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How to Survive a Tariff-Driven Market

How to Survive a Tariff-Driven Market

From Cotton Grower Magazine – January 2019

Any discussion of tariffs is, admittedly, tricky.

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On one hand, there’s a certain understanding surrounding the current tariff war between the U.S. and China. Intellectual property and unbalanced trade issues are valid reasons for the current (at press time) standoff.

Yet, on the other hand, anything that disrupts the flow of cotton and other agricultural commodities to a major importer leads to concerns at the farm level – and the markets, too.

“Since September, the cotton market has been in a somewhat narrow band,” explains Dr. John Robinson, professor and Extension economist with Texas A&M University. “We were left there by the discussions of the tariffs in August and September, which was really just another round of ‘We’re going to do this. Oh yeah, well we’re going to do this.’ That scared a lot of speculative money out of the cotton market, and we dropped to the upper 70s to low 80s level where we’ve been stuck.”

Any optimism about a 90-day negotiating period that came out of the G20 summit meeting between President Trump and Chinese President Xi in late November/early December was short lived. A quick price bump was immediately followed by a slide back to the same range bound prices.

“It seemed like the air went out of that optimism,” says Robinson. “The interpretation was that there wasn’t anything hard and fast in this tentative agreement, or truce, that the U.S. and China would work out over 90 days and not add additional tariffs.

“That’s not enough of a bullish event to break the market out of its range,” he adds. “And frankly, it’s typical of the uncertainty of this tariff influence that we’ve had for six months. It’s hard to call. It’s totally unpredictable. And the market doesn’t like that.”

So what’s a grower to do to manage through this uncertainty? Robinson offers some suggestions.

Don’t hold cotton very long. Plan to sell it. “If someone can’t sleep at night because they might miss a rally they think might come, look to participate in some other way like call options,” says Robinson. “I wouldn’t plan to pay to store cotton under these conditions with the hope it might get better.”

Only focus on what we have today. “If something happens that sends the market back up into the upper end of the range, act on it,” he advises. “Don’t hesitate, because you – nor anyone else – doesn’t know what’s going to happen.”

Take advantage of the rallies that are there. “If the market is giving you 82 or 83 cents in the future and you can get a good cash basis associated with that, I would be selling,” he adds. “Act quickly and have a plan ready in your mind.”