india poised to lead “vibtea” bloc as textile and … global 08 oct.pdf · india poised to lead...

OCTOBER 8, 2018 JERNIGANGLOBAL.COM ISSUE NO. 2378

HIGH GRADE, MACHINE PICKED

INDIA POISED TO LEAD “VIBTEA” BLOC AS TEXTILE AND APPAREL SOURCING CHANGES

The headlines in India may not tell the true story; much of the focus recently has been on the impact of surging oil prices, the weaker Rupee/USD exchange rate or its problems with infrastructure. However, the expanding trade dispute between China and the USA has put the country at the center of the shifting supply chain. China’s accelerated move back toward state capitalism after an opening for 40 years and the injection of the Chinese Communist Party (CCP) in affairs of private foreign owned businesses is changing the attitudes of multinational companies regarding their investments in China. Last week Bloomberg broke a major story in the US with the headlines, “THE BIG HACK: HOW CHINA USED A TINY CHIP TO INFILTRATE US COMPANIES”. The ramifications of this discovery are only beginning to unfold but it shook the foundation of manufacturing in China and exposed yet another risk for any multinationals operating in China. Every day it becomes more clear that the rule of law in China is through the CCP. China and India today are competing on many fronts; the most obvious is for the title of the world’s largest population, China with an estimated 1.38 billion vs India’s 1.35 billion. At the current growth rate India will overtake China for the title very soon. India is the world’s largest democracy and China is a Communist country with solid one party rule. Just last week it was announced that China had revoked the passports of all teachers, expanding what it had already done in Xinjiang and Tibet. The freedom of movement is ending and it was unclear what was behind this new policy against Chinese teachers. It cannot be economic since this group is not paid well so it must be linked to fear they would pick up western values while traveling. Against this backdrop India’s appeal, even with all its issues, is attracting attention. The

!1

THE BIG HACK: SUPPLY CHAINS UNDER THREAT

INDIAN COTTON YIELDS EXPECTED TO

FALL SHARPLY

TURKISH CONSUMPTION UNDER

THREAT

USA NEEDS TO TAKE BOLD ACTION ON

BEHALF OF US AGRICULTURE

http://jerniganglobal.com


country is the 6th largest economy in the world and in the quarter ending in June’s its GDP grew 8.2%. This was up from 7.7% in the previous quarter and compared to China’s likely inflated GDP of 6.7% growth. While it’s GDP per person is far behind China it also has room to double or triple.

For the moment it is Indian consumer companies which have grabbed the attention of the international groups. The most recent data regarding foreign mergers and acquisitions shows that as of October 1st investments had reached 40.6 billion USD, a record and very near the same as China’s 41.6 billion. This marks a major shift as China foreign M & A investment in 2012-2016 was double or triple that of India. US investor Warren Buffet recently made his first purchase in the Indian market and it is a milestone to win the confidence of this well-known conservative investor. India is one of the leading destinations as companies now think twice about new investments in China. While India needs improvements in the rule of law it is a free democratic country with a vibrant free press and offers investors transparency in their investments. Supply chains are moving and as the momentum builds the forces will be hard to contain. India perhaps stands to benefit the most as it is the leading country in our “VIBTEA” group of nations which will all be the beneficiary of the movement of the textile and apparel supply chain out of China. The end of China’s dominance of the global textile and apparel supply chain means that a new alliance of countries may assume the leadership role. Thus, we have coined “VIBTEA” as the term for the new textile and apparel supply chain which includes Vietnam, India, Bangladesh, Turkey, East Africa and the Americas (USA, Mexico, Peru, Columbia and the CAFTA countries).

India has been a cotton textile center for thousands of years, however, it has lacked the investment made by China over the past 20+ years. Last week we discussed the unprecedented investment by China in Xinjiang. In foreign direct investment China has attracted 3 times the level of investment as India prior to 2018. In textiles and apparel the investment difference is shocking. In 2017 China reported fixed asset investment in textiles and apparel of 180 billion USD. A complete number in India is not available but using UN data and Budget indication India likely invested close to one billion USD. Before the trade war began with the US China reported a further increase of over 30% in FAI in most major textile and apparel areas. The FAI has been growing at more than 15% annually since 2010 after a decade of even much higher growth.

