By Dr. Jody Campiche

From Cotton Grower Magazine 2018 Year in Review – December 2018

U.S. Production

While U.S. planted acreage increased by 11.3% in 2018, harvested area and production is projected to be lower than in 2017. Due to various weather events across the Cotton Belt this year, the abandonment rate is much higher than in recent years.

In the Southwest, severe drought conditions early in the growing season resulted in many abandoned acres. Untimely rainfall at harvest time led to additional yield and quality losses in the Southwest and in the Mid-South. In the Southeast, hurricanes led to a substantial reduction in the 2018 cotton crop. Hurricane Florence caused considerable damage to the cotton crop in North Carolina and South Carolina. Hurricane Michael struck the heart of the cotton producing region in the lower Southeast, with extensive damage in southeast Alabama, the Florida Panhandle and a wide path across Georgia.

USDA has estimated a loss of about 1.4 million bales from the Southeast hurricanes. U.S. production for 2018 is estimated at 18.4 million bales – a 2.5 million bale reduction from the previous year.

World production for 2018 is projected to be almost 120 million bales, which is 4 million bales less than in 2017. Along with the reduction in U.S. production, India, Australia, Pakistan and Turkmenistan are also projected to have lower production in 2018. Although USDA recently lowered the projection for 2018 world consumption due to weakness in cotton demand, the estimate of 127 million bales is still a record level of cotton consumption. At 127 million bales, world consumption is projected to be 7.5 million bales more than world production in 2018. As a result, world ending stocks are expected to decline by 7.8 million bales in 2018.

Export Markets

Although the United States will remain the world’s largest cotton exporter in 2018, ongoing trade tensions with China have resulted in a world cotton market disruption. U.S. cotton producers, along with the industry’s other six segments, operate in highly integrated and competitive global fiber and textile/apparel markets. Approximately 75% of U.S. cotton production is exported as raw cotton fiber and another 20-25% exported as textile products (yarn, thread, fabric) – so nearly 100% of U.S. production is ultimately exported in some form. The U.S. cotton industry is extremely dependent on open trade relationships with key markets. Likewise, factors in the global fiber market heavily influence the U.S. cotton industry’s economic situation.

For more than a decade, China has been a key market for U.S. cotton fiber exports and currently ranks as the second largest export destination for U.S. cotton behind Vietnam. In the 2017 marketing year, China purchased approximately 2.6 million bales of U.S. cotton. Of that total, upland cotton accounted for 2.4 million bales, with extra-long staple (ELS) cotton accounting for 210,000 bales. For ELS cotton, export sales to China represent 33% of total export commitments. For upland cotton, sales to China are 16% of sales to all destinations.

 In the absence of retaliatory tariffs, China was expected to purchase approximately 3 million bales of U.S. cotton in the 2018 marketing year. As of the end of October, Chinese textile mills accounted for 1.7 million bales of commitments for the 2018 crop. Prior to the current trade tensions, that strong buying pace was expected to continue in view of China’s growing demand for cotton, declining stockpiles and its gap between domestic production and consumption.

According to USDA’s weekly export reports, there have been both cancellations and destination changes for sales that originally were made to mills in China. In many cases, the cancelled sales have been shifted out to the 2019 marketing year. A key question hanging over the market is the fate of the remaining sales of 1.7 million bales currently on the books to Chinese mills. With the 25% tariff in place, more cancellations and destination changes are expected.

The application of the 25% tariff continues to affect the U.S. cotton industry and has resulted in lower U.S. prices. U.S. cotton is now less competitive relative to growths from countries such as Australia, Brazil and India. In addition, China is the largest producer of polyester fiber, and textile mills can adjust their blends to incorporate more polyester at the expense of cotton.

It is expected that as Chinese mills seek to source from other cotton-exporting countries, U.S. cotton will have an opportunity to gain some traction in other markets. However, that shifting of trade comes with additional costs, and those sales likely will be secured at lower prices. U.S. cotton producers feel the direct impact in terms of lower prices, but U.S. merchandisers will be hit with increased transportation and storage costs as they seek new markets. In addition, financing costs for export sales to key markets such as Bangladesh and Pakistan can be greater than those for sales to Chinese mills.

Given the importance of the Chinese market to U.S. ELS exports, the impact of tariffs on ELS prices is expected to be greater than on upland prices. The spillover effects from soybeans into cottonseed and other oilseed markets also must be taken into consideration. Soybean and cottonseed markets are highly correlated, and the decline in soybean prices is pressuring cottonseed oil prices lower.

There also are concerns about the longer-term impacts on trade if the tariffs remain in place. The tariffs could damage U.S. cotton’s reputation as a reliable supplier of cotton – a reputation the industry has worked hard to earn.

Looking Ahead to 2019

In 2019, cotton acreage will depend on several factors. Producers generally make planting decisions based on the relative prices and potential returns of cotton and competing commodities. Although cotton lint and cottonseed prices have declined in recent months, current 2019 futures prices suggest that cotton still may be a better alternative than some other commodities. Planting decisions for 2019 likely will be affected by the current trade disputes. If the trade tensions between the United States and China are resolved, the pressure on cotton prices and other commodity prices could be reduced.

Financing constraints likely will play a role in 2019 planting decisions, particularly for those affected by severe drought conditions in the Southwest and hurricanes in the Southeast. Congress will be requested to provide help through a potential disaster program for those affected by the 2018 hurricanes. If provided, the overall level and timing of payments likely will affect planting decisions in 2019.