Shurley on Cotton: More Tariff Talk
A tariff is a fee assessed on imports. The tariff is a per-unit charge that has to be paid to the government by whomever brings the good across the border and into the country. Assuming this fee is passed on by the importer, the impact of a tariff is to increase the price of the commodity to the user and, ultimately, the consumer. Alternatively, if such a tariff makes the imported good less price competitive, the impact of the tariff is to reduce the quantity demanded of the imported good.
A potential trade war between the U.S. and China has been brewing for almost a year. Only recently has this escalated and gotten increased political, industry and media attention:
- On March 1, President Trump announced non-country specific tariffs on steel and aluminum imports. Later, by the end of March, several countries – but excluding China – had successfully argued and been granted exemption from the tariff. But China is eleventh in steel and fourth in aluminum exports to the U.S.
- On March 22, President Trump announced tariffs on about $60 billion of Chinese imports. China responded by announcing new tariffs on U.S. imports, including meat, fruit, nuts, and ethanol.
- On April 3, the U.S. threatened to levy tariffs on more than 1,300 Chinese products worth $50 billion. On April 4, China vowed tariffs targeting 106 products from the U.S., including cotton. On April 5, President Trump called for imposing an additional $100 billion in new tariffs.
It is important to point out that, for the most part, this is nothing more than verbal sparring thus far. Still, this has increased tensions and uncertainty in stocks and commodities markets.
On April 4, prices (December futures) dropped almost 200 points on the news of China imposing tariffs of 25% on a long list of commodities including cotton. By the end of the day, prices had recovered a good portion of the decline and have since moved back above 78 cents.
Support at 76 cents held. For now, the market seems to be returning to economic fundamentals and taking a wait and see attitude on the tariffs issue. The initial drop in prices certainly sends us the signal that prices could move lower on any eventual reality of tariffs, but it’s early yet.
China is important to U.S. agriculture and to cotton. There is little argument about that. After three years of decline (2013-15) in total U.S. exports due to sharply lower exports to China, U.S. exports were almost 15 million bales for the 2016 crop year and will likely do the same or more for the 2017 crop year. The rebound the last two years has been due to higher sales to China, but also the emergence of sales to mills in Vietnam, plus increased sales to mills in Indonesia, Bangladesh and Pakistan.
It is also important and worth noting that a good share of the growth from 2015 to 2016 came about for an unusual reason – much higher than normal sales to mills in India. This was due to back-to-back low India production in 2015 and 2016 and low stocks.
Thus far for the 2017 crop marketing year, 17% of sales are for Vietnam, 16% for China, 11% for Turkey and 10% for Indonesia. Thus far, U.S. sales to China are 49% of their projected total for the 2017 crop year, compared to 44% last year.
World use/demand for cotton is growing/improving. Much of that growth is mill business in China. China’s textile mill industry is growing. They are currently in a third year of government reserve sales. Their stocks are declining, but still modest. Their production is far less than their mill use. Their mill industry is heavily dependent, or has been, on the U.S. as a major import supplier. A tariff will increase the cost of U.S. cotton to their mills. It’s hard to believe this is the desired impact unless they have cheaper, alternative sources. The issue of fiber quality also comes into play – what will be the quality of alternative sources?
This tariff talk comes at a particularly inopportune time. The southern hemisphere crop (Brazil and Australia, in particular) will be coming available for export soon. Of course, this is always the case this time of the year, but any tariff could create opportunity for increased market share for them.
The jury is still out on whether or not all the “verbal war” will actually result in tariffs, and what the impact on cotton will be.
If U.S. sales of cotton into China decline as the result of a tariff, it is possible that sales to mills in other countries could increase to offset the decline in China. If other exporting countries were to pick up the lost U.S. market share to China, then – unless those countries’ production and available supply is above average – that would only leave the door open for the U.S. to export to the countries being displaced by increased sales to China.
Could U.S. export sales to China be hurt by a tariff? Yes. Could US exports in total be hurt? That’s the bigger question and the bigger unknown. As long as the global demand for cotton remains strong and on the rebound, it is possible that U.S. exports will continue to find a home.
But this brings up a much broader issue. China is important to the U.S. cotton grower. Absolutely. Shipments to China represent our number one use. But we have also benefited from growth in mill use in other countries.
Let’s hope this situation with China can be resolved to the mutual benefit of both the U.S. and China. But longer term, let’s also work to develop and expand market opportunities in other countries, so we are not as dependent on one country.