cotton’s market share under major assault from … · august 17, 2020 jerniganglobal.com issue...

AUGUST 17, 2020 JERNIGANGLOBAL.COM ISSUE NO. 1084

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As the import data begins to normalize, it is clear that cotton has suffered from the

wave of consolidations that has hit retail and a wave of record numbers of bankruptcies. Using the US data as a guide, the June import data is very troublesome and shows the cotton industry needs a new, out-of-the-box solution. It is clear the light touch approach has not worked, as the consolidation in retail and the heavy focus on the basics have led to increased imports of cheap non-cotton apparel. US apparel imports in June reached only 3.968 billion USD, which is a 43% decline from a year ago. It was the lowest level of imports in over 20 years. Cotton apparel imports plunged to only 1.773 billion USD, representing

the lowest import level for the month of June since 1996, five years before China joined the WTO. Cotton apparel imports fell 48% from a year earlier when imports reached 3.331 billion USD. These import levels pushed January-June cotton apparel imports down to 13.139 billion USD, which reflects a 32.40%

decline from a year ago. Cotton’s market share in June declined to 43.67% in value terms, which compared to 48% a year ago, and in volume terms the market share reached only 37.26%. The market share in June was taken by man-made apparel and to a small extent

US DOMESTIC CONSUMPTION COLLAPSES TO RECORD LOW IN 19/20

UNREST IN CHICAGO/NYC TAKE TOLL ON US

APPAREL SALES

DOES CHINA HAVE A FOOD CRISIS?

INDIAN COTTON SET TO INCREASE ROLE IN

WORLD TRADE

COTTON’S MARKET SHARE UNDER MAJOR ASSAULT FROM RETAIL CONSOLIDATION AND A RETURN TO BASICS -

WHAT IS THE PLAN?


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vegetable fiber, which saw apparel imports expand 2.1%. This plunge in market share has occurred as the major mass retailers made a big shift back to basic products. One of the big four retailers’ focus on back to school was on very aggressively priced t shirts, pants, shirts, etc., which were dominated by man-made fiber. The price level made polyester a requirement given the aggressive levels. With polyester at 33-35 cents a lb., or less than half that of cotton, the retailers and brands need to understand the environmental cost of the cheap polyester apparel. In the US, the Wuhan Virus lockdown resulted in the major mass retail groups that also sold groceries being able to remain open. This dramatically increased the market share of the big four retail groups. These groups are all mass retailers, and apparel is only a small portion of sales. For most, the focus is on the basics. Earlier expansions into the higher end products appear to have ended. This means the battle for cotton in the basics must be driven by environmental awareness and a demand for quality.

One impact of the epidemic has been to hollow out the middle of the apparel market and the important Menswear segment in particular. This is where the greatest amount of bankruptcies and consolidation have occurred. The companies entering the process start with announcements of store closing and never reassemble their current form when they exit the process, if they survive. Demand for menswear has been decimated by the epidemic and move to work from home. This has had a major impact on wool and cotton demand. The wool market is suffering from a collapse in suiting and cotton from the dress shirts and formal apparel. This creates an opportunity for cotton if it’s innovative and aggressive. Up to this stage, the global cotton industry has not been as aggressive as needed in messaging. Polyester apparel and each cheap t shirts or other products are made from the same raw material as plastic and have a very expensive environmental price tag. They do not biodegrade, they release microfibers now polluting water and food supplies, and they are harmful to the environment when produced. Consumer research has shown these are all important to a large segment of the population. Cotton market share in the higher value products has not offset the weakness in the basics, as the luxury apparel sector, especially in the US, is still facing severe headwinds. The unrest we discuss this week in several of the poorly managed metropolitan areas of the US, New York, and Chicago, is playing a significant role in slowing any recovery. Normal tourist and shopping patterns have ended. In non-US markets, the luxury sector is recovering faster and is helping to improve ELS demand, which has been hard hit from the virus.


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Cotton’s market share weakness comes at a time when imports from China are falling. Apparel imports from China in June totaled only 1.155 billion USD. This is a 49% collapse from a year ago and only a 29% market share, while Vietnam was the second largest supplier with imports falling 20% to 849 million USD. One factor that hurt cotton market share was a decline in imports from Mexico and CAFTA-DR suppliers. The CAFTA-DR region is the third largest supplier of apparel to the US, and imports from CAFTA plunged 61.7% to only 289 million USD vs. 754.16 million USD a year ago. Imports of apparel from Mexico reached only 179.46 million USD, imports from Bangladesh fell 56%, and India 63%.