!2



What makes this amazing is that after 2000 the investment in the sector has been led by what are referred to as Private companies and foreign owned joint ventures. The exact ownership of the state champion companies which have emerged is extremely murky. State owned companies and other companies go public but then have state owned holding companies as their majority shareholder. All this blurs the difference between the truly private owned companies and those with state roots or shareholders. The largest Chinese companies were founded in the 1970’s when private companies were frowned on and few existed. Today, most of the companies have made major acquisitions of Hong Kong, Taiwanese, Japanese and other firms and are deeply intertwined throughout the global supply chain.

This record investment has given China the most complete modern textile and apparel supply chain in the world. The second advantage is scale and China is home to the largest textile operations in the world. The complete supply chain means all components are available locally at competitive prices. In Xinjiang all parts of the supply chain are subsidized. In the East the exact level of subsidies which continue are much harder to calculate, for example, in the man-made fiber sector much of the FAI came in cheap state loans that appear to be written off resulting in a low cost basis. The issue of VAT rebates is another advantage which was a significant benefit during the 2000-2012 growth period. Recently the government said it could again expand the VAT and other tax rebates to counter the US tariffs. China has the ability to do anything to compete vs India where aid has to move through legislative channels and bureaucratic agencies.

India has a strategic advantage with its large cotton production base with a much lower cost of production than China, however, India faces a crisis with yields which are far below China’s. BT cotton was introduced in India with great fanfare but it has now become quite evident the government

!3



and the private sector were ill prepared concerning the requirements and use of BT cotton. The sharp jump in yield was greeted with great excitement as farmer’s incomes increased and increased production brought new gins online while increasing ginner’s profit. However, the industry soon forgot the importance of the roots of that success. From the very beginning true market forces were never able to work unencumbered by the national government or local politics. For example, the pricing of BT seed is set annually by the government which set limits or caps on the trait fees that can be collected by technology developers. This set the stage for disaster as the producers and owners of BT technology were potentially not being allowed to recoup expenses associated with the development and introduction of new innovation. Simple economic logic dictates that if the seller of an innovation has no chance to recoup the costs of creating its product it no longer has an incentive to bring its innovation to market – this is the unfortunate situation which government interference has created in India. Furthermore, patent protection of seeds and traits is also threatened due to a landmark court case which has been moving from the low courts up through the court system over the past couple of years. The case has now advanced to the Supreme Court and will be critical in setting precedence for investment in India relative to agricultural (and I would think all industries involving proprietary technology) innovations reliant upon patent protection. Such a ruling would not keep companies from innovating it would just keep them from bringing those new products to the Indian market. This would harm all industrial sectors but in agriculture it would especially be a cruel blow to the farmers that most need these innovations.

If the technology investments of companies in agriculture are not protected then no companies will invest in the long-term R&D needed for the latest in seed and BT technology. The Indian market has an active free press and this means there are lots of false news and unconfirmed rumors. In this atmosphere it’s easy to paint the global multinational companies as the enemy and taking advantage of the Indian farmer. The reverse has happened; the limited sense of order broke down in 2018/19 when the BT technology which was released was older and ineffective against the Pink Bollworm. Seed companies went their own direction while counterfeit operations were set up when the marketplace went wild to meet the farmers demand for seed that would fight the bollworm. Attempts to enforce rules against such seed found ginners and others had produced false seeds and labeling. Others turned to the internet to buy the latest BT seed but this seed was not bred for India and its quality is not known.

The government turned a blind eye to the need of the farmers to obtain quality BT seed and instead focused on keeping the cost low while raising the MSP. This was the wrong strategy if cotton is to be a profitable crop. It is all about yields and not simply price. It will not be possible to raise the MSP 25% annually; so what happens in 2019/20 if Indian yields average 450 kilograms a hectare and prices decline? A yield of 1100 kilogram would change the entire economics even at a lower price. The increased yields in the US and Australia have played a crucial role in increasing the profitability of cotton, which was especially true in the US when the USDA cotton program benefits were greatly reduced. The 2018/19 MSP at the current exchange rate (71.56) and average ginning outturn equals

!4



around 78 US cents a lb. If one assumes a farmer has a 2 hectare farm at 450 kilograms yield this would equal a 1547.64 USD gross income, while at 1100 kilograms average yield income would mean nearly 3,664 USD. That is the difference between a good basic income and just paying input cost or going into debt.

