Thompson On Cotton: In The Market, Fundamentals Really, Really Matter

©Debra L Ferguson Stock Photography

The opening salvos of the trade war between the U.S. and China have been fired. At midnight last Thursday, the U.S. invoked tariffs on billions of dollars’ worth of Chinese imported goods. China was quick to retaliate imposing similar tariffs on goods imported from the U.S., including cotton and many other agricultural commodities.

Nonetheless, if this faceoff had not been the item of interest in every media outlet imaginable, one would have barely noticed. Markets held firm, squelching any fear of further sell offs.

This was welcomed news to those of us who watch the cotton market daily. Reaffirming our thoughts, bullish fundamentals should be enough to offset any trade issue aftereffects.

In fact, since this battle began, the cotton market has been trending upward, rebounding off a low last week of 81.96. Continued demand for U.S. cotton that could be in short supply is providing underlying support.

Over the past two weeks, the U.S. has shipped almost three quarters of a million bales. With only a few weeks left in the marketing year, we are poised to exceed the USDA export estimate.

Concern over sales cancellations resulting from this trade battle have not materialized. New crop sales have topped a half a million bales in this same two-week period, despite small cancellations from China. This proves what we’ve said all along: if we don’t sell our cotton to China, we will certainly sell it to someone.

This Year’s Shrinking Cotton Crop

Unfortunately, the U.S. crop continues to get smaller as insurance adjusters make their way through West Texas and Oklahoma, zeroing out a significant number of dryland acres. The latest crop progress report shows that only 41% of the U.S. crop rates as good or excellent. At the same point last year that number stood at 61%.

Looking closer, the percentage of the crop rated good to excellent in Texas is only 21%, while 42% is rated poor to very poor. Similarly, Oklahoma is at 38% and 28%, respectively.

It’s very possible this region could be off as much as much as two to three million bales from last year when accounting for reduced acres and limited yields from that carried to harvest.

As we had hoped, USDA agrees as seen in their July WASDE report released today. U.S. production was lowered by a million bales due primarily to increased abandonment. Thus, ending stocks were reduced by 700,000 bales from the June estimate to 4 million bales.

Globally, USDA sees a similar supply/demand scenario. For example:

  • Beginning stocks were lowered to 3.3 million bales as adjustments were made for China’s consumption.
  • The 2018/2019 world consumption was increased by 1.6 million bales,  with China, Bangladesh, Pakistan and Vietnam all expected to use more cotton.
  • World production was estimated to decline by 290,000 bales, with most of this attributed to the U.S. and Australia.

Putting all this together, USDA reduced their world ending stock estimate by a very bullish 5.2 million bales from their June estimate. This has given cotton prices a tremendous shot in the arm. At midday, following the report, the December futures contract was up 400 points at 88.54.

This is further testament that fundamentals always rule in the end, eventually outweighing any news of the day. Look for this to provide needed momentum as the market seeks to regain trade-war-induced losses.

Where Will The War Go Now?

Of course, the trade war now begun could intensify. We would be naïve to think otherwise.

The U.S. is already discussing placing tariffs on an additional $200 billion worth of Chinese imports and that caused a little market angst yesterday. If so, China will no doubt, retaliate again.

However, a couple of points to keep in mind.

  • First, China exports more product than it imports. Thus, with more at stake comes less leverage.
  • Secondly, China’s government doesn’t have to answer to their people. We know they are laden with cash, thus able to assist domestic manufacturers with these tariffs, if they so choose. All of which aids the U.S. at the negotiating table.

If this trade war does escalate, the biggest fear would be a decline in the overall global economy. Keep in mind that:

In an economic downturn, one of the first areas affected is home furnishing and apparel.

A reduction in disposable income forces consumers to tighten their belts. In such a situation, those threadbare jeans don’t look so bad and could last another year or so. Likewise, consumers begin to dig deeper in their closet rather than sort through retail sale racks.

It’s obvious when it comes to trade, the playing field hasn’t been level for some time. Though we may feel the sting a little, our trading partners must be held accountable. If this will get them to the negotiating table –wherein free trade can be made fair trade – it will be worthwhile.

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