US cotton apparel imports during the first half of 2020 reached 13.139 billion USD, which reflected a much better 47.12% market share, but imports in the first six months fell 32.40%. In June, China shipped just 362.6 million USD of cotton apparel directly to USA, which was a decline of 44.7%. China fell to the second largest supplier in January-June, as its exports fell 56.3% to 1.872 billion USD. This gave it a market share of only 14.2%. The top supplier of cotton apparel was Vietnam, which reached 2.34 billion USD for a decline of only 13.78% from a year ago. It had a market share of 17.8%. The replacement of Vietnam as the top supplier suggests some justice, as it is also the largest buyer of US cotton, taking over 3.5 million bales of upland in

2019/2020. The fabric of much of the imports was still made and finished in China but made from Vietnamese yarn made from US cotton.

The third largest supplier of cotton apparel during the period was Bangladesh with imports of 1.789 million USD. CAFTA was the fourth largest supplier at 1.388 million, followed by India at 1.069 million USD. Chinese fabric did continue to expand its way into the US in apparel cut and sewn in areas heavily dominated by Chinese apparel operations. Cambodia remains the largest of these with not a single spinner or fabric plant shipping 744 million USD of cotton apparel to the US, which was a 5.3% increase from a year ago. Ethiopia also increased its exports despite the pandemic, with shipments of 62 million USD or 6.51% increase. It also uses Chinese fabric along with domestic and other imports. Madagascar increased shipments 1.4% to 52 million USD. They also depend on Chinese fabric imports. Burma, which is dominated by Chinese investments in cut/sew and depends on Chinese fabric imports, increased its imports of cotton apparel by 35.45% to 35 million USD. One area of concern is Hong Kong, where imports were up 76.32% at 77.5 million USD. Those imports in September will be labeled as Made in China and face the same tariffs. Imports from Macau, which has not had any notable cut/sew operations, has surged 382% to 21.865 million USD. These are either transshipments or made with Chinese fabric and bypass the tariffs.

In contrast to the collapse in apparel imports, US textile imports reached 3.147 billion USD, which is only an 8.5% decline from a year ago. Fabric imports actually

The Guardian newspaper: Has the Suit finally died?


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The demand, as exhibited by textile imports into the US during the Wuhan Virus pandemic, should

serve as a shock for the US cotton industry and manufacturing sector as to what could have been. In June, over 1.762 billion USD of textiles (non-apparel) were imported into the US, which illustrates how the US has allowed its textile industry to be outsourced. The US imported 442.824 million USD worth of fabrics. While over 80% of these imports were non-cotton, it remains shocking how research into cotton being used in certain textile markets has been abandoned. As the demand for PPE fabric has surged, the cotton industry has allowed it to be dominated by the petroleum-based fabrics. The environmental disaster this is creating will be paid for by future generations. At the same time, we have missed the industry’s outcry as US cotton use in April, as the CAFTA region closed down and the limited US cut/sew operations stopped, consumed but 28,140 bales. Let that volume sink in. This should send chills down the spine of every US cotton producer or

US manufacturing advocate. The recovery has been slow, with May use reaching 77,739 bales and July returning to 128,333 bales. These volumes are shipped weekly to Beijing recently under the trade agreement. The problem here is that one creates jobs, provides local taxes, and gives the farmers a much higher per-bale income price, while the other is at a wholesale price and at the whims of political leaders that could end tomorrow. We are not sure why these conditions do not draw more emotion given the widespread impact they have.

As a result, US cotton use in 2019/2020 will fall to a record low, an unbelievable 2.2 million bales, raising the US carryout, as illustrated in the August WASDE report. Several weeks ago, we shared the emotion relating to the closing of three Brooks Brother landmark apparel operations, as it entered bankruptcy without a comment from the industry. It was sad to see the impact of these events on local communities, individuals, and the skills that were lost. The silence from the industry was deafening. No effort occurred to halt the closure. It is as if no lessons were learned from the experiences of the past 20 plus years when the US allowed an entire industry to be outsourced.

We estimate that for each million-bale reduction in US cotton consumption, it cost US growers 20 million USD or more in lost income, and this is before the cost is added in for grower funded promotion of non-value-added raw cotton exports. Then there is the loss in valued added income at the yarn, fabric, dying/finishing, and cut/sew stages. We could easily add another 100 million USD or more. As you can see, this gets to be a very expensive loss. For cotton producers who are battling to maintain income, it is extremely costly. Just since the 2017/2018 season, the loss of domestic use has cost the US more than 220 million USD.

increased 5.1% to 1.0462 billion SME, or 442.824 million USD, which is linked to the production of PPE products. Cotton fabric imports increased 35.1% but totaled only 148.9 million SME or 14.2% of all fabric imports. At a time when the US domestic textile industry was suffering with large amounts of idol capacity, the volume of fabric and textile imports was quite shocking and showed the need for a required change in sourcing.

