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How Will the Gov’t Shutdown Affect Cotton Trading?

Rivet's 2020 Denim Circularity report takes a deep dive into how the global denim industry is plotting its circular future amidst a worldwide pandemic.

While much of the hypothesizing regarding the impact of the government shutdown has narrowly focused on the flow of goods and services, discontinuities in the flow of information might be just as significant. Since the federal government shuttered some of its departments, the US Department of Agriculture (USDA) has stopped publishing its supply-and-demand data for cotton, making it difficult for traders to make predictions about the near-term future of the market.

Essentially, traders are finding it difficult to forecast the future of cotton prices in the absence of the USDA report, which was scheduled to be released October 11. If the numbers indicate that a poor harvest is on the horizon, traders could secure futures contracts to source their cotton. But without the data the report furnishes, how much demand there is or will be for cotton remains murky.

Increasingly worried about the protracted shutdown, the global garment industry has braced itself for some potentially tough days ahead. Trade agencies that superintend billions of dollars in international commerce are now hamstrung by a lack of resources. And fragile negotiations regarding several free trade agreements that profoundly affect the garment industry will now be stalled.

Congress proved unable to forge a bipartisan compromise on a new budget prior to the midnight deadline Monday. As a result, more than 800,000 federal workers classified as “nonessential” (out of an grand total of approximately two million workers) have been furloughed without pay indefinitely. The reverberations have already traveled wide: key government offices have been shuttered, national parks closed due to an absence of staff and several government websites that provide valuable information are no longer being updated.

While the totality of the economic fallout is difficult to measure, the IHS, a global information company based in Massachusetts, estimates that the shutdown will cost the U.S. about $300 million a day. While that figure is a negligible fraction of the U.S.’s $15.7 trillion economy, it could still have a disproportionate impact on future growth. The IHS predicts that the previous fourth quarter growth projection of 2.2% will have to be reduced by 0.2%, working on the assumption that the shutdown lasts for only one week. However, a more protracted discontinuation of federal services, say three weeks, could reduce the growth forecast by as much as 1.4%.

The lack of had data on stockpiling has a particularly strong effect on cotton trading since cotton is already susceptible to wild price swings over short durations. That volatility is potentially exacerbated by the fact that much fewer cotton contracts are exchanged on a daily basis than most commodities, meaning that even relatively modest trades can generate outsized imprints on the market as a whole.

Many traders are committed to avoiding the futures market, anxious that they could be vulnerable if demand turns out to be high, causing prices to spike. One aggressive wager by a single trader could send prices spiraling higher, effectively leaving more aggressive investors on the hook for big losses.

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