chinese e-commerce apparel groups undercutting …

JUNE 21, 2021 JERNIGANGLOBAL.COM ISSUE NO. 1128

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It has come to light that the US has a substantial exemption in its import duties and taxes that

is allowing Chinese e-commerce companies to dump apparel in the US at very cheap prices, thus undercutting all major importers and the US apparel industry. The Biden administration has been confronted regarding the exemption by the US textile industry and in-depth research by Bloomberg shows the extent of damage being done to the major apparel exporters to the US and the US industry. It also heightened the environmental damage done by the dumping of cheap apparel and the total lack of social and corporate governance leading to the practice. The practice also undercuts US laws concerning the use of slave labor and the ban on the import of Xinjiang-produced cotton products. These revelations come as it has been revealed, for example, that half of women’s Fast

INDIAN FARMERS EXPAND COTTON ACREAGE AMID

HIGHER PRICES

WILL GUANGDONG POWER OUTAGES IMPACT TEXTILE/

APPAREL ORDERS?

NEW STORMS THREATEN US CROP

CHINA ATTEMPTS TO REIN IN COMMODITY PRICES

CHINESE E-COMMERCE APPAREL GROUPS UNDERCUTTING COMPETITORS AND FLOODING US WITH CHEAP APPAREL


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Fashion apparel in the United Kingdom is made from virgin man-made fibers or the same raw materials as plastic. China is home to the largest man-made fiber industry in the world, and it fuels a wave of cheap environmentally damaging apparel which is flooding the world.

In the US, the surge in cheap apparel imports is the result of an exemption of all duties and taxes on E-Commerce shipments of less than 800 USD. This, combined with China’s move in 2018 to exempt direct to consumers companies from VAT and export taxes as part of the reaction to the US trade dispute, has opened the door for what is estimated to be a 280 billion USD or more loophole, which is allowing Chinese e-commerce companies to flood the US and other markets with extremely cheap apparel, undercutting all other exporters who pay duties and taxes and US apparel manufacturers. The exports to the US further undercut other importers as they are shipped by mail at subsidized rates and avoid the surging cost of freight other importers must pay.

The Bloomberg research highlighted the success of the Chinese e-commerce apparel company Shein, which just completed a 152-day run as the most downloaded shopping app in the US. Shein is the largest Web only fashion brand in the world according to Euromonitor. Bloomberg said it was valued at 30 billion and has key US investment banks as its bankers. It is reported to debut over 6,000 new apparel items in a day priced at 5-22 USD, with the goal to get the consumer to buy more

than one and then dispose of them often and try a new item. US customers buy directly from the app, and the apparel is shipped direct from China to the consumer at subsidized postage rates and then pays no duty or taxes. An estimated two million packages enter the US daily under this exemption, which means little inspection.

The combination of China’s move to exempt Shein and other e-commerce companies from VAT and export duties in 2018 gave them a 13% or more price advantage. Then, in the US, they avoid the duty and extra import tax applied to Chinese imports. In the case of a cotton T-shirt, the normal duty is 16.5% and then a 7.5% tariff from China, which means they have a 24% price advantage over Zara, H&M, or any other Fast Fashion company. They have the China tax exempt status as well. Shein shipments to the US surged in 2020, and in the first part of 2021 have posted 150%-400% month-on-month growth.

Shein does not promote that it is a Chinese company, and you cannot find that out on its website or app. It provides no information on its products and offers no transparency on its materials or where they are sourced. The direct-to-consumer model and its exempt status in the US means it avoids the normal Customs and Border Protection inspection and thus it is a large loophole to avoid any enforcement of the ban on the use of slave labor or the ban on Xinjiang cotton apparel imports. The US efforts so far has not yet led to any moves to close the loophole despite the damage it is doing to the major US importers and exporters to the US. It is allowing Shein and others to undercut the US brands and retailers who have invested in US stores and physical locations. It creates significant risk for US consumers on the safety of the cheap apparel being imported. It further creates an environmental


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cost as these items are worn only a few times and then dumped into landfills and other locations, causing added cost for each municipality that must deal with it.