The US textile and apparel import mechanism has a serious weakness in it that allows the large volume flow

of Chinese fabric through the major cut/sew centers, in many cases past trade agreements, to be imported duty free. This creates major problems for the loyal customers of US cotton exporting end product back to the US, which is undercut by these arrangements and also is an inhibitor to the development of domestic cut/sew operations. For example, Cambodia is a major loophole and should be closed immediately. The country, a client state of China, hurts the CAFTA region as well as others. It has been simply shocking that no effort has been made to have this addressed, given that not a bale of US cotton is consumed in this region.

US DOMESTIC COTTON USE SHRINKAGE FROM WUHAN VIRUS SHOCKING


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Chicago and New York City are in crisis, as are several other major US metropolitan areas. A

group of more than 100 well organized criminals hit the major shopping districts of Chicago last Sunday night, looting, breaking store front windows, and destroying property. The looters hit over 200 retailers located in the Magnificent Mile, Gold Coast, Oak Street, and Irving North. The looting was strictly criminal and was organized on social media with a caravan of cars, trucks, and even U-Hauls. The destruction was widespread, with major luxury stores completely gutted. Nordstrom, Bloomingdales, Dior, Yes Saint Laurent, Louis Vuitton, and Coach all reported significant damages. The looting was the second such event in Chicago in 2020. This round of looting included Oak Street for the first time. Four Gap stores were looted and 15 closed as a result of the unrest. Police responded but were late and appeared not to use appropriate force given the scale of the robberies. The criminals actually used U-Hauls and pulled into the stores, which is shocking and shows the level of organization. The Mayor attacked the criminals but has failed to manage the city, with Chicago the murder capital of the US due to its weekly shootings. She has failed to ask for Federal help despite the damage done to Chicago by the gangs. Chicago has seen a complete breakdown, and many retailers are now reviewing whether they will continue to operate in the City and surrounding areas. The impacted area is also home to 100,000 people who were in danger from the unrest, as the looters were well armed and obviously dangerous.

Chicago is a major retail center with retail sales in 2019 exceeding 128 billion USD. However, sales are collapsing in 2020 due to first the Wuhan Virus and now the lack of law and order. The trouble has been underway for some time On August 4th, a well-known

rapper was killed in a shooting near the area of the luxury chains. Foot traffic is basically nonexistent, and tourists are now avoiding Chicago, and this will only accelerate following these events. The headlines of Crain’s Chicago Business last week were, “Latest Downtown Looting Has Some Rethinking Commitment to City.” Many stores were closed over 30 days from the first round of the looting, and now there will be an even longer shutdown given the damage. The response of the Mayor and her administration has been a complete failure, with confidence destroyed and many businesses forced to close, including the major luxury retailers. The risk to operate in Chicago is now greater than in many developing nations. Millions of USD of apparel sales have been lost and will not be recovered. New York City, with its very large economic imprint, is facing a similar crisis, which is also continuing to worsen. Business headlines last week were dramatic as the losses and woes mount. Instead of controlling crime, the city is focusing on the establishment of checkpoints to enforce mandatory quarantine for travelers from 34 states and Puerto Rico. The police are giving fines and forcing a tracing program. It has been estimated that the virus lockdown has cost the city 173 million USD a day, with losses so far at 24 billion USD. More than 2.9 million jobs have been lost. Crime is rampant and increasing, up 286% in the upper east side, which is the wealthiest area of the city. This is

Chicago looting

Chicago Apple store looted

HOW MUCH LONGER WILL LUXURY RETAILERS RISK OPERATING IN CHICAGO AND NEW YORK CITY?


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triggering an exodus of the high-income tax base. The Mayor’s failed leadership is cited as a key reason for the loss in confidence.

