Global Markets: Cotton – Uncertainty Overshadows China’s 2019/20 Balance Sheet

Photo: Blair Fannin, Texas AgriLife Extension

This month’s forecast sees modest overall changes, but the level of uncertainty has risen significantly since last month. The novel coronavirus (CV) outbreak and its potential ramifications have lowered China consumption, more than offsetting any potential positive impacts from the U.S.-China trade truce.

China’s consumption is lowered modestly based in part on the initial impacts of the CV outbreak, including lengthened factory shutdowns due to the extended Lunar Holiday. Current impacts include a slowdown across the entire textile sector as travel restrictions and plant shutdowns have reduced commercial activity, and to a lesser extent, a slowdown in consumer demand for apparel and other retail products. The unknown duration and severity of these effects overshadows 2019/20 consumption developments since last month’s forecast.

In contrast, the recently signed trade agreement between the United States and China has reduced uncertainty, as the threat of escalating trade actions (negatively affecting the cotton sector) is replaced, at least in the short term, by greater potential for easing of trade measures put in place during the dispute.

By reducing uncertainty, the trade agreement positively impacts expected income growth in CY 2020 and world cotton consumption. Note that a recent reduction in some retaliatory duties by China did not specifically benefit the cotton sector.

This month’s forecast shows no change in either U.S. export or China cotton import forecasts. The public portion of the agreement contains no specific commitments on China’s part to increase market access for U.S. cotton, either by removing retaliatory duties on cotton or expanding access in general.

The agreement states that purchases will be made at market prices based on commercial considerations. Current market access for cotton consists of the WTO TRQ of 894,000 metric tons (tons) at 1 percent duty with an additional duty of 25 percent for U.S. cotton; processing licenses (estimated at 200-300,000 tons a year) at zero duty with no additional for U.S. cotton; sliding-scale duty (assumed to be announced as market conditions dictate) with an additional 25 percent for U.S. cotton; and imports outside these at 40 percent duty with additional 25 percent for U.S. cotton.

Imports by China’s State Reserve are not subject to duties, but there are currently no announcements for such imports.

Although the Phase One Agreement lessened market uncertainty, the CV outbreak is the newest headwind further dampening cotton demand prospects in China. The presence of uncertain market conditions in 2019/20, including the outbreak and initial trade dispute, has helped lower consumption more than 4 million bales since the initial May forecast and to the lowest total in 4 years.

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