In addition, The Sourcing Journal reported that several legal challenges have been issued against Shein regarding violations of intellectual property rights. The shopping app’s number one demographic is Generation Z or the teen market. It is reported that Shein spots an item that is trending on social media and then copies it and offers the item in about a week at a price far below the original. 5,200 new items were reported to be released on June 15 alone. The company is reported to require all suppliers to be located within a one-hour drive of its Guangzhou sourcing hub. They are also required to complete a design and production process in 10 days or less. It is not just the US, as the App sells in 220 countries.

In the UK, the Royal Society of Arts, Manufacturing and Commerce, after the review of the Fast Fashion industry in the UK, found that over half of women’s Fast Fashion apparel was made from virgin man-made fiber or plastic and created significant environmental problems. It urged the UK government to place a plastics tax on all man-made fiber apparel being imported into the UK. It cited a surge in the cheap apparel sold by the major UK Fast Fashion retailers, and it reported that Boohoo, for example, sold 84% of its products made from virgin plastic. The cheap price of the products such as a man-

made fiber dress sold at retail for 5 British Pounds or 7 USD, created a liability on the environment with a sizeable cost for energy and climate change, with each product designed for a short life span, quickly moving to waste disposal. A study revealed that 76% of those surveyed want to see less plastic used in apparel, and 59% want government regulation to tackle the problem. It was interesting that the same survey showed people were even reluctant to say they purchased man-made fiber apparel.

Shein is undercutting even Boohoo in the UK as it is reported to offer 1.49 British Pound tops and 2.50 BP dresses. UK designers have stated that a designer may offer a product at 59 BP and then have it copied and sold by Shein for a low as 6 BP. Shein was recently banned in India as part of its clampdown on China. The company is rapidly expanding and has 20 million Instagram followers in the US alone. It launched pop up stores to promote itself, offering of its prime lines, such as Sheinx, for emerging designers, as well as MOTF, its premium line, and Sheglam, its beauty line. It is open for 1-2 days and then moves to another city.

Against this backdrop, the 800-USD exemptions on direct e-commerce imports that has allowed Shein to flood the US market is creating a serious problem for cotton apparel and the environment, as well as undercutting US efforts to ban the import of products made with forced or slave labor. The common comment in China is that Shein’s goal is to undercut and replace Zara and H&M, and it has done that in online sales due to the special exemptions it receives from the US and China. While Zara and H&M pay duties and taxes (including local taxes) and hire thousands of employees around the world, Shein avoids it all. Moreover, it sources 100% from China, receiving all the subsidies and benefits offered and then producing products that have a short lifespan and cost the local communities millions to dispose of and deal with environmentally. It is simply impossible to produce a 2-4 USD dress in a fair supply chain, unsubsidized and with a fair wage paid.


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Daniel Ortega has been a major contributor to the destruction of Nicaragua since he first came to

power in 1989. He was ousted in 1990 only to return in 2007, and he has remains in power today. His socialist party has destroyed the country, and he is increasingly turning to tactics seen in Venezuela to lock up any opposition. His rebuke of any outside attempt to stop his concentration of power and destruction of freedoms as he clings to power are causing business to flee and have caused the Biden administration to threaten to revoke the CAFTA-DR trade status if he does not allow a free election. He has prohibited any election observers and placed his FSLN party in charge of the

vote. He even arrested the head of the US Chamber of Commerce recently. The CAFTA free trade zones are the life blood of Nicaragua’s shrinking economy. In 2019, Nicaragua exported 1.787 billion USD of textiles and apparel to the US. Exports fell to 1.396 billion USD in 2020 but have rebounded in 2021 reaching 557.94 million USD in January-April for a gain of 20.73%. It is an important supplier of cotton apparel, and in the January-April period, 368.346 million USD of the exports were cotton products. Two products made up the bulk of the exports, Men/Boys cotton knit shirts and Women/Girls cotton knit blouses, accounting for 74% of all cotton products.