Now, retailers are reporting a new crisis, with a surging homeless population concentrated in the major business and shopping areas. New York has the second largest homeless population in the US, second only to Los Angeles. Mayor De Blasio has moved the homeless population to 139 mainstream Manhattan hotels, which is costing taxpayers millions of dollars. In the garment district, problems are occurring with the major hotels used by commercial visitors now used for the homeless. This has affected commercial traffic. The garment district is also reporting homeless people on the streets with serious mental and drug problems panhandling and threatening people, as is the case with those placed in the hotels. Business owners throughout the city have told the press they feel unsafe, and the conditions have impacted foot traffic. The Hell’s Kitchen and West 30s are reportedly facing a severe crisis, as the homeless have concentrated in the area. The retailers of Midtown, West Side and East Side have all reported problems. Streets are empty, and tourists are gone and not returning. The city has not dealt with

the drug or mental health issues of the homeless, and thus the problem has only grown since the economic collapse due to the virus. The Mayor has instructed the police not to respond to the homeless issues, and many smaller retailers are simply closing and leaving. The New York Post headline last week was, “A Mad Rush for the Exit as NYC Goes Down the Tubes.” The latest data shows a record plunge in rents and apartment vacancies.

Washington, DC is sadly in an emergency situation that only a Federal takeover can cure. However, so far, the political will for such a fight has not been reached. The city has always been one of America’s most popular tourist destinations, but that is rapidly ending. Besides the threat to tourists, the many thousands of government workers face danger from the unrest that the failed Mayor has been unable to address. Last week, 21 people were shot in a single episode, and that was followed by a shooting outside the White House that disrupted a news conference. In Portland, Oregon, the rioting and looting by criminals continues, 75 straight days, and spread to the suburbs last week.

These conditions are having a significant impact on US retail sales and on apparel especially. For example, the unrest in Portland is located in the heart of the US outdoor apparel market. The city is headquarters for Nike, Adidas, Columbia Sportswear, and Nautilus. Portland is in meltdown, with many boarded-up storefronts and block after block of homeless camps. The protesters, criminals, and looters are camping on the street and grilling food on the street in front of retailers, which may or may not still be open. Many stores operate reduced hours. The city has been the epicenter of the US sporting goods industry for decades. Tourism was a major business, with 2019 spending around 5.6 billion USD supporting 36,930 jobs. The major outdoor trade shows that normally occur have been postponed, and the city conference center, which is used for the trade shows, is now used as homeless shelter, along with local hotels. These

New York in chaos

NYC homeless camp in shopping area

Portland looting


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events and travel to the city are collapsing with the continued unrest, which the state or city appears unwilling to address and bring under control.

The economic impact to US retail is severe and appears to be showing little sign of stabilizing until new political leadership is introduced in these key cities and law and order restored. This was confirmed in the US retail sales data for July. While total retail sales increased 2.7% from a year ago, apparel sales in contrast fell 20.9% from a year ago, as the spending went to home improvement, health and personal care, and sporting goods. Total US retail sales of apparel at apparel stores reached 91.077 billion USD in the January/July period. The next five months are important since the period includes back to school and the Christmas holiday season. We fear that, due to the growing retail bankruptcies, urban unrest in major Metro areas, and changes in consumer habits, total 2020 retail sales of apparel at apparel retail stores could amount to only 184 billion USD, which would be an 82.886 billion USD

decline in apparel sales. If you equate this to cotton, assuming a market share of 40%, it would mean the Wuhan Virus has cost the world cotton consumption over 5.5 million bales in the US alone.

Last weekend the US Secretary of Health made an official state visit to Taiwan, and it was the highest

level such visit by a US official since 1979 when the One China policy was put in place. Since that time, even a stopover in the US by Taiwan officials nearly halted US/China relations. This time, Beijing condemned the move, moved a few navy ships near Taiwan, and then turned silent. At the same time, the wave of US actions the previous Friday drew only symbolic sanctions of US Senators. Then, on Monday, the USDA announced that China had purchased 588,000 tons of US soybeans, and on Tuesday 132,000 tons were announced as sold. Wednesday brought an additional 258,000 tons of soybean sales. Additional sales were made to unknown buyers, which were

believed to be China as well. Then came the weekly export sales reports which showed corn, sorghum, and soybean purchases. In summary, China purchased US soybeans every day last week, with an additional 323,000 tons sold on Thursday and Friday, along with corn sales to unknown buyers. China had pledged to buy 25 billion in US energy products in the agreement. It is also moving to complete these purchases. Sales of US Crude Oil to China have soared in recent weeks, and recently at least 20 million barrels of US crude has been sold and booked to China. August imports of US crude by China are expected to be a record.

The timing of these sales suggests they were done for nonpolitical reasons and were based on the agreement

IS A PENDING FOOD SECURITY CRISIS BEHIND CHINA’S MAINTENANCE OF THE TRADE AGREEMENT?


