They finally did it. The Chinese enacted the most bullish scenario possible for cotton, save that of mandating every person in the country buy a new cotton shirt. Too, for all the serious intellect and market savvy they possess, they have no idea what they did.
After much historic discussion and arm twisting the free world allowed China to join to the WTO and enjoy all the free trade rights and privileges of the somewhat tariff free world economy. China’s only requirement was that they open their borders to free trade by 2020. The U.S. governance of the 1980’s and 1990’s accepted the Chinese promise, effectively abandoning the U.S. domestic textile industry and its 12 million bale demand for U.S. cotton, as well as the tens of thousands of textile and related industry jobs. The U.S. walked away from some 8-9 million bales of U.S. domestic cotton consumption. The corporate greed of Cone Mills and others moved all natural fiber textile operations out of the U.S. Those firms immediately began a transformation to acid based oil based fiber know as polyester. With Cone and other once based U.S. mills spinning polyester and other chemical fibers, they flooded the U.S. consumer market with Chinese produced synthetic fiber apparel and other clothing goods. Even the so called environmentally friendly companies such as Nike and Adidas joined in the environmentally carcinogenic production of these pollution fibers.
The Chinese agreed to import what turned out to be about one million bales of cotton from the U.S., and kept reminding U.S. trade ambassadors that the free market in China was coming. Let’s see: we gave up 8 million bales of consumption for some 1 million bales of exports and the promise that free trade was coming. The Chinese have barely sniffed at the air of free trade. They continue to say, “We do not understand.” For nearly two decades the standard Chinese response, repeat-Their Standard Response-has been: “Oh! So sorry we did not know to do this and that, we are just a poor undeveloped country and we did not understand.” The U.S. official response time and time again was to offer more assistance. Finally, the U.S. says no more help and no more sucking of the free milk. The U.S. finally did not give in and the Chinese response was to impose tariffs on U.S. cotton. President Trump responded with the notion that now Chinese textile goods will face a tariff. Talking about killing the goose that laid the golden egg—The Chinese just killed their goose, a goose totally based on the cheap polyester fiber.
How wonderful for cotton demand. Chinese tariff action will now require a higher cost of production for polyester textile goods—a cost, coupled with the recent environmental tax the Chinese placed on their pollution-heavy polyester production, will make polyester and other chemical fibers manufacture economically prohibitive. The age of the natural fiber has returned. Natural fibers are considerably friendlier to the environment and are less expensive and more comfortable for the consumer, a win-win all around for agriculture, the American farm sector, the cotton grower, the consumer, the U.S. textile industry and on and on. The economic response to the Chinese tariff will be an increase in cotton demand and the corresponding effect of an underlying support for cotton prices around the world. As we wrote a couple of months ago, the U.S. cotton industry has always supported fair trade. Many Asian and European countries have asked for free access to the U.S. consumer, but have not been willing to offer the U.S. access to their consumers. Beside China, the EU is a major backslider in that U.S. grains are heavily taxed in the respective member countries. So, finally the U.S. was willing to speak and demand treatment so mandated in the international agreements. And the response from the Chinese government will be, “But… (fill in the blanks any way you wish).” Bottom line, the U.S. tariffs are viable and are spot on.
Much of the same is true with soybeans. Some blame the U.S. for the drop in soybean prices, but have never stopped to notice that 1.) For the first time in history the U.S. has seeded more land to soybeans than to corn and 2.) Brazil is harvesting a record soybean crop. To the extent China shuns U.S. cotton or U.S. soybeans in favor of Brazilian production, then the Brazilians will have to come to the U.S. for cotton—bale for bale. The same is true for soybeans, bushel for bushel. Imagine, Brazil importing soybeans. World supplies of quality agricultural crops is especially tight.
The near term outlook for cotton is decidedly bearish, but the 79 cent support level is considered extremely strong. Too, as traders begin to realize the amount of abandonment in Texas, coupled with the significantly reduced plantings in India, the market will rebound and fall into the bulls lap. U.S. export sales for the coming marketing year continue very impressive. Too, U.S. export numbers rebounded this week and are back on track to climb to 16.3 to 16.6 million bales. Total shipments on the week were 423,700 RB (411,600 Upland). The full report can be viewed at: apps.fas.usda.gov/export-sales/cottfax.htm
Traders are itching to get back solely to trading cotton fundamentals. The hysteria surrounding the potential tariff issues are just beginning to be understood. The market may well try to trade to 79 cents, but the longer term view returns cotton to the mid 80’s and higher.
Of course, should China renounce its cotton tariff, the market will return to its bullish scenario sooner than later. However, that path will not offer as much price support as the imposition of a tariff on U.S. cotton.