India also has an advantage in labor cost which is below that of China. Labor costs are estimated to make up from 25 - 30% of an apparel products manufacturing cost. Estimates of the average labor cost continue to rise in China. India’s average wage is near the same as Vietnam’s and the recent Rupee/USD exchange has lowered cost further. The average textile and apparel worker in India is paid near 150 - 200 USD a month below the 2018 wage in China, however, at this stage the Chinese worker has much higher efficiency. China also has a significant advantage over India in infrastructure after years of record investment. Landholder’s rights do not exist in China so there is speedy government approval of huge infrastructure projects which have established some of the most modern roads and ports in the world. India has a major issue with land disputes which has created the lack of modern infrastructure. The cost of transportation has added to the cost of cotton for Indian mills making imports in south India cheaper than transporting cotton from central India, at times. India has had difficulty finding a proper procedure to pay for the needed infrastructure. This fact was illustrated by the current shadow banking crisis caused by an infrastructure company that defaulted on loans, again highlighting a host of issues which has plagued the sector for years.

The most strategic advantage for India in the period ahead rest with the need of firms to move supply chains out of China. Overall, India is attractive due to its growing domestic market which will soon be larger than China’s. The average Indian consumer is at the same level which China was at maybe 15 years ago so a repeat even half that of China’s growth would offer firms a significant opportunity with the largest potential customer base in the world. Entering the market today will give those firms a major foothold advantage. As a democracy India also promises stability; no ruler for life, no Communist Party officials forced upon private companies, no CEOs vanishing in the middle of the night, no policy changes made suddenly at the whim of the party and at least a transparent policy making system.

Today, these points all seem quite attractive as highlighted by last week’s major news of no supply chain or company’s security and intellectual property being safe in China. Private enterprise in China is under assault at the moment; a former Minister warned last week that, “We should try our best not to replicate the nationalization of private enterprise in the 1950s and the state capitalism”. This comes as some Communist intellectuals are calling for private business to be abolished. Against that backdrop the investment choice between India and China becomes easier.

!5



US COTTON CRISIS; TURKEY NEEDS AN AGRICULTURE CREDIT EXPORT PACKAGE

Turkey is the Europe’s textile and apparel alternative to China; it has developed a full supply chain and has made itself as the go to location for European retailers for just in time deliveries. The country is expected to export over 30 billion USD of textiles and apparel in 2018 with about 19 billion in apparel. Cotton plays a major role in its supply chain thus making it a very important market for global cotton trade. Turkey imported more than 4 million bales in 2017, in addition to using a large domestic crop. Turkey was the second largest importer of US cotton in 2017 and has been a major export market since 2001. The 2018 Lira crisis caused by the increasily authoritarian Turkish government has put cotton trade in jeopardy as credit has become a significant obstacle for the economy, especially for imports.

In August Turkey imported 72,502 tons of cotton which was down by a third from last year with the US accounting for 39,705 tons of that total. We expect September imports to drop sharply as opening of letters of credit have become very difficult. Turkey imported 1.841 million bales of US cotton in 2017 or 11.6% of all US exports. US export sales of cotton came to a dramatic slowdown on August 1st when the Lira/USD exchange began to collapse. On August 1st its exchange rate stood at 4.99 per USD and before the panic ended it reached a low of 7.2362 which reflected a 45% loss in value since August 1st. The Lira/USD has since stabilized near 6.16 which is still down 62.86% year to date. The collapse had a significant impact on companies which have USD or Euro debt, including all the Turkish banks. The Turkish trade deficit has been financed by foreign capital and the Lira crash caused a halt in the flow of capital and a withdrawal of funds. In 2017 Turkey enjoyed an economic boom created by the inflow of foreign capital but the Lira crisis and the Erdogan government’s reaction triggered a lack of confidence which result in construction projects being halted. Many construction sites are standing idle with unfinished buildings, thousands of new apartments are unsold and businesses are scrambling to service debt. Turkey has approx. 77 billion USD in debt payments due over the next 12 months. Some have estimated that Turkey will need a 75 billion USD IMF loan package to get through the crisis and the behavior of the Erdogan government makes an IMF bailout appear difficult.

Turkey’s textile and apparel companies need an outside credit package. Turkey is likely to import 4 million bales during the next twelve months if the credit can be obtained. If the credit is not available then these export mills could lose market share to Chinese exporters which are aggressively looking for new markets and Xinjiang’s One Belt/One Road, as we discussed last week, has Turkish customers in its sights. Once market share is lost it will be difficult and expensive to get back and could cause a contraction in the Turkish textile and apparel sector. The US needs to fill a 3 - 4 million bale void the Chinese and Turkish crisis left and this could be accomplished with an agriculture credit export package to Turkey. Turkey in 2017 imported 1.7 billion USD of US agriculture imports and under a finance package this could be increased to 3 billion USD or more in imports.