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and possible needs. These purchases follow very active sales of US corn, wheat, sorghum, pork, and soybeans to China over the past few weeks. July China soybean imports reached 10.09 MMT, and January-July imports are up 18%. Meat and offal imports in July were a record, and January-July imports were up 74%. These imports are occurring as food inflation has been expanding for some time. Meat protein is in tight supply, and animal feed is in strong demand. China has sold out its weekly auctions of corn reserve stocks for 12 consecutive weeks. Several interesting scenarios are beginning to unfold as to the motivation and need to keep to US grain flowing.

On Tuesday August 11th, Xi Jinping made comments that China needed to address its food waste, which made global headlines, quite a mundane topic for a ruler for life that wants to conquer the world. This followed a headline on July 27th in which Xi told locals on a visit to Jilin Province to make grain production a priority. Then, in a food security conference shortly before that visit, Vice Premier Hu Chunhua told a meeting of all provisional governors to make sure agriculture production was maintained or they would face discipline. These actions follow the dramatic increase in domestic food inflation resulting from a series of events that have affected crops. The virus outbreak affected the early work by farmers in the fields and disrupted distribution of feed and food supplies. This was followed by some of the most serious floods in 200 years and drought in parts of western China. After all of this came massive clouds of locusts in some areas and a major armyworm outbreak in the provinces of Shandong, Anhui, Jiangsu, and Henan in July, which has affected corn production. The food part of the CPI release last week showed food Inflation was up 13.2%, led by an 85% jump in pork prices and a 40% increase in egg prices in just one month.

The flooding across the south has broken all records, with large scale damage to rice and wheat acreage.

Wheat quality in many areas is reported as very poor. The west has experienced drought. In Inner Mongolia, 50% of the region has experienced a major drought that has destroyed soybeans, corn, and wheat. Gansu reports no harvest due to the drought, and wheat fields in Xinjiang are reported to have dried up as the water was diverted to cotton and fruit crops. More than 65% of the corn crop in Liaoning was lost to drought.

There are worries that the grain held in the massive Reserve stocks is not of the quality or the levels the statistics indicate. China Sinograin has the largest grain reserves in the world, with silos across the country. The sheer volume of the stocks has always triggered doubt about efficiency and quality of storage, and fears of corruption. Even the cotton stocks that were generally well managed had large losses during the period. Stocks swelled to over 50 million bales for several years. A later audit found stocks below the expected levels. Volumes of this scale make management difficult and allow for waste and losses. For grain, much of the stocks are too poor for human consumption. China has stopped publishing official grain Reserve data, and we understand the CCP has issued stern policy regarding secrecy with no release of data to any locals. A committee has been formed to make sure only very highly placed local CCP members have access to data. A few dissidents who recently left China indicated the recent push to expand production and reserve levels has resulted in fraud in inflated numbers just to get the subsidy. In the early years before cotton and its production was reformed and its statistics were considered a state secret, we uncovered massive efforts to overstate or understate production in Xinjiang, all related to taxes and subsidies.

These conditions could explain why record corn, sorghum, wheat, and soybean purchases have been underway. In the case of soybeans, the alternative is


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limited, with heavy Brazil purchases causing it to now be sold out of soybeans until the next harvest. Thus, the US is the supplier for the next several months. The next Brazil crop is planted in September. The much more conciliatory tone of China is now drawing attention and was a feature of the Financial Times last week, as speculation grows as to the reason. In addition, the fear is that China could also be preparing for more sanctions pressure. It is becoming quite clear they face a food shortage, and China also fears an embargo from some exporters. The actions are clear and telling us this is the case. Social media apps have banned pictures of people eating too much, and local provinces passed laws to limit food consumption, which is quite remarkable and suggests very serious issues. The laws go down to the restaurant level and apply to how much food a person can order in a restaurant. In Wuhan, it was reported that a party of 2-3 people must limit orders to half meals, and a party of ten is to order nine meals and share. These actions come as the flooding across the

south grows worse, with Sichuan issuing a red alert for the first time. These floods are destroying food crops, local vegetables, and transport is also difficult. The size of their US purchases of wheat, sorghum, corn, and soybeans is becoming serious. Rice imports would be much more alarming and would shock the world and cause alarm. The US purchases can occur under the guise of the trade agreement. Just how much the world feels it has abundant grain stock is dependent on China, which is kind of alarming. Regarding wheat, China was estimated by the USDA to hold 151.68 MT of the world’s 309.10 MMT stocks. In corn, China was estimated to be holding 204.7 MMT. Coming into 2020/2021, out of world stocks of 311.3 MMT and China’s rice stocks were estimated at 116.50 MMT out of 181.6 MMT. No independent group has verified these stocks, and China stopped publishing any detailed data on the stocks. The only evidence of the stocks is based on several-year-old data published by the same government that made Hong Kong a police state after swearing it would allow a free system for another 25 years.