NICARAGUA IS A MAJOR CAFTA SUPPLIER THAT COULD LOSE TRADE STATUS

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The US in 2019 exported 484.173 million USD of textiles and apparel to the country, and in January-April 2021 exports reached 132.813 million USD, with fabric accounting for 54.103 million and apparel 74.523 million USD. They appear to use a lot of imported fabric, with cotton fabric exports by the US at only 9.205 million USD and few yarn exports. It does have a spinning sector that imported 56,200 running bales of US cotton in 2020/2021 so far. A large apparel group announced it was closing a plant in the Astro Industrial

Park in Managua. Nicaragua has a notable denim sector with exports of denim apparel in January-April up 26.11% at 32.593 million USD. It is the largest CAFTA exporter of denim apparel. It has drawn investment from Taiwan, Hong Kong, and South Korean companies.

A lot is at stake in the threat to remove the CAFTA status, and many believe the US will not do it due to the economic pain it would cause on the workers and and the fact that it would further accelerate the migration from the country. However, last week the US announced sanctions on Ortega’s daughter and others close to the leader. Ortega also arrested members of his own party he saw as a threat. As near sourcing expands, the CAFTA-DR region is now increasing exports and attracting some new investment. Guatemala appears to be a key source of interest but, unfortunately for cotton, much of that investment appears to be man-made fiber. One estimate has the country attracting an impressive 4 billion USD of investment in 2021 in the synthetic yarn and fabric manufacturing sector. The country expects to export 400 million USD in fabric exports in 2021, with the shipments focused on other CAFTA suppliers and mostly man-made fiber. Guatemala is a sizeable cotton spinner as well and is expected to consume more than 135,000 bales of US cotton in 2020/2021.


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The highest local prices in over ten years combined with a record MSP appears to be drawing Indian

growers back to cotton. In the Northern Zone where the crop is now developing, Punjab reports that growers increased cotton acreage by 52,000 hectares and increasing planted acreage to 303,000 hectares. In Gujarat, there are indications that cotton acreage may expand 5%-10% due to price and higher production cost associated with groundnuts, a major competing crop. Planting is also advancing rapidly in Maharashtra, where indications are for a 5%-7% increase. These indications are occurring as the monsoon remains active and local prices hold just below their highs. Maharashtra reports that as of June 16th it had planted 269,641 hectares to cotton.

The Cotton Association of India (CAI) released its May supply and demand estimates in which it raised consumption by 1.0 million 170-kg bales to 32.5 million bales and lowered production by 400,000 bales, with the reduction occurring in Gujarat -100,000 bales, and Southern Zone -300,000 bales. Production was placed at 35.6 million bales. Exports were placed at 7.2 million bales and imports at 825,000 bales. Season-ending stocks were lowered to 9.4 million 170-kg bales as of September 30th.

The CCI announced a change in the structure of its daily auctions as stocks decline. It will now offer cotton

in three auctions – first, to MSMC mills, second, to private mills and NTC mills, and third, to traders. As of June 16th, its unsold stocks were estimated at only 2,326,000 170-kg bales, with 238,000 of that total from 2019/2020. The largest block of stocks left is held in the Northern Zone with over 1.5 million bales. Its stocks of Shankar-6 are nearly depleted. Southern mills have resumed full operations and are seeking imported cotton with a focus on US and African Franc Zone, which has logistical issues. The interest in imports and the prospects of a larger crop appear to have calmed the surge in domestic prices for the moment. The SMIA asked the government to lift the 10% duty on imported cotton.

In fiscal year 2021, India exported 27.2 billion USD of textiles and apparel, which represents a 14% decline from FY 2020. Imports fell 33% to 5.21 billion USD. The US, EU, and UAE were the largest textile and apparel export markets. Exports to the US totaled 7.0 billion USD, and 4.2 billion USD to the EU.

Indian domestic prices declined in USD as last week ended due to the weakness in the Rupee against the USD, which fell over 1% Thursday. The Shankar-6 price ex-gin retreated to 87 cents, which is well off its highs. The J-34 price was at 82.53 cents.