!6



The ramifications of doing nothing would mean, first, that US exports face a sizeable hurdle meeting estimates without access to China, which will influence prices, Secondly, the Turkish textile and apparel sector will contract with orders switched to Chinese companies permanently reducing one of the most promising non-Chinese supply chains. Any reduction in Turkish cotton import needs will have long-term consequences for the ability of the US to expand exports outside China.

CHINESE MILL DEMAND CONTINUES FOR NON US COTTON DESPITE THE HOLIDAY

International merchants were active last week as Chinese mills were active buyers of Brazilian, Greek and Indian cotton. Missing from the off-take was US cotton as the trade war continues and the US takes no action to create market access. As we had expected, Brazilian and Greek cotton are popular due to the fact they are both machine picked, contain low levels of contamination and are available at attractive basis levels. The lack of Turkish demand has weakened the Greek basis by more than 200 points which has put it in play in China. Chinese mills are expected to have the sliding scale import quota in hand this week and the big unknown is the volume of quotas which will be processing quota that would allow US cotton to be purchased. After 18 years of China joining the WTO the cotton import procedure outside the WTO mandated quota (which was violated in the 25% duty on US cotton imported) remains as opaque and un-transparent as it was in 1990. All power remains in the hands of the government and no published procedures have been provided. This leaves the cotton trade, domestic and foreign, always in the dark as to what the allocation will look like.

These conditions have cost growers worldwide billions of dollars and are having a long lasting impact on the US cotton industry. CFR basis levels were steady to firm last week as Chinese demand supported Brazilian and Greek styles. US export sales for the week ending September 27th declined to only 26,400 running bales following a net reduction of 85,900 bales from China after another 90,200 bale sales was rolled into the 2019/20 season. This was a marketing year low which also reflected the fact that at the moment merchants are pushing Brazilian, Greek and other origins. The main reason for this is the Brazilian harvest is completed and the US harvest is just gaining momentum with much of the crop still exposed to weather risk. As we previously discussed, the US crop faces a great deal of weather risk as periods of unwelcome rain continue. Forward sales are robust and a large volume of Middling 1 1/8 and better quality cotton has already been committed at cheap basis levels. Merchants are very reluctant to add to sales of the better grades until additional ginning activity occurs.

Argentine cotton continues to sell into Asia due to its discount. August export shipments from Argentina reached 10,868 tons, which was the highest since October 2014. Indonesia, Pakistan, Vietnam and Thailand were the main destinations. The Peso/USD exchange rate has remained weak at 38 - 39 per USD.

CANADA JOINS MEXICO IN NEW “USMCA” AGREEMENT WITH USA

US Trade Representative Robert Lighthizer called the new US-Mexico-Canada trade deal a “paradigm-shifting model” of American policy following the successful renegotiation of the NAFTA trade agreement, something the critics thought was impossible. This agreement marks a major departure from the past 25 years of US policy in which trade agreements were formulated on assisting US companies in outsourcing their supply chains and lowering labor cost. It all started with

!7



President Bill Clinton and NAFTA agreement and it is ending under the Trump administration. Analysis of the agreement indicates the following features will be part of future trade agreements:

• Raising wages for workers in all countries involved; Mexico is the major benefactor in this feature of the agreement.

• Protection of Intellectual Property.

• Adopting US rules and standards.

• Punishing currency manipulation.

• Using trade to deal with non-market economies

• The US has the right to approve any new trade agreement entered into by the other parties with a non-market economy

• Export quotas for automobiles to protect US Industry.

The administration’s NAFTA trade policy and feature are important because they will play a crucial role in the upcoming trade agreements which will soon be negotiated with Japan, EU and the Philippines.

