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The Trade Deal Is Signed and Cotton Prices Are Climbing. Coincidence?

Wednesday’s signing of the Phase One trade deal between the U.S. and China might mean the easing of both tensions and the threat of future tariffs, but it also likely to spell higher cotton prices, according to Cotton Incorporated.

Since early September, the New York futures contracts for March increased 12 cents percent, or around 20 percent, the organization said in its just-released monthly analysis of the cotton industry. In the last month, the New York March futures contract increased to 71 cents per pound from 65 cents.

The December futures contract, which reflects expectations after the 2020-21 harvest, has been consistently trading above 70 cents per pound since late December and is currently over 72 cents. U.S. spot cotton prices averaged 65.48 cents per pound for the week ended Jan. 9. That was up from 64.74 cents the prior week, but down from 68.16 cents a year ago.

The A Index, an average of global prices, rose to 79 cents per pound from 75 cents in the last month. The China Cotton Index climbed to 91 cents from 85 cents.

“The lows marked a few months ago coincided with the last round of escalation in the U.S.-China trade dispute,” Cotton Inc. said. “The rapprochement that followed, leading to the anticipated signing of the Phase One agreement, coincided with rising cotton prices.”

The deal signed on Wednesday between the two countries does call for increased U.S. exports of cotton to China in the next two years, but left the bulk of tariffs in place, with recutions expected to be addressed in a future Phase Two deal.

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Tariffs on Chinese apparel led to sharp decreases in U.S. apparel imports from China, Cotton Inc. said. In volume terms, U.S. imports of cotton-dominant apparel from China between September and November were down 28 percent or 255 million square meter equivalents (SME) year-over-year, according to data from the Commerce Department’s Office of Textiles & Apparel (OTEXA).

Declines in shipments from China have been accompanied by decreases in total U.S. apparel imports, Cotton Inc. noted. From September to November, U.S. cotton-dominant imports from all sourcing locations were down 9 percent, or 265 million SME, exceeding the decrease from China.  The same pattern holds for apparel of all fibers, with the decrease in total volume (762 million SME) exceeding the decrease from China (753 million SME).

“One implication of these data is that other apparel exporters have not been able to capture the losses from China, resulting in a net loss in apparel demand,” the report said. “With the decreases in U.S. apparel imports from the world exceeding the losses from China, another implication is that there are spillover effects. This could be a result of retailer concerns about pricing and profitability.”

“Retailers sourced from China before the tariff increases for a reason, likely because they found it to be the most profitable choice for those particular products,” Cotton Inc. added. “Tariffs have changed those calculations, creating new costs stemming from the search for alternate locations, while also pushing retailers away from what they had previously determined to be their best option.”