The USDA created quite a buzz when its first objective yield survey for the 2020 crop season

showed record yields for corn, soybeans, and cotton. Rumors said the USDA did not visit the fields due to the virus. However, they confirmed the normal work on the survey occurred. The USDA lowered US cotton harvested acreage by a million acres to 9.25 million acres, while it raised the average yield to a record 938 lbs. per acre. This appeared to generate lots of discussion. This is as we expected and was no surprise, with yields across the belt outside the Texas High

Plains on track for a record. Weather conditions have been near ideal, and other than the RGV of Texas the belt has so far avoided any major storms. Another factor which is often forgotten is the progress being made annually by the US plant breeders and seed companies in genetics, which is pushing US yields steadily higher outside of the volatile weather of the West Texas region. The US average yield of 938 lbs. per acre equals 4.8367 bales per hectare. To put that in perspective, the average yield last week in Brazil was estimated at a record of 8.051 bales a hectare. Thus, at just over 60% of the average yield of Brazil, the US has room for major strides in yields in future years. The Mid-South crop is fast catching up in yield thanks to the new seed performance and improved farming practices. The highest dryland/irrigated mix yield in the US will be in Missouri, where the USDA estimated yields at 1,331 lbs. per acre or a very impressive 7.1377 bales per hectare, not too far short of Brazil. Mississippi is expected to have the second highest yield of 1,240 lbs. per acre or 6.395 bales per hectare. On the other hand, Texas harvested acreage is expected to only be 3.861 million acres with an average yield of 774 lbs., with production of only 6.337 million bales. US production was raised 580,000 bales to 18.08 million bales. The US demand was the shock, as US domestic consumption plunged to a record low of 2.2 million

USDA RAISES 2019/2020 AND 2020/2021 CARRYOUT LEVELS AS US YIELDS HIT RECORD


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A RESPONSIBLE CHOICE FOR BRANDS, RETAILERS & MANUFACTURERS

Making farmers lives better with a more equitable supply chain

WHY COTTON? Comes from Nature, Returns to Nature

bales. This number was the result of weak domestic use followed by a complete collapse in demand following the Wuhan Virus. This represents a 300,000-bale reduction from the previous estimate. US exports increased 200,000 bales to 15.4 million as the USDA adjusted the weekly data to reflect Census Bureau-confirmed exports. The end result was US ending stocks for 2019/2020 of 7.1 million bales, which was further raised to 7.6 million bales for 2020/2021. The potential exists for the US carryover to reach 8.6 million bales or more, as US exports slide to 14.0 million bales. Even that estimate is dependent on generous exports to China under a still valid US/China Trade Agreement. Global production was raised 1.282 million bales to 117.53 million bales, with the increases in the US, India 1.2 MB, and Australia +.200 MB, while production was lowered in Mali -.400 MB and Greece-.175 MB. Consumption was lowered 1.362 million bales to 113.08 million bales, as the USDA continues to trim its overly optimistic earlier estimates. Consumption was lowered in Brazil -.100 MB, China -.500, Pakistan – 400, India -.500, and US -.100, while raised in Turkey +.100 MB. World ending stocks were raised 3.138 million bales for 2020/2021.

The FSA also released its August estimates. The Farm Service Agency (FSA) is in charge of certifying acreage for crop insurance. The FSA placed planted acreage at 11,196,878 acres, which is 993,122 acres below the USDA planted acreage estimate of 12.19 million acres. In 2019, the August FSA acreage estimate was 623,000 below the USDA June planted acreage. Final planted acreage was only adjusted slightly lower than the June estimate, with the FSA estimate slowly adjusted higher.

The largest difference in the August FSA estimate and the USDA June planted acreage was in 2012/2013, when the FSA August estimate was 821,000 acres below the June planted acreage. That year, the final planted acreage was 320,000 acres below the June planted acreage. Overall, the FSA final acreage has averaged 192,000 acres below the USDA final planted acreage estimate. The difference in the FSA acreage estimates and the USDA is spread across a number of states. In Texas, the FSA is at 6,424,264 acres, while the USDA is at 6,615,000 acres. Thus, the difference is a bit unusual.