INDIAN FARMERS APPEAR TO BE EXPANDING COTTON ACREAGE AS PRICES ADVANCE


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Guangdong is an economic powerhouse with a GDP larger than Canada, and it is still a very important

textile and apparel sourcing and manufacturing hub. It has many specialized apparel industrial clusters that dominate the world market and continues to draw new investment and innovation. But textile and apparel are only one of many industries. In January-April, the manufacturing volume of the province reached 1 trillion RMB or 156 billion USD for the first time. This pushed GDP growth to 18.6% and made its economy larger than Canada or South Korea or Russia. Such economic growth needs lots of power, and even China’s rapid infrastructure expansion cannot keep up with that scale of growth, especially in a region that experiences extreme heat in the summer. Early May power demand was reported up 15.7% to a record high.

The power demand has outstripped the supply, and massive shortages have developed. China added more coal fired power plants than the record number of coal plants retired in the rest of the world in 2020, and that was still not enough. The growth in coal plants has been slowed to attempt to use more hydropower. Nearby Yunnan supplies about a third of the power to Guangdong, and it has experienced a drought and electricity generation is down 11%. In the region, the great Three Gorges Dam is running low, and it is home to the largest hydropower plant in world. Water levels on the Yangtze and Pearl rivers are low and reducing power generation. All this has power in Guangdong being rationed.

The new fear is that the Tiashan nuclear power plant, an important supplier of power in the region, may have to shut down for repairs. The French company that owns a part of the plant has contacted the US over

fears it has a leak. China has said the radiation levels are normal, but the region is on edge. The plant is one of the largest in the world and is located 80 miles from Hong Kong. Any closure of the plant would cause the blackouts to increase and even effect operation at the ports. Currently, significant power rationing is underway in the province, with Guangzhou, Shenzhen, Dongguan, and Foshan forcing power cuts every 3-4 days. Some cities are reported to have banned new plants and factories from being linked to the power grid for fear of more overloading.

All of this is occurring at a time when China’s Eastern textile and apparel industry is believed to be operating at 90% of capacity, with many plants at 100% capacity. Chinese exporters in Guangdong and other locations report that some orders were switched from India due to the pandemic’s second wave, which has boosted orders. This has many plants going at full capacity and being forced to bring in generators in an attempt to keep the plants running. Breakouts of the virus have also caused disruptions. Yantian port is still only at 40% of capacity, with a 16-day backlog to unload or load. This is an important terminal in Shenzhen, and the delays at the port caused by the virus outbreak and efforts on containment have now gone on for two weeks compared to only five days caused by the Suez Canal blockage that impacted global shipping. Cargos are being diverted to the ports of Nanshan, Shanghai, Ningbo, and Xiamen. The greatest impact on shipping cost has been a new surge to record highs in the cost of moving a 40-foot container from Shanghai to Rotterdam, which reached a record 10,522 USD before any special cost. This is up 547% from the five seasonal average cost. This has caused some European retailers and brands to halt sourcing in China as the freight cost

WILL POWER SHORTAGES IN GUANGDONG IMPACT TEXTILE AND APPAREL TRADE?


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Brent Crude oil has rallied well off its lows. Since October 29, 2020, it has surged 98.2% to 74.54

USD a barrel on June 16th. Since crude oil is the base for the petrochemical industry and plastics, you might expect a similar move in the raw materials of polyester of polyester staple fiber. That has not been the case. In China, the cash price of polyester staple fiber stands at 47 cents a lb. compared to a low of near 35 cents in March of 2020. After recovering to a peak near 56 cents in February of 2021, it has again fallen sharply. The lead polyester staple futures contract, Sept, is up just 16.8% from its Dec low despite the nearly doubling of crude oil prices. In China, the two main raw materials of polyester staple fiber are PTA and MEG. The lead PTA futures is up just 37% off its low despite the rally in crude. The lead MEG futures are only up 23.3% off its November lows. It appears the further you move down

the refining chain the less the direct link to the cost of raw material.

