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Uncertainty in cotton trade continues

Oct 01, 2019
Uncertainty in cotton trade continues

In the recent times cotton prices in the entire major cotton-producing countries have been falling posing problems to the farm community. More than that, the production estimates have also been steadily declining, causing worries to the cotton community.

The latest USDA report featured a slight decrease to the 2019-20 production forecast (-179,000 bales, from 125.8 to 125.6 million) and a larger decrease in the projection for world mill-use (-1.2 million bales, from 124.3 to 123.1 million). When combined with an upward revision to beginning stocks (+1 million bales), the result was a two million increase to the expectation for global ending stocks in 2019-20 (from 80.4 to 82.5 million). This volume is slightly higher than levels from the past three crop years (80.3 million in 2016-17, 81 million in 2017-18, 80.3 in 2018-19), but is well below the amount in 2015-16 (90.2 million).

At the country-level, the largest revisions to 2019-20 production figures were for the US (+516,000 bales, to 22.5 million), Uzbekistan (-250,000, to 3 million), Turkmenistan (-150,000 bales to 1 million), and Burkina Faso (-100,000 bales to 1.1 million). For mill-use, the largest country-level changes were for China (-500,000 bales to 40.0 million), India (-500,000 bales, to 25 million), and Uzbekistan (-100,000 bales, to 2.9 million).

The global trade forecast was lowered slightly (-220,000 bales, to 43.9 million). In terms of imports, only notable change was for Pakistan (-200,000 bales, to 2.8 million).

For exports, notable changes included those for the US (+200,000 bales, to 17.2 million), India (-200,000 bales, to 4.2 million), and Turkmenistan (-175,000 bales, to 275,000).

Trade-related uncertainty remains a central question for the cotton fibre market, apparel supply chains, and the global economic outlook.

The USDA publishes weekly export data regarding US export sales and shipments for many agricultural commodities. Because these data are published weekly, figures are available to describe the entire 2018-19 crop year (ended July 31). As a result, it is possible to examine how the tariff increases on US fibre that China implemented last July affected US sales and shipments throughout 2018-19.

At the onset of 2018-19, the US had two million bales under contract with China. That commitment eroded between September and February, bottoming out a level near 1.7 million 480 lb bales before climbing slightly higher over the remainder of the crop year. At the onset of 2019-20, the US has 1.9 million bales committed to China (-3 per cent year-over-year).

The tariff increase had a more significant effect on shipments than sales. Accumulated US shipments to China in 2018-19 were 1.6 million bales, 930,000 bales (-35 per cent) lower than in 2017-18. Despite the tariffs, China was the top destination for US pima shipments in 2018-19 (237,000 bales). Vietnam was the top destination for US upland (3.4 million bales). Turkey (1.4 million bales) ranked second, narrowly beating out China (1.4 million bales). In terms of total cotton exports (pima plus upland), China (1.6 million bales) was the second-largest destination (only behind Vietnam), demonstrating the continued importance of China for US exports, even after the tariff increase. While tariffs lowered US exports, the impact was not been as severe as it was for other commodities. For comparison, US exports of soybeans to China were down 61 per cent year-over-year in 2018-19.

The latest Chinese import data are for June. This means that data for all of 2018-19 are not yet available, but a full year of monthly figures have been published since the tariff increases were implemented (July-June). In those numbers, US market share was sharply lower year-over-year (47 per cent between July 2017 and June 2018, 17 per cent between July 2018 and June 2019). The decrease in share was a result of a strong increase in Chinese imports from all locations (+73 per cent or +4 million bales year-over-year June-July) and a decrease in imports from the US (-35 per cent or -890,000 bales). This implied significant increases in Chinese imports from most alternate locations, especially Brazil (+450 per cent or +1.7 million bales), Australia (+122 per cent or +1.4 million bales), India (+217 per cent or +944,000 bales), and West Africa (+196 per cent or +440,000 bales). Even with these shifts, the US ranked as the third-largest source (behind Brazil and Australia), demonstrating the continued importance of the US as a source of supply for China despite the tariff increase.

The US is scheduled to increase tariff rates on China-made apparel by 10 percentage points on September 1.

By raising sourcing costs for US retailers and brands, these tariffs may lower order volumes. However, the US has been making threats to increase tariffs on Chinese apparel for more than one year. Those threats have not caused any shifts in US apparel imports, with China continuing to represent about 40 per cent of imports of apparel of all fibres and about 30 per cent of cotton-dominant apparel imports. USDA data that convert apparel imports into their raw fibre equivalence show the volume of cotton brought into the US in apparel form (from all sources) has been gently rising over the past year (+4 per cent year-over-year during the first five months of 2019). With sourcing costs set to increase with tariff implementation next month, both the allocation and volume of retailer orders may change.

