2019: The Costs of Continued Frustration for Cotton
December 30, 2019 No one can say we weren’t warned.
Roll back to the 2019 Mid-South Farm and Gin Show in early March. In his annual Ag Update presentation, Joe Nicosia of Louis Dreyfus Company bemoaned eight months of the U.S.-China trade dispute, noting that “There’s plenty of pain to go around – a little bit everywhere.”
Fast forward to now. Hopes of a quick resolution to the trade dispute have, to date, been buried in increased tariffs, broken promises, trade disruptions and shrinking demand. Add untimely rainfall, delayed planting, drought and extreme heat, and unseasonably cold harvest conditions to the mix, and 2019 has defined the U.S. cotton industry and its growers as – according to a recent Bloomberg article – “the unsung victims of the tit-for-tat tariff battle.”
Although word of a pending phase one agreement in December offers some hope for lowered tariffs and greater agricultural trade, Nicosia’s March prognostications still seem prophetic. “We’re going to end up with a price of about 55 to 65 cents, and that might be optimistic,” he stated. “If that happens with China, they’ll get half of nothing, we’ll get half of nothing and – as Foghorn Leghorn once said – two halves of nothing equals a whole nothing.”
How Did We Get Here?
Dr. Jody Campiche, vice president, Economics & Policy Analysis for the National Cotton Council, said the application of the 25% retaliatory tariff on U.S. cotton has significantly affected the U.S. cotton market over the last year.
“For more than a decade, China has been a key market for U.S. cotton fiber exports, and currently ranks as U.S. cotton’s second largest export destination,” she said. “For the 2018 and 2019 crop years, U.S.-origin cotton has been less competitive relative to growths from countries such as Australia, Brazil and India due to the tariff’s imposition.
“The current trade dispute with China and the resulting retaliatory tariffs on U.S. cotton and cotton yarn are increasingly harming the U.S. cotton industry and our long-term market share in China,” she continued. “The immediate impact has been a decline in market share of China’s cotton imports from 45% in 2017 to 18% percent in 2018, while Brazil’s market share increased from 7% in 2017 to 23% in 2018.
“This lost market share has reduced overall export sales and shipments, further depressing U.S. cotton prices.”
U.S. cotton’s uncompetitive position in the Chinese market has led to direct impacts on trade flows and market prices, with U.S. cotton growers feeling the impact in terms of lower prices. Before the U.S.-China trade dispute began in June 2018, producers could price cotton off a futures market trading in a range between 85-95 cents. Prices now sit in the low 60s – a direct result of the U.S.-China trade tensions.
Put simply, explained Campiche, “The retaliatory tariffs and the uncertainty facing the textile supply chain have reduced expectations for global cotton demand.”
U.S. cotton merchandising firms also faced increased cancellations of sales to international customers during the 2018 marketing year. And, without a resolution to the U.S.-China trade dispute soon, merchants could be facing additional cancellations and defaults for the 2019 marketing year, pointed out Campiche.
Certainly, as Chinese mills continue to source from other cotton-exporting countries, U.S. cotton will have an opportunity to gain some traction in other markets. However, that shifting of trade comes with additional costs, and those sales likely will be secured at lower prices.
“For U.S. merchandisers, that likely means increased transportation and storage costs as they seek new markets,” said Campiche. “In addition, financing costs for export sales to key markets such as Bangladesh and Pakistan can be greater than those for sales to Chinese mills.”
Promise Turns to More Frustration
As growers were finalizing their 2019 plans, cotton prices were in the lower to mid-70s. And, in most parts of the Cotton Belt – including Texas – there was adequate soil moisture in place to help ensure a quick start after planting. A USDA-confirmed 13.7 million acres were planted in anticipation of a good year. Then early season weather issues and additional tariffs took the wind out of the market.
“It’s been another frustrating year on the farm,” said Dr. John Robinson, professor and Extension economist with Texas A&M University. “Growers have been looking for a home run for the last 3-4 years, and this year had a lot of promise. It was the year when they felt like they could make good yields with low abandonment at a good price – and hopefully not have a tropical storm show up at harvest time.
“Some people were able to get that,” he added. “But now, unless a grower forward priced, they’re still selling good cotton at a low price. It’s yet another disappointment.”
Using Texas as an example, Robinson said the limited potential for grain crops in the state – particularly sorghum and wheat – keep growers gambling with cotton. He noted that planting delays turned some potential cotton acres in the Panhandle back to corn this year, and current prices may keep those growers in corn for 2020.
“But as we’ve seen before, when cotton growers have to dig themselves out of a hole, they roll the dice and plant cotton and hope for a home run,” he said. “That’s what keeps cotton acreage from dropping so much across most of the state.”
Then there’s the residual impact on local farm economies. Robinson recalled the end of a recent cotton-focused interview he did with Texas National Public Radio, when he was asked “Is there anything else the people of Texas need to know?”
“By ‘the people of Texas,’ I knew he really meant the 80% of urban Texans,” he said. “I told him in terms of crops, there’s more business to business activity upstream and downstream, there’s more infrastructure, there’s more people involved, there’s more revenue, there’s more influence on land values, there’s more tax base, and everything that’s important is reflected in cotton. If we lose cotton acres statewide, the alternatives are weak and there’s not a lot of economic activity associated with them.”
Brighter Days Ahead?
USDA threw the cotton market a curveball in its November World Agricultural Supply and Demand Estimate (WASDE) report, reducing U.S. production by 900,000 bales and cutting U.S. ending stocks from 7 million to 6.1 million. The news prompted Mississippi State University Economist Dr. O.A. Cleveland to proclaim the market bear dead and create a path for higher prices (70s anyone?).
Robinson concurs – to a point.
“This WASDE doesn’t solve the problem of increasing ending stocks year over year, but it does take the edge off of it,” he said. “Maybe we’ve seen the worst of the weaker prices. Fundamentally, I wouldn’t expect that we are headed back below 60 cents. If there’s an announcement or movement on rescinding some of the tariffs – and if it’s confirmed that cotton will be part of that – we may see another short covering rally.
“But there’s still a healthy world supply of cotton. We just have to be able to work through that.”
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