In China, despite the poor margins that continue because of the surge in crude oil, new petrochemical capacity keeps coming online. The new petrochemical plants were commissioned years ago with construction underway, meaning new plants are coming online. China’s crude oil imports in May hit a new record, and that means refining and more petrochemicals that are fueling the cheap plastic boom and the availability of cheap polyester staple fibers. It is estimated that in the first quarter of 2021, five million tons of new PTA capacity came online in China, with 2.42 MMT of new polyester staple fiber capacity. Additional new plants are expected to become operational in the second quarter. Paraxylene, another essential raw material in the production of plastics and polyester, is experiencing an even larger expansion capacity. In the first quarter of 2021, Paraxylene capacity in China increased an estimated 9.3%.

The surge in new capacity is causing low margins and losses, but after millions in investments the plants continue to produce, and cheap polyester staple fiber and plastic chips continue to move into the market. At 47 cents, polyester staple fiber is a shocking 50% cheaper than the average CFR price of cotton. Such a discount driven by subsides and overcapacity continues to fuel the cheap man-made apparel that results in 2-3 USD dresses from Shein or Boohoo and others. The environmental damage done is actually greater than the retail price of the cheap apparel.

will force retail prices to double. The cost of shipping from China to Europe is now 67% higher than to ship to the Los Angeles ports.

This is causing a boom to apparel sourcing in Turkey, Morocco, and other nearby locations. Some companies report that it has become a bidding war to get a container on a ship. The shipping lines bid the final containers out to the highest bidders for the remaining space to finish a load. This is forcing the high margin goods to the top of the shipping order and resulting

lower margin items not getting shipped. Home Depot is believed to be the first company to charter its own containerships to service its sourcing hubs in a solely dedicated route following major shortages of tools and appliances at its US stores.

With China’s textile and apparel exporters at 90% or more capacity, the looming power shortages, and shipping issues, the 2021 Back to School and Christmas season will bring many challenges.

PETROCHEMICAL OVERCAPACITY DRIVING CHEAP POLYESTER PRICES IN CHINA


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May US apparel retail sales were the strongest of any major product group as sales reached 26.244

billion USD, a 3% increase from April, and surged 200.3% from year-ago levels. January-May retail sales of apparel hit 106.42 billion USD for a gain of 81.3% from a year ago. The performance of US apparel sales in April-May was the strongest of any major economy, far outpacing Europe, and China. China’s retail boom in apparel has slowed, with May retail sales of apparel reaching 113 billion RMB or 17.656 bBillion USD, which reflected 12. 3% YOY growth. January-May sales of apparel and footwear have reached 556.8 billion RMB or 87 billion USD for a 39.1% YOY growth. The US apparel market has regained its status as larger than China, with both markets putting in a strong performance, which has provided a further boost to global consumption and growth prospects.

Bangladesh’s cotton consumption is expanding, cotton yarn prices are firm, and import trade is

brisk. However, the problem is the shipping congestion at Chittagong port. The port is experiencing significant congestion due to booming exports as apparel exports exceed the pre-pandemic level. Imports are also at risk, with cotton shipments very important as Indian prices remain elevated and the land route trade is restricted. Adding to the issue is the fact that thousands of containers are stranded at regional transfer ports due to a shortage of feeder vessels amid a capacity crunch. The problems are at Columbo port, Singapore, and Port Klang. Ships are also being forced to wait to load and unload at Chittagong. The port has been operating at capacity and has had issues with congestion for

some time. Now adding to the issue is the reduction of service by some lines until conditions improve.

Three of the major shipping lines report they have containers stuck in the transshipment ports that are causing delay problems. May apparel and textile exports from Bangladesh reached 3.108 billion USD, an increase of 112.12% from a year ago. July 2020-May 2021 cumulative apparel exports reached 28.5615 billion USD for an 11.1% increase. Home textile exports have risen 54.76% to 1.038 billion USD. Despite all the issues, the domestic economy is expanding, posting 5.8% growth in 2020/2021, which increased the burden on the port as increased consumer goods are imported.

