Cotton Prices Are Rising—Whose Fault Is It?

Textiles

As of Thursday, May 10, 2018

Hovering at approximately 85 cents a pound this week, cotton has been selling at record highs not seen in four years. The causes vary, but there is one issue taking a lot of the blame—the looming trade war between the United States and China.

Since the Chinese government in April announced potential 25 percent retaliatory tariffs on U.S. goods, many in the cotton industry have wondered about the consequences. If implemented, the tariffs would affect approximately $50 billion in goods—$16.5 billion of which includes crops and food items the United States sends to China. China’s proposed tariffs are in response to the 25 percent tariff the United States has threatened to tack on to $50 billion in Chinese goods imported into the U.S.

While talks of a tariff war go on, some in the U.S. cotton industry aren’t convinced this trade climate is the only culprit driving up prices. For Roger Isom, president and chief executive officer of the California Cotton Ginners and Growers Association, one of the largest threats to the state’s cotton industry has been a lack of water.

“The biggest difference would be water,” he said. “Because I can tell you, in December we were looking at a 10 to 15 percent increase, but it didn’t rain until March and guys already made planning decisions. It’s only been 20 percent water allocation.”

Despite 2017’s high rainfall, which yielded a precipitation index of 95 inches, according to the California Department of Water Resources, the agency couldn’t forecast the same wet weather for 2018. After an unimpressive storm season that ran from December 2017 through February 2018, this year’s water supply doesn’t look promising for California’s cotton crop.

This dry spell isn’t limited to California. Jon Devine, the senior economist at Cotton Inc., was concerned about other regions of the country as well.

“A little bit more than half of our cotton acres are in Texas, located in the northwestern part of the state in Lubbock,” he explained. “They are in a pretty severe drought right now, which is feeding into concerns.”

With these dry conditions, farmers are cautious about growing and their lenders aren’t as generous. As growers wait to see what the second half of 2018 brings, there is still a bit of hope for this cotton season. While 2018 hasn’t delivered a lot of rain in certain regions, other threats from last year—such as insect infestations—seem to have been resolved.

“One thing that happened last year, even though we had more acres, was a big problem with lygus. People lost half a bale to a bale per acre,” Isom said. “We don’t think we’ll have the lygus pressure like last year. We might have fewer acres, but we hope yields are better. We want price, quality and yield, but we’ll take two out of three.”

Tumult in the cotton trade

After stepping away last year from the Trans-Pacific Partnership free-trade accord, the United States’ trade policies with Pacific Rim countries have been a hot topic since the beginning of 2018.

While Devine agrees that China is an important trade partner for cotton, he emphasizes the Asian country’s cotton imports from the United States have fallen over the years from approximately 40 percent to 15 percent to 20 percent. Chinese tariffs on U.S. cotton would be problematic, but they are not the only country importing this commodity.

“China is an important customer of U.S. cotton and has been for the past two or three decades, but the U.S. has been shipping more cotton to other locations over the last few years,” Devine said. “There is not as much of a concern as five or 10 years ago when [this tariff] would have been catastrophic.”

With U.S. cotton exports expanding to other countries, the market has opened up more. Last year, Devine said, the U.S. saw its second-highest cotton export yield and would have been successful without China’s business.

The cotton trade between the United States and China might be jeopardized if tariffs are implemented, but that doesn’t mean all U.S. cotton products to China would incur tariffs. There is a roundabout way to get around this import tax.

“Vietnam has seen tremendous growth. Growth in Vietnamese spinning has been fueled by China, too,” Devine explained. “If you take a look at Vietnam, more than half of its spun cotton is shipped to China. There is still a lot of U.S. cotton fiber being shipped to China through Vietnam, but it’s spun into yarn first.”

In marketing year 2016/17, U.S. cotton exports to Vietnam totaled 644,229 metric tons, or 2.95 million bales, valued at $1.07 billion. The United States comprises 53.7 percent of the market share for Vietnam’s cotton imports—an increase from 42.1 percent in 2017, and China imports 75 percent of its cotton yarns from Vietnam, according to the U.S. Department of Agriculture.

In this climate of unpredictable growing conditions and threatening tariff talks, the apparel industry should be concerned, but it’s not all doom and gloom. Prices still haven’t risen to the $2-per-pound high seen in 2011.