THE BIG HACK; A TURNING POINT IN GLOBAL SUPPLY CHAINS

Bloomberg Business Week magazine appeared to reach back to the golden days of investigative journalism, conducting years of investigation and research in China and around the world. Their snooping paid off with a discovery that is something right out of a Hollywood spy thriller as it alleges an attack by Chinese state sponsored spies on around 30 U.S. companies, including Amazon and Apple, which compromised America’s technology supply chain. The story rocked the w o r l d o f t h o s e m a n y g l o b a l mul t inat ional companies doing

business in China. What was once considered the world’s most secure supply chains were actually not secure at all when Chinese spy agencies with the help of subcontractors in China were able to secretly implant computer motherboards with mini chips to facilitate the hacking of corporate secrets. Shares of US and international tech companies fell sharply on the news, US giants Apple and Amazon fell 1.76% to 2.22% respectively while Chinese or Hong Kong listed Lenovo fell 20% and China’s ZTE fell 11%. The US listed company at the heart of the hacking “Super Micro” fell

!8



41.12%.The interconnectivity of the world supply chains means there will be real pressure to bring supply chains back to the US and for companies to disengage from China in tech and other sensitive technological products.

At the same time the Bloomberg story broke the New York Times reported on how private business had fallen out of favor in China. The reporting brought to light rather shocking developments which will further shake the confidence of any company operating in China or planning to set up operation there. An unknown Chinese blogger wrote, “The private sector should be ended now that it has accomplished its historic mission of achieving growth”. The statement went viral and raised a lot of questions, i.e., is the Chinese government using this post from an unknown blogger as a test to see how the public would react to an assault on private business. This was followed by a statement from a Minister of Human Resources and Social Security who said private business should be required to have democratic management. Such comments suggest that next on Xi Jinping’s To Do List could be a hard attack on private business. As these comments emerge one thought comes to mind, as Xi Jinping began to put his stamp on China there was a rush by many Chinese people and businesses attempting to get their money out of China. This resulted in the largest acquisition of global companies, often at extremely inflated prices, by Chinese companies in history and also by Chinese individuals which purchased record amounts of real estate in the US, Australia, Europe, Canada, New Zealand and any country where polices allowed them to do so and they felt protected by the rule of law. Xi Jinping ended this spree in 2016 with capital controls. Today, acquisitions are mainly by state owned companies or those sponsored by Beijing. In hindsight the Chinese companies and wealthy individuals appeared to sense what was coming, which explains why in Australia for example wealthy Chinese drove up home prices during the past six years in Sydney and Melbourne by more than 50% making these two cities some of the most expensive real estate markets in the world. Since the placement of capital controls and close monitoring of cash flows out of China prices have peaked and have fallen sharply. At the peak of the outflow even mid-tier US c i t i e s s a w C h i n e s e purchases. Today, Chinese have to sign pledges that cash sent out of the country is not for real estate purchases.

The current conditions could ignite yet another massive attempt of high net worth citizens and private businesses to get their money out of China. The story has already appeared to change the atmosphere in US business circles, China’s rebuttal appeared to be more reflective of the 1950’s in rhetoric than 2018 and lacked specifics, which only added to the anxiety. It will also add to pressure on European firms to secure their supply chains.

!9



The textile and apparel supply chain has a large foreign investment and it remains to be seen how this sector will react to the current changing conditions.

INDIA BEGINS TO UNDERSTAND THAT THE MSP IS NOT THE ANSWER TO COTTON SUPPORT

India has yet to unleash the free market forces necessary to provide growers with robust demand for their cotton. In 2018/19 it raised the Minimum Support Price on cotton by a record amount which was to assure growers a 50% return over their cost. At the same time it raised the MSP for all major crops by a record amount which put a massive burden on the state to procure and store the products in the volume needed to maintain prices at artificial high levels. India’s MSP support program is causing problems for markets worldwide; in the case of some commodities, such as sugar cane, Indian stocks of sugar have been forced onto the world market pressuring prices even lower. By not tying the MSP to actual market demand leads to the overproduction of some commodities which is not required while others will be in short supply. This season the cash price of Bajra, Pearl Millet, is an example of the MSP’s failure as the average price in some areas has fallen to 1250 - 1350 Rupees a Quintal as compared to the MSP of 1950.

The CCI has in the past done a good job, generally, in executing the MSP despite all its flaws in cotton but this season it is again facing the challenge of getting all operations open and contracts signed with ginners before the crop begins to move in volume. Daily arrivals have picked up and now have reached over 30,000 bales a day. The return of dry weather to the northern zone has accelerated movement. In some areas of Rajasthan the spot price of the seed cotton has fallen to 5,000 - 5,100 Rupees, which is below the MSP of 5,450. The crop is moving at a time when the domestic market faces a credit crisis following the failure of a large shadow banking group. The domestic market is weak and the Rupee is under pressure against the USD.

