(Bloomberg) --

China has bought more than $1 billion worth of American cotton in the past three months. And it doesn’t even need it.

The purchases -- made as part of the phase one trade deal between Washington and Beijing -- are hitting just as the pandemic shuts down clothing stores, decimating demand. That means China’s state-run companies are stashing away the cotton they bought, dimming the outlook for further imports.

The trade deal requires China to buy $36.5 billion in U.S. agricultural products this year. That’s created a disconnect between real demand and purchases, which are running at the fastest pace since 2013. More than 50% of the defaults reported to the World Cotton Exporters Association and the American Cotton Exporters Association in the past year involved Chinese counterparts.

“Recent Chinese purchases have not been correlated with downstream demand,” said Jon Devine, chief economist for Cary, North Carolina-based researcher Cotton Inc. “Much of that cotton is believed to be destined for the Chinese reserve system. If it moves into storage, it can be used against future demand and offset future purchases.”

The spread of Covid-19 has caused havoc in the global cotton industry, with shutdowns and bankruptcies of retailers including J.C. Penney Co. and Neiman Marcus Group Inc. hurting demand. World consumption is forecast to drop 23 million bales, the most on record, the U.S. Department of Agriculture estimates.

China Mills

China’s mills haven’t seen any growth in orders since June and 45% of the facilities surveyed were losing money by the end of that month, 17 percentage points higher than a year earlier, according to the nation’s Cotton Textile Association. U.S. mill use also dropped to an all-time low.

“While agriculture was deemed critical and essential and supply chains remained open, retail clothing sales suffered immensely due to closures,” said Buddy Allen, president of the American Cotton Shippers Association. That caused a “tidal wave of disruption through cotton’s global supply chain creating incredible costs, losses, and risks for participants.”

With Chinese mills struggling, performance on purchases made prior to both the trade war and the coronavirus remains “weak,” Allen said. Other countries including India, Pakistan and Bangladesh have also defaulted, he said.

The recent rise in U.S. cotton prices is further weighing on the outlook for Chinese imports. New York futures have rebounded more than 25% from the a 10-year low reached in April, in part due to concerns about drought in the U.S. and Australia. China’s state purchases have also added fuel to the recovery.

China hasn’t issued additional import quotas to mills as in 2019 and if anything, it has canceled U.S. purchases in the two weeks to July 16. The nation is also selling government reserves to textile mills at a cheaper price than imports. All of that could point to a potential slowdown in purchases.

Rival Brazil

Rival cotton shipper Brazil is also feeling the pinch. Chinese private buyers aren’t picking supplies from the South American nation even when prices are cheaper, said Marco Antonio Aluisio, vice president of an exporters group. He added that the U.S.-China trade deal was bad news for Brazil.

To be sure, China’s purchases of U.S. cotton could still increase further as the government seeks to meet its phase one pledges, said Wang Qianjin, head of the information department at the Shanghai International Cotton Exchange. China is still far from meeting the target.

“We are excited to see these increased purchases but acknowledge the gap that still exists from commitments,” Allen said. “We to see mill use ramp up in China and around the world very soon, otherwise we are just moving stock from to U.S. to Chinese balance sheet.”

©2020 Bloomberg L.P.