Unlike the USDA yield survey, the FSA requires the producer to file the reports, and some of the differences may be due to the Wuhan Virus outbreak that has disrupted FSA office hours and farmer activity. The differences in California and Arizona got our attention, with both having been very hard hit by the second virus outbreak. In California, the total ELS and upland acreage in the June planted acreage was estimated at 205,000 acres, while the FSA reported only 75,737 acres. Pima was placed at only 53,079 acres vs. the June estimate of 165,000 acres. The Pink Bollworm acreage survey was near 178,000, which means the FSA acreage will be adjusted higher. In Arizona, total acreage by the FSA was only 70,514 acres compared to the June estimate of 132,000 acres, so a sizeable adjustment is expected. In the Mid-South, wide differences were noted in Mississippi and Missouri, which will both likely be adjusted higher. The other significant difference was in Alabama where the virus also had a major impact on everything. We expect the FSA acreage to be adjusted higher, and planted acreage will likely only have minor adjustments.


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ICE cotton futures continued its bizarre behavior last week as Managed Fund buying continued to provide

support. The strength in ICE has again applied pressure to the CFR basis. Indian traders and international merchants now include CCI designated offers in their catalog. These, along with private ginned supplies, have given spinners the choice of a wide variety of Indian export offers. A moderate additional volume of sales was made last week, again to international merchants. These sales occurred as ICE again pushed the ICE basis out to very extreme levels. The standard private offer of Shankar-6 1 5/32 CFR export basis moved back out to 300-400 off Dec out of Indian traders and offers of S-6 1 1/8 to 5/32 3.7-4.9 mike moved back to 400 off Dec. CCI RG Middling 1 5/32 high strength 29 offers were at 250-300 off. Even the official Cotlook A Index offer of a Middling 1 1/8 was at 125 points off on the same date. However, by Friday, the basis levels had firmed sharply from Wednesday, as the CCI raised prices on its sales. CCI Middling 1 5/32 offers had firmed to only 100-125 off Dec.

Local cash prices for a Shankar-6 ex-gin rallied, reaching over 57 cents by August 12th, and by August 6th planted acreage increased to 12,363,700 hectares. The USDA raised Indian production, and monsoon levels continue to suggest a large crop is coming. A warning did show up in Maharashtra, where 77 villages reported an infestation of Pink Boll worm. The spread

of this will depend on the departure of the monsoon and how quick the harvest can advance. It has been proven that when harvest is prolonged into the next year with 3-4 pickings or more the infestation can really spread. Additional sales of CCI and Maharashtra Federation stocks occurred late last week, as ICE futures rallied and approximately an additional 800,000 bales sold. Sales of CCI/MF stocks have now exceeded four million 170-kg bales. The CCI over the weekend did announce a major discount scheme for the Domestic mills. From August 16 to August 31, private mills will be given a special purchase scheme and discounts will be given for small purchases. At 50,000 bales, the discount will be 1,500 rupees per candy. This is the same as given to commercial traders and spinners previously on 200,000 bales or more. The discount will also be applied on a smaller scale all the way to 500 bales for the private mills under the new scheme. The Private Mills will also be given up to 90 days to take up the purchases depending on the volume purchased, up to 30 days for 9,999 bales, etc., up to 90 days on 100,000 bales. This move will put pressure on the earlier four million bales sold. The volume sold to traders and merchants has lost a strategic advantage and will not be able to mark up and sell in small lots to private mills. Many bales will have to move to export.

The US harvest is underway in South Texas with 36,850 bales classed so far, and we are seeing

excellent quality. When the remaining RGV crop is classed, a much higher percentage of lower grades is likely. Hurricane Hanna caused major damage to the RGV crop, with 6-18 inches of rain and 30-40 MPH winds. Estimates suggest 100,000 acres or more may have been totally lost, and other fields were in standing

water with some round bales in water. Picking is advancing rapidly in the Coastal Bend, and cotton is rapidly opening on the Upper Coastal Bend. The crop in the High Plains remains under stress, with some isolated rains and storms last week. The Delta and Southeastern crop are developing well, with beneficial rains falling in the Mid-South at the end of last week.

