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Trade War Fallout: China’s US Cotton Imports Dive, Prices Under Pressure

It probably wasn’t the intended result of the tariff-fueled trade war President Trump started with China, but since China implemented a 25 percent retaliatory tariff on imports of U.S. cotton fiber last July, its imports from the U.S. have dropped 44 percent, or by 868,000 bales.

In its new monthly analysis of the market, Cotton Incorporated said, “In the ten months of trade data that have become available since then, there has been a definite shift away from the U.S. Chinese imports from all locations rose 80 percent (weight basis) year-over-year” through April.

Cotton Inc. noted that non-U.S. machine-picking countries have benefited the most in terms of volume. Chinese imports from Brazil and Australia were up 1.5 million bales year-over-year in the period–up 396 percent and 153 percent, respectively. Strong increases have also been registered from hand-picking sources. Chinese imports from India were up 1 million bales, or 325 percent in the period year-over-year, and shipments from other sources, mainly West Africa, rose 550,000 bales or 108 percent.

“A central source of uncertainty for the cotton market remains the trade situation between the U.S. and China,” Cotton Inc.’s Monthly Economic Letter said. “These two countries represent not only the world’s largest exporter and importer of cotton fiber, but are also the world’s largest exporter and importer of apparel and the world’s two largest economies.”

The U.S. has yet to increase tariffs on apparel imports from China, but last month Trump threatened to raise duties on all goods from China that have not been covered by previous increases. Cotton Inc. noted that this would include U.S. imports of Chinese apparel and home textiles.

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Cotton Inc. noted that threats to hit the entirety of U.S. imports from China were initially made last summer, and in the nearly 12 months since those threats were made, China’s year-long pace of increases, which have already slowed for micro and macroeconomic reasons, has slowed although the country remains the top supplier.

In the first four months of 2019, U.S. apparel imports from China increased 2 percent in volume, although they were flat in value year-to-year.

“Beyond the direct effects that the trade dispute has on global fiber and apparel markets, there are also indirect macroeconomic consequences,” Cotton Inc. said. “If tariff increases are extended to cover all U.S. consumer goods imported from China, U.S. retail prices could increase and demand across product categories could fall. From the U.S., this suggests smaller retailer orders. For China, this suggests smaller manufacturer orders. With Chinese manufacturers serving as a source of demand globally, this could mean less demand for raw materials and intermediate goods around the world and feed into a vicious cycle of slowing economic growth.”

As for the effect on cotton prices, volatility seems to be in the cards. Most benchmark prices decreased over the past month, with Chinese prices moving sharply lower.

After moving lower in early May, values for the July contract were volatile but ranged between 65 cents per pound and 70 cents per pound for most of the past month, the analysis noted. The A Index, an average of global spot prices, fell in early May, but has been more stable in recent weeks, holding to levels between 76 cents per pound and 81 cents per pound.

U.S. spot cotton prices averaged 61.05 cents per pound for the week ended Thursday, according to the U.S. Department of Agriculture (USDA). That was down from 63.55 per pound last week and 90.27 cents per pound a year ago.

The International Cotton Advisory Council (ICAC) said in a recent report, “The cotton market faces continued uncertainty due to the escalating U.S.-China trade war, with prices under additional pressure due to a projected increase in global stocks.”

ICAC said while there is some hope that U.S. and Chinese representatives might be able to de-escalate the conflict later this month when they’re together at the G20 Summit in Japan, the U.S. government recently announced it will provide $16 billion in additional support to its farmers, potentially indicating plans for a prolonged standoff.

“Prices have suffered from the escalating tariffs, dropping to a season-low of 76 cents per pound on May 14th. Although global consumption is expected to rise by 1 percent, production is expected to jump 7 percent, with the resulting increase in global stocks exerting further downward pressure on prices,” ICAC said.

While the demand for cotton could be impacted by a predicted slowing global economy, supply is seen diminishing. The latest USDA report had slight reductions to forecasts for world production and mill use in the upcoming 2019-20 crop year. The global production number decreased 137,000 bales to 125.3 million bales, while the global consumption forecast fell 660,000 bales to 125.3 million bales.

For the soon to be completed 2018-19 crop year, the global production estimate increased and the mill-use estimate decreased. This lifted the figure for 2018-19 world ending stocks 1.1 million bales to 77.5 million bales, and resulted in a corresponding increase to 2019-20 beginning stocks.

In combination, the smaller decrease in 2019-20 production relative to 2019-20 mill-use, and the increase in 2019-20 beginning stocks, pushed the forecast for 2019-20 ending stocks higher.

ICAC said the increase in global stocks will exert “further downward pressure on prices.”