lower than the longer-term average over four million bales. With U.S. exports to China already lower, there is simply less room to fall than there would have been several years ago.”
If the proposed tariffs are implemented alongside increases in Chinese imports, it would affect the volume of U.S. cotton that could go to China, according to the report. But no other country has an exportable surplus rivaling that from the U.S. As a result, if China imports more cotton from other suppliers, the corresponding tightness of non-U.S. exportable supply could push higher U.S. exports into import markets outside of China, leveling the supply and demand situation and minimizing the impact on price.
New York futures experienced volatility in early April and current values for all benchmark prices are flat to lower compared to month-ago levels.
The latest values for the May and July futures contracts have been holding near 83 cents per pound, while December futures have been holding near 78 cents per pound. The A Index, an average of global prices, was mostly stable over the past month, trading between 90 cents and 93 cents per pound.
In international terms, the China Cotton Index fell slightly to $1.12 per pound from $1.14. Prices for the Indian cotton held steady in the month at 80 cents per pound, while Pakistani spot prices increased to 84 cents per pound from 78 cents in the period and then fell back to 77 cents per pound of late.
Spot prices for U.S. cotton averaged 77.93 cents per pound for the week ended April 5, down from 78.34 cents a week earlier, but up from 72.51 cents the corresponding period a year ago, according to the U.S. Department of Agriculture.
Looking ahead, Cotton Inc. said while U.S. sales to China have decreased over the last year, the U.S. increased sales to other markets, notably to Vietnam and South Asia. The U.S. shipped the second highest overall volume of cotton on record last crop year, with 15 percent going to China, far below market share of 30 percent to 60 percent a decade ago, meaning 85 percent of U.S. exports have shifted to other markets..
“The large percentage going to other markets also implies that the U.S. has less exposure to a downturn in Chinese demand than five to 10 years ago,” the report noted. “Nonetheless, the importance of China as a customer of U.S. and global cotton exporters should not be understated. Given the drawdown in reserve stocks over the past several years, China is approaching the transition point when it should begin to import significantly more cotton. The prospect of China eventually returning to import volumes between 10 to 15 million bales should be encouraging for cotton exporters all over the world.”
Cotton has long been a barometer for prices of other fibers, and while dynamics such as consumer choice, input prices and environmental factors come into play, it still generally holds true.
The synthetic fiber Producer Price Index fell 0.2% to 128.1 in March compared to April, but was up 5.4% from March 2017. Experts have noted that polyester, the largest of the synthetic fibers in terms of market share, has seen costs increase with higher energy and petroleum prices, and pressure from environmental groups and state governments on the impact of microplastics pollution the fiber is charged with causing when washed.
On the other hand, producers like Unifi Inc. report increased sales of polyester made from recycled materials, such as its Repreve line. Kevin Hall, Unifi’s chairman and CEO, said during a conference call with analysts that domestic polyester sales were boosted by its recycling operations.
“An important dynamic to highlight–as we connect with more customers and built relationships by leveraging the Repreve brand and our sustainability story–we were often able to have discussions across our customers’ entire product portfolio,” Hall said. “A switch from virgin polyester to Repreve polyester can be low hanging fruit and the conversion can happen quickly. This carries a good margin, but lower than say performance athletic wear or footwear, with added technologies for odor control and moisture management.”
Australian Wool Innovation said Friday that following a recess in auction sales, Australian wool markets performed well. Merino types of all descriptions sold solidly and finished the week at similar levels. The Eastern Market indicator was up 1 percent to $13.77 per kilogram.