When the possibility of lower order volumes is extended across other supply chains, it becomes evident how the trade dispute can impact the global economy, and concern about escalating tariffs has been a reason forecasts for economic growth have been falling. Slower global economic growth is associated with slower growth in mill-use, and this can be another way tariffs can affect the cotton market.

Nonetheless, the trade dispute has demonstrated that it can quickly evolve. A resolution could improve the global economic outlook, apparel demand, and therefore, fibre demand. However, momentum appears to be on the side of further escalation, and there does not appear to be a clear path towards an agreement.

India’s cotton crop estimate for the season 2018-19 is retained by the CAI at 312 lakh bales, although in the northern zone, there is a reduction of 10,000 bales in the crop estimate of Punjab (8.65 lakh bales compared to the earlier estimate of 8.75 lakh bales) and there is an increase of 10,000 bales in the cotton crop estimate of Upper Rajasthan (13.10 lakh bales compared to 13 lakh bales estimated earlier). Similarly, in the central zone, there is an increase of 50,000 bales in the cotton crop estimate for Gujarat (87.50 lakh bales compared to 87 lakh bales estimated earlier) and reduction of 25,000 bales each in the estimates for Maharashtra and Madhya Pradesh (70.25 lakh bales in Maharashtra compared to 70.50 lakh bales estimated earlier and 22.93 lakh bales in Madhya Pradesh compared to 23.18 lakh bales estimated earlier). There is no change in the cotton crop estimates of the remaining States.

There is a reduction of two lakh bales in the projection of cotton export for the season and the same is now estimated at 44 lakh bales compared to 46 lakh bales estimated by the CAI previously. Export of cotton waste was inadvertently included in the estimate of cotton export made by the CAI recently. This mistake has now been rectified and the estimate of cotton export has been lowered by two lakh bales to arrive at the exports of only raw cotton excluding cotton waste.

There is a reduction of two lakh bales in the projection of import of cotton and the same is now estimated at 29 lakh bales compared to 31 lakh bales estimated by the CAI previously. CAI has lowered its estimate of cotton imports for the season in view of actual import shipments reaching Indian ports till end of August 2019 being only 23 lakh bales, which are lower than estimated previously.

The yearly consumption estimated by the CAI is also retained at the same level as in July 2019, i.e., at 315 lakh bales. Indian cotton arrivals during the months of October 2018 to August 2019 were estimated at 307.02 lakh bales. Around 98 per cent of the total crop for the ongoing season has already arrived in the market.

Shipment of imports from October 1, 2018 to August 31, 2019, which have reached Indian Ports are estimated at 23 lakh bales while balance six lakh bales are estimated to arrive Indian Ports in the month of September 2019 (total imports estimated during the entire season are 29 lakh bales). Cotton export shipments of cotton (excluding cotton waste) from October 1, 2018 to August 31, 2019 which have already been shipped are estimated at 43 lakh bales while balance 1 lakh bales are expected to be shipped in September 2019 (total exports of cotton (excluding cotton waste) estimated during the entire season are 44 lakh bales).

Consumption by Indian spinning mills for 11 months, i.e., from October 1, 2018 to August 31, 2019 is estimated at 288.75 lakh bales. Cotton stock held by mills in their godowns on August 31, 2019 is estimated at 17.55 lakh bales.

CCI, MNCs, Ginners and MCX are estimated to have stock of 13.72 lakh bales as on August 31, 2019 which is equal to about 14.58 lakh running bales. Thus, total stock held by spinning mills and stockists on August 31, 2019 is estimated at 31.27 lakh bales of 170 kg each which is equal to about 33 lakh bales. Due to small crop size and very tight cotton balance sheet, stock as on September 30, 2019 is estimated by the committee at 15 lakh bales of 170 kg each.

Cotton plays an important role in the Indian economy as the country’s textile industry is predominantly cotton based. India is one of the largest producers as well as exporters of cotton yarn. The textile industry is also expected to reach $223 billion by the year 2021.

The States of Gujarat, Maharashtra, Telangana, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana, Rajasthan, and Punjab are the major cotton producers in India.

Key markets & export destinations

Cotton yarn and fabrics exports accounts for about 23 per cent of India’s total textiles and apparel exports. In 2017-18, India’s cotton production was 34.86 million bales of 170 kg each. Between April-October 2018, total textile and clothing exports stood at Rs 1.52 trillion ($21.95 billion). Between April-October 2018, exports of cotton raw including waste, cotton yarn, cotton fabrics and cotton made-ups grew by 26.01 per cent year-on-year to $6,893.05 million from $5,470.20 million during the same period last year.

Various reputed foreign retailers and brands such as Carrefour, Gap, H&M, JC Penney, Levi Strauss, Macy’s, Marks & Spencer, Metro Group, Nike, Reebok, Tommy Hilfiger and Walmart import Indian textile products.

Trade-related uncertainty remains a central question for the cotton fibre market, apparel supply chains, and the global economic outlook.