US RETAIL SALES OF APPAREL IN MAY OUTPACE CHINA

BANGLADESH’S COTTON IMPORTS BOOM/CHITTAGONG PORT CONGESTION AN ISSUE


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Spinners’ cotton stocks are tight, and strong demand has been noted for any cotton afloat or that can be shipped in a short time. Spinners are also seeking longer-term coverage. We would expect strong

demand for Indian cotton when and if prices return to a competitive position, and African Franc Zone styles remain popular. Cotton use in 2021/2022 is expected to reach a new record.

No two seasons are alike, and 2021

is shaping up to test US cotton farmers and traders as the level of uncertainty grows. The season began with a record-breaking drought in the Far West that dramatically reduced US Pima acreage. Currently, the same region is experiencing record heat of 115 F or more. Then, the West Texas drought reached distressing levels, threatening 3-4 million acres of dryland or semi-irrigated acreage before the “Big Wet” raised the fear of prevented acreage from excessive rains. The region is dry again with 105 F or more heat. This was followed by excessive moisture and rains in the Coastal Bend region of Texas, which produces more than a million bales. The Mid-South, which has the highest non-irrigated yields in the US, experienced a wet spring that gave way to devastating floods in many regions and left the area with prevented acreage from excessive rain and from being too wet. Now, the first Tropical Storm of the season appears set to hit, which will bring

excessive amounts of rain to most of the region and Alabama. The rain could be quite heavy and result in crop losses and more flooding. Only the Southeast is experiencing good conditions after a dry start.

Amid these conditions, the growers, traders, and market are uncertain what to expect. The crop is certainly late in many areas, thus offers prior to

November are tight and difficult to find. Sellers are in no mood to discount or lower CFR basis levels with very tight old crop stocks. The CFR basis for a Middling 1 1/8 old crop has reached 1100-1200 point On after holding near 900 points On for months. There is much anticipation waiting for the June 30th US planted acreage report in order to better gauge actual planted acreage, while yield and harvested acreage will be a moving target for a while. Due to these conditions, the world’s largest exporter is no longer an aggressive seller until the status of the crop become clearer.

NEW STORMS POSE RISK TO MID-SOUTH CROP AS US WEATHER TURNS UNCERTAIN


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Many of us remember the days when the China National Reserve Corp Reserve inventory was a

mystery and China’s cotton stocks were regarded as a state secret. The lack of transparency and the constant flow of rumors and bogus estimates caused the global cotton market great pain and could be the subject of a Hollywood-like drama. That period gave way to reform, the birth of the China Cotton Association, the Beijing Cotton Outlook, CN Cotton, and others who now provide very accurate estimates of production, Reserve stocks, and consumption. The Chinese cotton market has matured and now has the most active cotton futures contract in the world. These reforms have not occurred in the strategic metals or grain crops, and the Reserve actual stocks in these commodities are an unknown. Stock levels in these commodities have not been published or updated in years and remain mired in the secrets and intrigue of the days gone by in cotton. These commodities, however, have greater significance to the global economy, which has added to the drama. China has been on a major buying spree across all the major commodities since its economy emerged from the Covid outbreak and returned to growth. The buying spree has changed global supply and demand balances and occurred as the US and Europe began to return to normal, creating competition for key commodities. For China, the bull market in prices has caused substantial inflation at the factory gate, cut profits, and risk new pain for consumers.

Under Xi, the previous practices of “Capitalism with Chinese Characteristics” have given way to a more Soviet style command economy ruled by deeper government control. During the last 30 days, the Chinese government through the National Development Reform Commission and other agencies has attempted to rein in the surge in commodity prices by a series of decrees

and warnings. These have included attempts to limit speculation, hoarding, the size of commodity positions held by state firms, and limiting the size of position in domestic futures. Last week, it took additional steps by again ordering state firms to curb overseas commodity exposure. It further called for review of all futures activity and positions. Then, in a move that drew widespread notice, it said the sate reserves in strategic metals, such as cooper, aluminum, and zinc, would begin auctions of Reserve stocks to commercial companies to reduce prices. The Reserve stocks in these commodities has been a state secret, and no information has been published. It was reported that the last public release of cooper Reserve stocks occurred in 2005 and in 2010 for aluminum and zinc.

