Cleveland On Cotton: Waiting For The Reality Of Demand

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Tariff nervousness plagued the cotton market all week as December futures momentarily broke below longtime support at 79 cents. However, going into the weekly close, the market was trying to hold the price support line.

Prices are hovering around that level, so all is not lost just yet. I was one of those suggesting that the market would not suffer from the tariff as world cotton trade needs the U.S. crop that otherwise would have gone to China.

I was wrong.

Finally, I can’t blame this one on USDA. The fact remains, tariff talk spooked the market lower. The fundamentals have not changed, but speculative traders forged a crack in cotton’s armor and took profits. It is critical that the 79-cent price support hold if prices are to return to 80-84 cents. Loses to Hurricane Florence are being made up by improving crops in all other regions.

At present, the only U.S. cotton moving into China is WTO quota cotton. New sales to China are not part of new export sales listing. See apps.fas.usda.gov/export-sales/cottfax.htm

China Never Held Up Its Side Of The Deal

The tariff background came about as the U.S. essentially opened all of its textile and apparel doors to China. This was generally true for most goods. The trade agreement was that U.S. manufactures would have reciprocal access to China’s consumer markets.

China flooded the U.S. with goods, and still does. However, the Chinese never allowed the U.S. to ship goods into China, which created a one-way trade agreement. Additionally, U.S. seed firms were to be allowed to sell seed (technology) to China. Yet, China prohibited U.S. based seed companies any access to their market.

On academic and business trips, Chinese scientists and other travelers obtained patented seed and smuggled them out of the U.S. and into China. While U.S. seed industry spent billions in seed development cost and decades of time, the Chinese made seed available with limited research and expenses.

Economists love to spout off about the wonderful benefits of free trade. Yet, when putting the textbook aside, one realizes the multitude of assumptions made by economists so we can all enjoy the beautiful benefits of free trade. In today’s business and investment world, “there is no free trade and there is no free lunch.”

Typically, so the textbook tells us, one would favor free trade and most do. However, free trade comes with a flower basket full of assumptions of perfect knowledge. Just as perfect knowledge does not exist in any economic setting, neither does free trade. Free trade is a utopia. I love it, but then I recognize it will never happen.

At Attempt At That Level Playing Field

The tariffs imposed by the U.S. are simply there to keep as level of a playing field as possible. Such is not possible, but at least there is an attempt to allow and promote fair trade. It’s akin to the Waterhole Number 3 lyric, “Do unto others before they can do it to unto you.”

Some are expecting a quick end to the tariff battle. The dispute, though, could last as long as a year, or even longer. The past three Presidents never enforced the trade treaty, so why now? After all, the U.S. has given up its entire cotton supply chain, given up all but the production of cotton, given up all the textile manufacturing, given up most all of its cut and sew business. Given, Given, Given.

In the meantime, world cotton trade flows have not really changed and all parties are grasping for an understanding of the events.

Hopefully, the cotton market will soon reflect the tight world cotton supplies and the fundamental fact that cotton stocks are declining around the world. The market for U.S. cotton has not diminished. U.S. cotton will find a home – and not in a warehouse but in the textile manufacturing chain.

I have predicted the last two market bottoms that proved to be false, so why not another one. The market decline should end in the very high 70s.


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