The trade dispute between the US and China has hit cotton supply chains

The trade dispute between the US and China has hit cotton supply chains

The escalating trade dispute between the US and China continues to hit cotton supply chains, with prices on the ICE cotton futures exchange for December delivery falling to just 58.53 cents per lb amid fears the ongoing tensions will worsen demand for the natural fibre.

The level on Monday was the lowest in nearly three-and-a-half years, according to Reuters, which added that cotton has fallen more than 8% since 1 August and over 20% so far this year owing to the long-drawn-out trade war.

On top of this, prices are down 26% in the year since last August when they sat at 81.28 cents per lb.

Looking further ahead, futures prices for March 2020 delivery are currently sitting at 59.4 cents per lb.

Last week the International Cotton Advisory Council (ICAC) noted cotton prices on the Cotlook A Index have dropped from 99.5 cents per pound in August 2018 to 74 cents in July 2019 on the back of uncertainties surrounding the trade.

And according to the latest data from Cotton Incorporated's Executive Cotton Update, the trade environment and its "erratic trajectory" is one of the biggest questions looming over the cotton market ahead of the 2019/20 crop year.

In early May the US imposed an additional 25% tariff on US cotton imports from China and last week (1 August) threatened to hike tariffs by 10% on $300m worth of additional Chinese products – including apparel and textiles – from 1 September.

Cotton Inc's update says China represents 30% of US cotton-dominant apparel imports, so these increases have the potential for increasing consumer apparel prices. But it also notes a response to the increase in US tariffs has been a decline in the Chinese RMB against the US dollar. "For the first time since 2008, it takes more than seven RMB to equal the dollar. The depreciation of the RMB relative to the USD will offset some of the effects of higher tariffs on sourcing costs."

As for cotton supply, it adds that in 2019/20 the US is expected to grow 22m bales of cotton. But with only 3.1m bales for domestic use, exports will need to be strong to prevent a major accumulation of stocks.  

US ending stocks are already forecast to grow by more than 30% and that is with a projection of near-record exports. If shipments end up being weaker than forecast, further build-up in supply in the world's largest exporter could weigh on prices globally.

During July, global production increased to 125.8m bales compared with 119.3m a year earlier. Production remained flat in China at 27.8m bales and in the US grew to 22m bales from 18.4m a year earlier.

World mill use in July increased to 124.3m bales on 121.1m bales a year earlier. China's mill use increased to 40.5m from 39.5m in 2018/19.

Global world cotton ending stocks were at 80.4m bales, up from 79.3m bales a year earlier. This has come from higher production and lower consumption. In the US they grew from 5m to 6.7m bales and in China, fell from 35.4m bales to 33m bales.