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Stormy Times For the Cotton Sector, With Prices in Flux

While two major hurricanes have posed major threats to the supply side of the U.S. cotton market, greater uncertainty is coming from the demand side.

In its October report on the state of the market, Cotton Incorporated said Hurricane Michael—the second storm in a month—topped Hurricane Florence as a bigger threat to U.S. production. Michael covered more cotton acreage, and the crops in its path had a higher percentage of bolls open and more vulnerable, according to the report.

Georgia, which was directly in Michael’s path, had been forecast to represent about 15 percent, or 2.9 million bales, of U.S. production this season. About 90 percent of Georgia’s acres had bolls open when the storm hit, and only about 15 percent to 20 percent had been harvested, Cotton Inc. said. Production in Florida, Alabama and the Carolinas was also affected, but to a lesser degree, after the Carolinas and Virginia suffered notable damage during Florence.

But the major threat to the health of the market comes from the escalating trade dispute between the U.S. and China, said Cotton Inc., which represents American cotton growers and importers. It noted that on Sept. 24, a new round of tariff increases went into effect on both sides. For the U.S., a list of Chinese goods valued at $200 billion was hit with a 10 percent increase in duty rates. Scheduled to rise another 15 percent on Jan. 1, this list includes fiber, yarn and fabric.

The latest tranche of Chinese tariff increases covered a list of U.S. goods valued at $60 billion, imposing 5 percent or 10 percent increases in duty rates. Following this round, essentially all U.S. exports to China are now subject to tariff increases.

In response to the latest set of Chinese increases, the Trump administration has threatened to impose tariffs on essentially the remainder of its imports from China, representing $267 billion worth of goods, including apparel and textiles.

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“Given that the U.S. imports the vast majority of the apparel and home furnishings sold at retail, and that China has a dominant share of U.S. apparel and home furnishing imports—about 40 percent of apparel imports and 30 percent of home furnishing imports—these tariff increases could lead to higher U.S. consumer prices for finished textile goods,” the report said. “A consequence of higher retail prices could be reduced consumer demand.”

Additional factors are also emerging that could have negative effects on the cotton market. For instance, Chinese mills in the past few weeks have started to cancel orders from the United States.

“The extent to which China might turn away from the U.S. as a source of supply could be expected to complicate trade patterns globally,” Cotton Inc. said. “The prospect of higher Chinese import demand resulting from lower Chinese reserve stocks, as well as smaller crops from alternative exporters like Australia, add to the complexity.”

How this will impact prices is also uncertain, but lower demand usually doesn’t bode well for price stability or strength. Overall, most benchmark prices fell over the past month.

December New York futures moved lower in the second half of September, dropping from 82 cents a pound to 76 cents by early October, and holding between 76 cents and 78 cents per pound last week.

The Cotlook A Index, an average of global prices, also moved lower in the second half of September, falling to 86 cents a pound from 92 cents. U.S. spot prices averaged 73.25 cents per pound for the week ended Thursday, according to the U.S. Department of Agriculture (USDA). The weekly average was up from 72.66 cents a week earlier and from 67.04 cents in the year-ago period.

This month’s USDA report included slight downward revisions to world production and mill-use figures. With the changes to global production and consumption numbers being relatively minor, substantial revision to India’s stock levels drove the forecast for global 2018-19 beginning stocks down 2.9 million bales and ending stocks down by 3 million bales.

Likewise, India’s significant changes had a large impact on projected world-less-China ending stocks, which also fell 3 million bales month-over-month, but the current prediction for world-less-China stocks still calls for a new record this crop year. Global trade forecasts were lowered 353,000 bales, to 41.4 million bales.