No mention was made of additional sales of grain reserves, but it has already been releasing pork Reserve stocks. A mention was also made that domestic soybean prices should be kept in line. No information or transparency has occurred in the grain Reserve levels in many years, and the Reserve’s actual levels are unknown or not published and are said to be regarded as top secret. The USDA carries a very speculative estimate of the last indicated Reserve level in its ending stocks, but there can simply be no confidence in those estimates. The USDA has China ending stocks of corn at 198.18 MMT or 70.6% of all world stocks as of July 31, 2021. Why would China pay record prices for corn imports at such volume in 2020/2021 if they hold stocks like that? Wheat stocks are estimated at 49.6% of all world stocks and rice at 65.4 %. These estimates are very questionable.

Adding to the drama of the exact level of Reserve grain stocks and what the true motivation is behind

CHINA MAKES NEW MOVES TO CONTROL KEY COMMODITY PRICES; HOW WILL THAT IMPACT TRADE AGREEMENTS &

COTTON RESERVE ACTIONS?


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the record corn imports, along with other grains, is the sudden crackdown on the private grain analysts that have been operating for years, with many having international clients. We have used their services in the past, and they attempted to provide a clear estimate of stocks, production, and use in the absence of any official data. In 2021, these groups have quietly been the subject of forced closure and arrest and have been silenced. One major grain consulting group’s owner was jailed and its office padlocked, while another had a top official arrested. The arrests and closures all started in April without public notice. Since these groups began operating the law was murky, as it always is regarding just how much information they were allowed to disclose. It appears they must have gotten closer to the truth recently. What is clear is that if the conditions in grain are what they were in cotton before the reform, the global markets are in for significant shocks. The question for cotton is how this effort to rein in commodity prices will impact the behavior of the Reserve for cotton in 2021/2022. The year has about reached the halfway point and no Reserve purchases under the Trade Agreement have been made. Neither the Biden nor Chinese side have had any real discussion concerning the second year of the agreement. The understanding when the agreement was negotiated was that China had flexibility in which commodities it purchased, but the Trump team had been given commodity specific targets and cotton was well taken care by them. The 2020/2021 purchases occurred when global cotton prices were quite depressed, and the Reserve purchase proved very astute. However, in 2021/2022 prices on a CFR basis are near 100 cents, and any move by the Reserve to buy a block of US cotton would send prices soaring to new highs above 100 cents. Even if a 17 million plus bale US crop occurs it might be 2022 before large volumes could be shipped. Thus, will the Reserve move to boost stocks in this environment? That is a big if, especially when a concerted effort is being made to rein in prices. An expected decline in the Xinjiang crop will add to import demand, but that might be handled by commercial imports. Even if it does sell

600,000 tons of Reserve stocks soon, it will still have ample stocks in the Reserve after the 2020/2021 buying binge. The drama of its decision will loom over the cotton market.

The outlook of this attempt to use the force of the state to control commodity prices may play a role. Early attempts to force or talk the markets down have failed. Iron ore declined after the first strongly worded government decrees but later moved to new highs before falling after this latest directive. Nonetheless, China does not control the global markets, and a curtailing of supplies to the domestic market would have major ramifications on the economy. The blockage of Australian coal imports has contributed to surging domestic prices and electricity shortages, while the Australian economy has boomed. It appears we are beginning to see the impact of greater state control, which has not worked out well for others. The experience in cotton in 2010 and what followed illustrates what happens when China state buyers miscalculate. In 2010, it allowed cotton Reserve stocks to fall to almost nothing, and when the Reserve was sold out the Chinese market panicked resulting in prices exploding to record highs. The Reserve moved to restock when prices collapsed, while also then supporting domestic prices at record premiums, which resulted in purchases of the entire domestic crop for two seasons. The cost to the treasury was a record for any government’s support of cotton, and its impact on the global market lasted for years. The Xi team, which appears to be less responsive to market forces, is playing with fire in its attempt to rein in prices, and it could have a far greater impact than any of us know. Last week, a very well written article was a feature in the London Financial Times – “How Xi’s China came to resemble Tsarist Russia under Tsar Nicholas I.” It was a fascinating piece that went in depth comparing the two regimes and how Xi had reversed all the innovations and reforms of Deng Xiaoping who ushered in the greatest era of modern China.