Yields appear to be below expectations in most areas which are going to have a significant impact on grower’s income. Gujarat has suffered one of the sharpest drops in yields in years because of the lack of water. The average spot price of Shankar-6 in Gujarat, ex-gin, neared 79 cents as the Rupee/USD rate moved to a new record of 73.81.

BENEFICIAL RAINS FALL IN PARTS OF AUSTRALIA AS PLANTING ACCELERATES

Planting of the 2019 Australian crop is accelerating as some welcome rainfall occurred last week. The non-cotton area of NSW at Broken Hill received 34 mm for its heaviest rain in 2 years. In the New South Wales cotton belt rainfall was scattered but several areas reported enough rain to aid soil moisture. The heaviest amount recorded so far was at Dubbo which recorded 63 mm, Condobolin 21 mm, Trangie 34 mm, Hillston 22 mm, Moree 5 mm, Walgett 20 mm and Collarenbri 20 mm. In Queensland most amounts were only 5 - 60 mm or less. The cotton belt will have a chance of additional rain through Tuesday. The rains in the heaviest areas may save some irrigation supplies but have not yet altered crop prospects.

!10



US HARVEST ADVANCES BUT RAIN NOW A CONCERN FOR WEST TEXAS

The US harvest is gaining real momentum with 185,172 bales classed last week and additional gins opening daily. The quality of the cotton classed during the week was generally quite good with no real issues. The new seven day outlook is very much a concern with heavy rains forecast for the entire West Texas, Oklahoma and Kansas region through last weekend and into this week with the rains returning to the Mid-South and Southeast by the end of this week.

ICE FUTURES FIND SUPPORT NEAR 76 CENTS AS TRADE WAR CONTINUES

ICE cotton futures remained weak last week slipping lower following the rolling forward of additional US export sales from the 2018/19 season to 2019/20 by Chinese mills and the lack of any action by the US to assure access to China for cotton and US agriculture products. As the week ended it felt as US/China relations were back in the 1950’s with China rebuking a US Vice President speech in rhetoric not seen since the 1950’s when Mao ruled China. Of course the speech by Pence followed

!11



Bloomberg’s breaking story of the alleged major security breach of US tech companies’ supply chains, which had a very negative impact on US equity markets. The US harvest is advancing and with it is coming the reports of agony at the farm gate. Even an astute hedger has some of his crops open and even the higher priced forward sales face the scrutiny of buyers who faces losses on many of the purchases. The problem is most acute for southern soybean farmers who face weak basis levels and record moisture discounts. In many areas storage capacity is expected to be very tight. Cotton does not face those issues but prices are down more than 20% from June levels and basis are weak which reflect a lot of money on any unsold acreage. While the current crisis has been building for at least six years or more, today, appears to be a much different world in China/US relations than just four months ago. The revelations which have come to light since June and how China has responded to them makes one wonder how a major agreement can be reached very easily. The early calls of Free Trade have begun to fade as it has become evident there is no such feature to international trade only Fair Trade. Even Fair Trade appears a difficult task when episodes such as the “Big Hack” occur.

The weekly CFTC COT report revealed strong Trade support and heavy speculative selling. The Trade purchased a net 11,144 contracts, Swap Dealers purchased a net 2,634 contracts and Index Funds purchased a net 1,181 contracts. All three speculative groups were heavy sellers, the Managed Funds sold a net 7,525 contracts reducing their net long position to 51,440 contracts, their smallest net long since November of 2017. The Other Reportable specs sold a net 4,246 contracts reducing their net long to 7,806 contracts. The small non reportable spec’s sold a net 1,977 contracts reversing their position to a net short of 272 contracts, their first net short position since November 2017. When you match up the COT data with the bar chart you will find that the speculative position is now the same as when the December 2018 contract was in the 69 cent area.

!12



Cotton trade was very active last week with Brazilian the highest volume trading followed by Greek, West African, Indian and several minor growths. For coops and others focusing only on US styles it was a slow week because two of the largest US buyers of cotton are out of the market, both because of artificial conditions. Other buyers of US cotton are being selective since they have good forward coverage and know that with China and Turkey out the US sellers may have to get more aggressive. Adding to conditions is the fact that the US is well sold and the quality of the crop, especially in color grades, remains in doubt meaning international merchants would likely feel much better selling Brazilian than US until the US crop is at the gin and free from the threat of rain.

