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ANALYSIS: Cotton market weaves a winding trail

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"We are at the crossroads" said Shigeru Omi, head of Japan’s Community Health Care Organization yesterday, as he hinted that in Japan, at least, the aim now is to contain the spread of Covid-19 rather than keep it out completely.

 

Mr Omi’s comment might seem far removed from the cotton world but actually it contains a dire warning. If the genie is ’out of the bottle’ then global economic activity could grind to a halt until Covid-19 has clearly peaked.

 

More than 80,000 cases of infection are now known about, which is 10 times more than the 2002-03 Sars epidemic, which lasted about 11 months. The world is only about two months into the latest virus - it could be a while before it is clear that it is ending.

 

USDA’s estimates a shrinking cotton stockpile

 

Wall Street’s S&P 500 share index fell 3.4% on Monday as it became known that Covid-19 has spread to 29 countries. Italy, for example, sealed-off towns and halted the Venice carnival.

 

The Chinese textile industry has become one of the main pillars of its economy. Clothes,textile yarns and textile articles are among China’s top exports. The cheap T-shirt you sometimes wear was almost inevitably made in China.

 

In 2018, China’s textile exports were valued at approximately US$119bn, more than 37% of global market share, and China is the world’s biggest importer of cotton, although India outstrips it as a producer.

 

Cotton accounts for more than 80% of natural fibre production. The US Department of Agriculture (USDA) reckons that global cotton production in 2019-20 will fall by 2.3%, to 118.5m bales, and that the global cotton acreage will be 4% smaller, year-on-year.

 

The US is the world’s biggest cotton exporter. That the USDA anticipates that global ending stocks will fall 3.3% to 79.4m bales ought to be seen as a bullish indicator for futures’ prices, especially if (as the USDA suggests) China’s imports rise this marketing year by 18% to 20m bales (a bale weighs 480 pounds).

 

 

China’s textile producers may not import so much

 

In China, about 30m households are involved in cotton production

 

Right now we have no certainty about Covid-19 will impact these households, or the factories where they work. China is understandably anxious to get its population back to work as quickly as possible, and to call an end to the viral spread.

 

And as yet various agencies do not appear to have caught up with the realities of the spread of Covid-19. The (US) National Cotton Council is still forecasting that the US will export 2.5m bales to China in the 2020 crop year, 0.5m bales more than in the 2019 crop year.

 

Cotton futures have slid by about 7% so far this year.

 

That there will be a strong price rebound is likely, given the propititious global fundamentals - but that may not be on solid ground for months.

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