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Despite the widespread inflation in the

supply chain, the first signs of a hike in interest rates from these low levels triggered a massive wave of selling across the commodity complex. It began on Wednesday when Brazil raised its interest rate by 75 basis points to 4.25% and then followed by the US Federal Reserve later that day saying it expected to raise rates twice in 2023. The Brazilian Real surged to a one-year high of 5.0278 against the USD, and the USD soared against all other currencies, including the Chinese RMB, which fell sharply to 6.436. These moves on Thursday triggered massive selling across most commodity markets, with the selling the heaviest in the recent, strongest bull markets. In metals, copper fell 5%, silver 7%, gold 5%, and crude oil tumbled over 3%. The grain markets simply collapsed, with corn losing over 30 cents, taking its losses since the early June highs to over 14%, while soybeans lost over 60 cents, extending its losses from the June highs to over 13%. It appeared that the Federal Reserve gave China what it could not get by decree, a sharp correction in commodity prices, which, along with the collapse in the RMB, began to put a dent in Chinese inflation concerns. For cotton, a wave of speculative selling started on Wednesday and continued Thursday with prices retreating all the way to new lows that exceeded the lows of Monday’s rather odd collapse of 3.75 cents in the early Asian trade hours. All this occurred as the first tropical storm of the season was headed to add misery to the wet conditions in the Mid-South and more heavy rains, hail, and dust storms hit China’s Xinjiang region.

For spinners, the sharp collapse in prices helped to stimulate export offtake across all markets in volume with the exception of China, which appeared cautious. CFR basis levels firmed as merchant’s long positions were reduced and selling interest from origin was limited. The cheapest basis levels for African Franc Zone, US, Brazilian 2020 crop and Australian 2021 crop all firmed. Brazilian 2020 crop offers are now firm as are US offers for shipment before January. The US

crop is late, and stocks are low. 2020 crop recaps are selling well, and the US remains likely to have most bales committed before new crop moves. Merchants’ offering sheets of recaps are shrinking rapidly as stocks shrink. It is becoming clear stock levels will be very tight as we move through the third quarter. The US and Brazilian crops are late, and the basis pressure many have expected appears unlikely. Spinners

are increasingly expanding coverage into 2022 as they want to be assured of shipping schedules, which are getting tighter. Increased shipping rates remain a problem in many areas as does port congestion.

Prices recovered on Friday following the brisk export offtake that has continued. Additional mill buying is waiting on any break, and the 84 level in Dec is support with major support in the 82-84 area. China’s cash cotton prices and ZCE futures were quite dull after reopening on Tuesday. The Cash Cotton Index, after changes in the RMB/USD exchange rate, was about unchanged, while the lead ZCE September contract lost 195 RMB a ton or 1.37 cents to close the week at a discount to cash at 109.18 vs 111.40 cents on the cash index. The China government directives have reduced futures volume and speculation for now. Chinese mills were light buyers last week on the weakness as the sliding scale quotas were finally issued. The Xinjiang crop experienced more pockets of heavy rain, hail, and sandstorms, and we continue to expect a much lower crop and increased imports. The RMB fell sharply to end the week at 6.4531, which should provide some export help and reduce import cost.

The weakest part of the outlook for the moment is the lack of speculative excitement for cotton. The Fund’s position was likely reduced further last week, placing it at a very low extreme. Not only did cotton recover on Friday, but the corn and soybean complex soared back. We continue to expect higher prices in cotton, so spinners have been given an opportunity to cover at reasonable prices all the way through 2022 and should take advantage of it. Demand is strong, CFR basis levels

ICE FUTURES FALL SHARPLY AS COMMODITY BULL PLAY COLLAPSES AMID HIGHER INTEREST RATES


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

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are firm, there is no selling pressure at origins, and stocks are tightening. The missing element has been speculation, and we have no idea how long it remains

absent, but if or when it comes back, then the games changes.

chinese e-commerce apparel groups undercutting …

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