Cotton This Month
3 June 2019
Looking Beyond the Uncertainties of Trade Tensions
The trade dispute between the United States and China has impacted cotton demand and supply chains over the course of the past year. On 1 June 2019, China is set to increase tariffs on $60 billion of US goods in retaliation to the US tariff increase on the remaining $200 billion worth of Chinese imports. The G20 summit in Osaka, Japan, at the end of June may provide an opportunity for de-escalation, however the additional $16 billion of government support to US farmers may be signalling entrenchment in a prolonged trade standoff. US cotton, amongst other agricultural commodities, has been subject to additional Chinese import tariffs since 6 July 2018. Following a period of the A index above 100 cents per pound in early June 2018, the international reference price began responding to trade issues and tariffs on cotton. The additional tariff lines escalated trade tensions through August and September of 2018 as the A index declined to a 94-cents-per-pound average. Between October and April, the A index continued to decline, dropping below 80 cents per pound in February before moving to 88 cents per pound in April on the possible trade resolution. As trade negotiations appeared to regress in early May with each side raising tariffs on remaining goods, the A index fell again, reaching a season low of 76 cents per pound on 14 May.
However, despite the trade dispute — which may become and remain the ‘new normal’ — global cotton consumption is projected to increase to 26.9 million tonnes in 2019/20 with expected growth in the East Asian region coming from India (5.5 million tonnes), Pakistan (2.4 million tonnes), Bangladesh (1.8 million tonnes), Vietnam (1.6 million tonnes) and Turkey (1.6 million tonnes). While cotton consumption in China is expected to decrease to 8.25 million tonnes, the country will continue to remain the world’s largest consumer and importer. Imports by China are expected to remain near 2 million tonnes in 2019/20 even though production is expected to decrease to 5.9 million tonnes. Reserve sales in China continue to progress with an average of 85% of the 10,000 tonnes offered daily being sold.
While global consumption is expected to increase 1% in 2019/20, global production is expected to increase 7% to 27.6 million tonnes. At this level of supply and demand, stock levels at the end of the 2019/20 would be expected to increase to 18.6 million tonnes at a stocks-to-use ratio of 0.69. Higher stock levels would be expected to exert downward pressure on prices already impacted by the uncertainty of trade issues, slowing global economic growth and slowing consumption growth.