ICE futures remained in a rather bizarre trading pattern last week, as turnover remained light and dominated

by the High Frequency Traders and Algometric Systems. These systems have direct high-speed connectivity with the exchange, which gives them the ability to

front run every order. Their income comes from small movements in which they capture small profits at the expense of the outside order. A majority of the Funds employ these systems to move in and out of the market, and very few fundamental based Hedged Funds

INDIAN CCI EXPORT OFFERS FROM TRADERS INCREASE AS SALES CONTINUE

US HARVEST STARTS IN SOUTH TEXAS

ICE FUTURES RALLY DESPITE USDA ESTIMATES AND NO EXPORT TRADE


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exist anymore. Even some of the agriculture trading firms in the physical commodities have employed these systems in an attempt to increase profits. Thus, the daily movements in many markets, especially on ICE, have nothing to do with any fundamental development, and all commentary is focused on attempting to justify the movement. The exceptions are when a fundamental development is in the headlines, which then triggers the Algorithmic systems that play off certain words they have been programed to react to. On Friday, this occurred in the session’s final hour when prices retreated after a Bloomberg headline that US/China trade talks were postponed indefinitely. Up to that point, prices had been higher in featureless light trade. Volume Friday was only 13,414 contracts of futures, which suggest actual commercial paper was very light.

As the only cotton futures market outside China, and with its several hundred-year-old-history as a price barometer, ICE remains a major feature and plays a key role in the CFR basis. The behavior of the last week has been unusual. The earlier price weakness generated some offtake for nearby shipment in non-US styles. US cotton is very uncompetitive and at record premiums against Brazil, Argentine, and Indian. The weekly export sales report for the week ending August 6th showed net upland sales of only 6,900 bales. Pima, in contrast, experienced brisk sales of 10,400 running bale. Pima is not tied to ICE futures, and aggressive merchant offers are drawing offtake. Last week, offtake was noted in Pakistan, China, and Vietnam. Brazil featured in all markets, as it remained aggressively priced all the way through 2021 shipment. In China, Brazilian sold to mills from bonded warehouse stocks, with Middling 1 1/8 selling at near 300 on Dec. Some Indian sold as well. Vietnam was also a buyer of Brazilian and Indian. Pakistan saw active offtake of Brazilian, West African

lower grades, Argentine, Tanzanian, some US cheaply priced recaps, and Pima and Egyptian. Brazilian 2021 crop also sold at aggressive basis levels on July 2021 futures. India focused on Indian CCI stocks.

Demand is poor throughout the supply chain overall, but there are green shoots at the spinner levels, with mills willing to buy aggressive basis offers of non-US at the low 60s and below CFR. Two weeks ago, we discussed that a pattern of demand was beginning to be seen when spinners could pick up at these price levels and below. Cotton used in open end is the cotton being purchased. Order books for the cut/sew operations remain very weak and scattered, as retailers and brands continue to report unsettled consumer demand and the resurging virus remains a problem in the US and now in parts of Europe. US retail sales of apparel appear to be stabilizing down 20% from a year earlier, which reflects the loss of a sizeable volume. In addition, the wave of bankruptcies has not ended. In China, physical prices are firm, as supplies tighten ahead of the next harvest that will begin in a few weeks. Yarn prices are not firm, and weakness remains in the upper count yarns including 40s. Mill inventories are tight, and they continue to focus on Reserve stocks for open end yarn needs. The bonded warehouse stocks offered at aggressive basis levels are cheaper than Xinjiang, which has stimulated offtake and begun to draw down the burdensome levels. The Cotlook PMI for China’s textile industry remains below 50, confirming contraction. For the moment, it appears some support is building in the physical markets at 62 and below. The large block of Indian cotton in trade hands may test this stability as it will need to move over the next 90 days. This stability may be tied to the lofty levels of the US CFR basis and ICE. ICE remains tied to the US/China trade deal, the ability to ship the outstanding sales, and also to sell additional large blocks to the Reserve. Just as we discussed some time ago, the longer the US stays uncompetitive, the more difficult it will be hitting the 14 million-bale export target. The 15 million-bale target of the USDA appears a very difficult target. We discussed earlier that the US/Chinese Trade Agreement may be tied to food security issues. Then came the late Friday afternoon announcement that the US/China talks on the trade deal scheduled for Saturday were suspended indefinitely. The speculation over the weekend however was it could be tied to keeping the agreement intact instead of letting political pressures get involved. It remains to be seen what this means. An end to the trade deal would mean the US surplus is back in the price war, and the entire price structure could suffer.


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The CFTC COT data showed what we expected; the Trade in the week ending August 11th added 9,472 new shorts or hedged 947,500 bales, which confirms the hedging of Indian CCI purchases likely occurred as expected. The Managed Funds added 8,506 contracts and are 39,838 contracts net long. ICE futures experienced an outside range session on Wednesday, so a close below 62 would now likely trigger some long liquidation. Until then, the Funds are likely to continue light buying. The Index Funds were flat and may have ended additional longs until more allocations occur. Overall, it is the trade deal that holds the future for ICE and is also the key to the support in physical prices.

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.

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

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