Cotton industry in need of new trade deal

Cotton industry in need of new trade deal

“Let’s Make a Deal”... will the best scenario for cotton producers be behind Door No. 1, Door No. 2 or Door No. 3?

Forrest Laws

Let’s make a deal — any kind of a deal that will restore the U.S. farmer to the role of pre-eminent supplier of cotton to China, says Louis Dreyfus Commodities LLC executive vice president Joe Nicosia.

Nicosia, who serves as senior head of the cotton and merchandising platforms at Louis Dreyfus Commodities, made a good case for resolving the U.S.-China tariff war — and soon — during his comments at the Mid-South Farm and Gin Show in Memphis, Tenn.

“You don’t have to be too smart when you look at that graph to see the implications and the negativity the trade war has brought to us and its direct implications to cotton,” said Nicosia, who was the headliner for a “cotton-only” Ag Update Session at the 67th annual edition of the Gin Show.

“We hear a lot about it in soybeans, we hear about it in general in the farm community, but you don’t really hear the same amount of press or the same amount of concern about the cotton community,” said Nicosia.

Referring to a graph displaying the steep drop in cotton shipments to China after President Trump’s announcement of Chinese tariffs last June, Nicosia said part of the reason for the lack of attention is that cotton prices were at a higher level when the trade war began.

“It may seem like a long time ago that we had high prices, but it wasn’t,” he said. “Eight months ago we were at 93 cents, and, in response to those higher prices, acreage grew. Plantings moved up to over 14 million acres.”

U.S. exports were forecast to reach 16 million bales, and prices were pushed up by hurricanes and other weather events, masking the impact of the Chinese imposition of tariffs in response to President Trump’s announcement. But the placement of duties on U.S. agricultural exports led sales of U.S. cotton to plummet.

Market share before and after tariff war

Nicosia displayed another graph depicting the U.S. market share before and after the tariff war began taking a toll on U.S. exports of cotton and other products.

“You can see how well we were doing back in January, February and March of 2018” he said. “Then we come to June of 2018. If we were in the medical profession, we would say we flat-lined at that point. Our exports to China have gone to zero.

“We were once the first or second largest exporter to China,” he noted. “Now we’re headed straight down to the bottom. The impact for cotton has been real, and it’s been substantial.”

U.S. and China trade representatives reportedly have been making progress on resolving the dispute. Those reports have China promising to buy substantial amount of U.S. commodities, but such predictions have proven overly optimistic in the past.

“So here we are,” says Nicosia. “It’s time to make a deal, right?”

The tariff war has been bad enough, but the U.S. cotton industry has had plenty of other issues to deal with including a drought on the Texas Plains and twin hurricanes that have made life miserable for cotton producers in Alabama, Florida, Georgia and the Carolinas.

“When we got into the 2018 crop we got knocked out,” he said. “We had the drought, and we had the hurricanes. I don’t have to tell you what it is like. We were supposed to have a crop of 19.5 million bales, but it turned out to be 18.4 million. And the export outlook for 16 million bales turned out to be 15 because of the smaller crop that was available due to the disasters we had.”

Despite the problems that occurred in 2018, Nicosia said he’s still optimistic the cotton industry can meet the objective of 21 million bales of exports in 2021 he outlined in his comments at last year’s Gin Show. The question is whether the U.S. can end the tariff war with China.

‘Let’s Make a Deal’

Working on a theme based on the “Let’s Make a Deal” TV show, Nicosia discussed the options behind three doors, each with a different outcome from the current situation confronting cotton producers.

Door No. 3, he said, would be the current outlook of where growers stand today. “We have GDP growth that’s reasonable, but slightly lower than where we were. We find ourselves with a 1.1-million-bale increase in consumption, which is projected to be much higher. But because of the problems with the trade wars and other uncertainties in the world we’ve seen reduced consumption and economic activity. The projected price range would be 68 cents.”

Door No. 1, he said, would be a collapse of the current negotiations and an extended trade war with China. “What are those benefits? We’re going to get higher non-trade barriers, which are real in the cotton industry. We have a continued disruption of trade in goods and services. We have a reduction in cotton imports by the world’s largest importer. We create a marginal decrease in total world cotton demand due to higher costs of trade that will take place and a preference for foreign cotton over U.S. growths. Prices would range from 55 to 65 cents, but that might be optimistic.”

Door No. 2 would be a new trade deal with reductions in tariffs on both sides. “There could also be a possible reduction in non-tariff barriers such as those concerning bale packaging and ties,” he said. “A lot of people don’t understand that under the current contracts, China can reject all your bales because they don’t like what you wrap them in. We get an increase in market share for the United States from China’s imports, and we get a temporary increase in demand for U.S. exports. And we get an incentive for production in the U.S. for years to come because we secure the largest buyer.

“And, if we can get rid of the old crop in the U.S., I think prices move up very quickly, possibly up to 95 cents, if we get a deal with China fairly soon.”

Source: farmprogress.com
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