What is so ironic about the current situation, which has cost especially US growers millions, is occurring when the US economy is the strongest in decades with wages and employment rising, which should mean record domestic cotton use at retail. The loss of market share for cotton has kept usage from growing to new levels but we are revising our estimate of cotton consumption at retail to 20 Million bales which is the highest since 2008. However, US growers are not experiencing any of that benefit. The reason is that the US allowed its domestic consumption base to collapse and no program has been launched to successfully establish a firm Americas supply channel. This has returned to haunt the US industry and growers in 2018/19. With US consumption at 3.6 million bales (yarn moves to CAFTA region and returns as apparel) the balance of the cotton consumed at retail comes from a mixture of origins. With Vietnam, Indonesia, Bangladesh, Pakistan, Mexico and others major buyers of US cotton then we can likely be safe in saying 50% of the cotton consumed at retail was US cotton. Two big factors are keeping that market share for US cotton from being much higher; no agreement to assure US cotton access duty and quota free to China and lack of a finance package for Turkey which included US market access for the US cotton used. Let this fact sink in, the US is on track (based on data through August) to consume 5.664 million bales of cotton products from China in 2018. Without a change more than 90% of that will be made with non-US cotton. Currently one out of every 4 cotton towels sold in the US is from China. Even besides the access issue the import prices need some review.

The total US consumption of all fibers at retail is forecast to reach near the equivalent of 45 million bales and of that total 16.3 million bales will come from China. Herein lies our call for Washington to solve the entire US agriculture market export problem with this as the carrot. The 38 - 39 billion USD of annual imports come in under the WTO access with no quota and no differential duty for Chinese products. Meanwhile, a mockery of Fair Trade has occurred by placing a duty on US cotton and agriculture products. As someone pointed out, the US agriculture sector and most of the US industry went against all risk mitigation and became far too dependent on one country. There is a crisis in the US heartland and the answer is not just aid to the growers( the bizarre payment limitations make aid distribution ineffective) but rather it is forcing China to give US agriculture products both duty free and quota free access by January 1, 2019 are everything changes. In addition, US agriculture needs a finance package for US customers, such as Turkey, which need assistance amid the Emerging

!13



Market turmoil. Some in the US are getting on this page; the US Senate passed a 60 billion USD Foreign Finance bill to counter the One Belt/One Road assistance in Emerging Markets.

We said several weeks ago as ICE futures fell to below 78 cents that we felt cotton prices were in an area where prices could bottom. The Bullish Consensus at one point last week was 5 but as a famous trader once said, “markets can stay oversold longer than your money can last”. We have no taste to be bearish at these levels, however, two big negatives remain hanging over the market, the large unshipped export sales to China and the inability of Turkish mills to finance needed imports. We can only hope that somewhere in the halls of Congress members are listening and that others will join in our call for action.

Jernigan Commodities Global, LLC and its offer of services, whether given orally or in writing or in electronic form, has been prepared for information purposes only. This newsletter may contain statements, opinions, estimates and projections provided in respect of future periods. Such statements, opinions, estimates and projections reflect various assumptions concerning future results, which may or may not prove to be correct. As a result, no representation, warranty or undertaking, expressed or implied, is or will be made or given in relation to the accuracy of any such statement made in this brochure. In particular, but without limitation, no representation or warranty, is given as to the achievement or reasonableness of future projections or the assumptions underlying them, management targets, valuation, opinions, prospects and returns, if any. Consequently the recipient of this newsletter must make their own investigations and must satisfy themselves as to the particular needs of the recipient and seek professional independent advice. Jernigan Commodities Global, LLC disclaims all liability at law and in equity from any and all damages, loss, claims, liability, costs and expenses of whatever nature arising directly or indirectly out of any act, omission or decision made by the recipient in reliance upon this brochure or any statements made by any director, officer, employee or agent of Jernigan Commodities Global, LLC.

!14

@Globalej @JerniganGlobal [email protected] JerniganGlobal.comRegister for Research [email protected]

Eddie Jernigan



mailto:[email protected]?subject=

mailto:[email protected]

mailto:[email protected]

mailto:[email protected]?subject=


india poised to lead “vibtea” bloc as textile and … global 08 oct.pdf · india poised to lead...

Documents