Optimism for US-China deal | Global Perspective

Confidence and the US-China cotton trade

Agribusiness
World cotton demand has been stagnant, even reducing, over the past season.

World cotton demand has been stagnant, even reducing, over the past season.

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China is set to hike purchases of American products - including agri goods - while American intellectual property will see increased protection.

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PHASE one of the US-China trade deal was drawn up in December 2019, after almost 18 months of tricky negotiations and geopolitical maneouvering.

Markets are optimistic, however, as the announcement has the potential to cut some of the $US360 billion in US tariffs on Chinese goods, as well as preventing China's retaliation of $US110 billion on US products - cotton included.

As both economies start to creak, coupled with incoming US elections, the US and China are feeling the heat of this prolonged trade war.

But what could this new 'phase one' deal mean for future agri trade flows? And how would Australia be placed, wedged between a major Western ally and our most valued trading partner?

The new deal - which is yet to be signed - is set to see the US reduce tariffs on $US120 billion of Chinese goods, to 7.5 per cent from 25pc.

A fresh round of tariffs has also been shelved by the US. In return, China is set to hike purchases of American products - including agri goods - while American intellectual property will see increased protection.

Agricultural purchases are anticipated to total a whopping $US40 billion per year - fantastic news for otherwise stifled US commodity markets.

This will likely include wheat, corn, rice and, in our view, cotton. There is still everything to play for in these high stake negotiations - nothing is agreed until all is agreed - but the deal brings potential for a major readjustment in world commodity flows.

Now let's say China starts to buy US cotton in a big way. This is highly likely given China's new season cotton import requirements, coupled with a lack of available cotton in Brazil, Australia and West Africa.

The first effect Australian growers could feel is a sharp dip in demand for Australian cotton and consequently a drop in local basis - the premium paid for Australian cotton.

That said, the impact would be offset, to some extent, by a sharp forecast rise in Intercontinental Exchange number two cotton futures - the result of improved US export demand - cushioning the price impact for Australian growers. Rabobank forecasts the net impact will see Australian cotton prices come under short-term pressure.

That said, there are longer-term ramifications of resumed US-China cotton trade. World cotton demand has been stagnant, even reducing, over the past season. Both China and Turkey have been major contributors, amid trade wars and currency crises respectively.

The less obvious has been Bangladesh, Indonesia and Thailand - another three major consumers experiencing stagnant demand. For these South-East Asian nations, lack of growth is rooted in market uncertainty - surrounding world trade, global textile demand and consumer confidence. Put simply, lower growth here is an indirect impact of the US-China trade war.

This means the implementation of any US-China trade agreement for cotton - even a temporary or partial settlement - is likely to go some way in restoring confidence in the broader textile market. Mills can be confident in their cotton suppliers, while off takers can be confident in their textile supply.

This ability to plan, organise and manage will, in our view, restore a degree of demand growth. This spins a much more positive story for global cotton following any US-China trade deal - one which should benefit Australian growers.

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