U.S. Cotton Just Took One For The Team

Taking one for the team: It's an expression from American baseball where a batter allows himself to be beaned by a hard leather ball thrown by a pitcher at autobahn speeds. The point of intentionally allowing for potential bodily harm is to advance the batter to first base, thereby increasing the odds that the next batter can hit the ball enabling the previous player to score a run.

The same principle holds true in trade wars. Someone will inevitably take one for the team. Most recently, I fear the American cotton industry took one for the team thanks to the trade policy of the Trump administration. Only I'm not sure if the batter will be able to score a run.

As has been widely reported, the Trump administration imposed import tariffs of 25% on $50 billion worth of Chinese merchandise imported by the United States. Unsurprisingly, China responded swiftly with a commensurate list of 25% tariffs totaling $50 billion. Products affected included lots of agricultural products besides cotton. These duties are due to take effect on 6 July.

Nevertheless, stuck in the middle of the Chinese retaliation list is raw cotton. HS code 52010000. Assuming the Chinese proceed with their tariff retaliation, American farmers will be faced with a 25% surcharge to sell their cotton in the Chinese market, the largest textile market in the world and one of the top consumers of cotton.

How did markets react to all of this tariff sabre-rattling? They freaked. Prices tumbled. Take a look at the ICE Exchange futures market; it's not pretty.

Many will point out that lower cotton prices will be good for textile mills around the world, and the apparel brands and manufacturers who buy their products. But for farmers, it's a different story. It's a shame. Cotton prices had risen in recent months – nearly approaching $1 per pound – only now to tumble back again.

Tough times

But here's the rub: lower prices make farming, an already stressful profession, even more difficult. The textile supply chain asks the cotton industry to grow its crops sustainably, but how can farmers do that if they can't secure a decent price for their cotton? Sorry gang, sustainability comes with real costs. Despite rhetoric from NGOs and environmentalists to the contrary, doing the right thing with sustainable growing practices cost farmers a lot – and if they can't maintain reasonable prices for their crops, then we're kidding ourselves.

The price of cotton fell more than 10 cents a pound last week, a margin that makes an enormous difference for cotton farmers throughout the United States – and around the world, as global prices also dipped as result of the US-China trade actions. In fact, all of this tit-for-tat trade stuff has only resulted in harming the American farmer. 

For my friends in Memphis, home to the leaders of the American cotton industry, I'd like to suggest that our president just trashed our industry. China didn't start this trade row; the US did. Oh, and guess what? China didn't retaliate against synthetic fibers. They specifically chose cotton, along with a substantial list of other agricultural products. Trump just flipped the bird to our industry.

"Lower cotton prices will be good for textile mills, apparel brands and manufacturers – but for farmers, it's a different story."

Of course, cotton and other agricultural products were retaliated against by the Chinese not only to inflict economic pain but also to inflict political pain on Trump. Supposedly so many farmers voted for Trump, and now it seems that Trump's actions on trade have hurt a key constituency.

Curiously, all of the front-page reporting in the media about Trump's "historic" meeting with Kim Jong-un in Singapore has suddenly disappeared. What has happened to all of the talk of nuclear disarmament? According to the Trump administration, China was supposed to have the leverage on North Korea necessary to force Kim Jong-un to accede to US demands for nuclear disarmament.

So far, details remain scarce on what actually happened in Singapore, but we have seen Trump's response to China after the meeting: the beginnings of a trade war. What's going on here? It seems increasingly possible that the Singapore meeting failed to accomplish much, which, if true, likely steamed Trump. So, did he take out his ire on China? Time will tell.

What happens now?

My hyperbole about cotton prices aside, there are workarounds for America's cotton farmers. Higher tariffs in Shanghai will result in expanded trade in Ho Chi Minh City and elsewhere. Trade will likely shift to countries that have large, competitive spinning industries. In turn, yarn from these countries made with US cotton will be exported to China avoiding the 25% tariff. Vietnam is already the largest destination for American cotton exports, so that will likely only grow under China's tariff regime.

But the Chinese spinning sector will also become more dependent on other sources of cotton. Australia and Brazil come to mind. China's yarn sector has struggled in recent years to remain competitive in global markets. Moreover, China maintains an import quota on raw cotton, the existence of which has resulted in the importation of yarn from places like Vietnam, India and Pakistan.

Even so, China's strategic reserve of cotton is low. After years of buying up the global crop of cotton for its textile industry, Chinese authorities have sold off most of it state warehouse supplies – and for a good reason. The inventory was getting old, and its quality had deteriorated. Replenishment was inevitable, which helps to explain this year's run-up in cotton prices (dry weather in Texas and India also helped to push prices higher).

But it's not the end of the world for farmers. Prices will dip for a while but will likely gradually build back up as global traders adjust to higher Chinese tariffs – assuming, of course, that trade tensions between the US and China don't escalate further. And that's the real question. When in all of the back-and-forth will jeans be hit? When will T-shirts be hit?

Trade wars. Yikes. Globalization has now devolved into #mefirst and #yousecond. Where does it end? I'm afraid to find out.

This article was originally published on just-style.com on June 26, 2018