THERE are few market developments with the same scope as the US-China trade war.
Soybean, grain and cotton markets have all felt the full-force of this trade spat – with US futures hit the hardest.
The S&P Grains Index gave up nine per cent through June 2018 on expectations of tariff announcements, and has failed to make a full recovery as of yet.
Cotton also counts itself a victim of this trade war –amid other demand concerns – knocking prices off 2018 peaks in US dollar terms.
However, unlike the Chicago Board of Trade grains and oilseed markets, US cotton prices have failed to recover – or even stabilise convincingly – as prices sink into the mid-low US70 cents a pound level.
As a trade-war victim, US cotton exports have floundered in the first part of the marketing year – after starting the season some 40 per cent ahead year-on-year, export sales are now below the 2017-18 season.
China is the main culprit, having cancelled over 330,000 bales of US purchases from August to December 2018.
This is somewhat understandable, since tariffs make purchases 25 per cent more expensive and Chinese importers likely have a political motivation to avoid US supplies.
Alternative exporters – Australia, Brazil and India – have taken up some of this slack, but not enough to fill China’s import requirement void.
As a recap, Chinese imports are set to improve both this season and next, with domestic inventories being drawn down for a fifth consecutive year in 2019-20.
Put simply, China will need more cotton next season than any other single importer and, last year, 44 per cent of their cotton imports originated from the US.
So the question remains – how will the Chinese get the cotton they need this season?
In short, by waiting.
While we see recent US sales cancelled, these purchases have been shifted into the future –perhaps a bet that future trade talks will yield unrestricted cotton flows once again.
So, while cotton prices are a soft touch versus other grains and oilseeds – CBOT corn and soybeans prices have increased one per cent and two per cent respectively year-to-date – they may also be the most explosive once a trade agreement comes into play and China dives back into ample US supplies.
Rabobank sees this as the single largest upside risk for Intercontinental Exchange number two prices.
But, for Australia, the impact threatens to be less positive.
A trade truce in mid-2019 could see Chinese purchases of US cotton pushed into the usual Australian export window.
This could cause an unusual development whereby Australian bales compete with the US.