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Tariffs, Trade War and Global Slowdown Have Cotton Prices Under Siege

Whether the U.S. and China can find a resolution for their trade war or if uncertainty and escalation continue will go a long way in determining near-term cotton demand and prices, Cotton Incorporated said in a new analysis.

Cotton Inc.’s September report said the ongoing dispute is having a direct impact on cotton prices because since China imposed tariffs on imports of U.S. cotton, exports have dropped significantly. The latest round of announced tariffs, if implemented as planned on Dec. 15, would bring the total increase in tariffs on U.S. cotton shipments to 30 percent.

In addition, the trade war’s indirect effect on macroeconomic conditions has seen many of the world’s largest economies experience slower growth over the past year, Cotton Inc. noted.

“The ability for the tariff dispute to change so quickly has been a significant source of uncertainty across cotton supply chains,” Cotton Inc. said. “Uncertainty can postpone investment and order placement, and therefore can slow demand.”

After falling in July, benchmark prices were stable in August and the first half of September. The New York December contract has held to levels near 58 cents per pound since mid-August and Cotlook A Index of average global prices was steady near 70 cents per pound.

U.S. cotton spot prices averaged 55.97 cents per pound for the week ended Sept. 12, according to the U.S. Department of Agriculture (USDA). This was up from 54.61 cents per pound the prior week, but down from 78.98 cents a year earlier.

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The latest USDA report featured decreases in world production and mill-use. The global harvest forecast for 2019-20 was lowered 709,000 bales to 124.9 million bales and the consumption forecast fell 1.3 million bales to 121.7 million bales.

Combined with an increase in beginning stocks–up 503,000 bales to 80 million bales–the higher decrease in mill-use relative to production resulted in a 1.3 million-bale increase to the projection for world ending stocks in 2019-20 to 83.7 million bales. This means higher supply against potentially lower demand from slowing economies and trade turmoil, portending softer cotton prices.

Almost all the additional accumulation in global stocks is expected to occur outside China, according to the USDA. The prediction for ending stocks for the world-less-China is now 50.0 million bales, an increase of 1.3 million bales from last month’s forecast. Cotton Inc. noted that if this occurs, it would represent the largest volume of cotton held outside China on record.

The largest country-level production revisions included declines for the U.S., Australia, Burkina Faso, Mexico and Turkmenistan, while India’s production forecast increased. The projection of 1.4 million bales in 2019-20 represents less than 30 percent of the 4.8 million bales grown in 2017-18. The 2018-19 harvest came in at 2.2 million.

The largest country-level revisions for mill-use included decreases for China, Bangladesh, Brazil, India, Thailand, Turkey, the U.S. and Vietnam. The largest changes or imports were an increase for India and declines for Vietnam, Pakistan, Thailand and Turkey.

The most significant changes in exports were increases for the U.S., Brazil and Australia, with decreases seen for India, Mexico and Burkina Faso.