Economic Observation: Brazil Cotton Benefits From China'S Additional 15% Tariff On American Cotton

After levying tariffs on cotton originating in the United States, American cotton imports will be affected to some extent in the future. In 2023/24, China imported 3.24 million tons of cotton, with a year-on-year increase of 1.81 million tons; Among them, 1.11 million tons of American cotton was imported, an increase of 390000 tons year on year, accounting for 34%; Brazil imported 1.32 million tons of cotton, accounting for the first, accounting for 41%.

In 2018/19, affected by Sino US trade friction, China imported 365000 tons of American cotton, accounting for 18%. Therefore, with the implementation of China's tariff increase on American cotton imports, the volume and proportion of American cotton imports are expected to decline this year. In terms of foreign trade, China's imposition of tariffs on American cotton imports will reduce China's imports of American cotton, which will negatively affect American cotton prices and further weaken the already weak ICE cotton futures price.

In recent years, China's purchase of American cotton has declined significantly. In 2022/23 and 2023/24, China imported 720000 tons and 1110000 tons of American cotton respectively. By the end of December 2024, China will only import 50000 tons of American cotton in 2024/25. As of February 20, 2025, the number of American cotton contracted by China is only 191000 tons, down nearly 80% from the same period last year, and most of the American cotton contracted has been shipped.

At present, the quantity of goods that China has signed up for but not shipped is about 59000 tons, which may be cancelled or transferred to Southeast Asian countries. One of the main reasons for the sharp decline in the quantity of American cotton purchased by China is that the basis difference of American cotton is much higher than that of other producing areas with the same quality. In addition, due to concerns about Sino US economic and trade relations, enterprises also consider reducing American cotton purchases from a prudent perspective.

At the same time, tariffs will be imposed on cotton originating in the United States. If China reduces its imports of cotton from the United States, it will correspondingly increase its imports of cotton from other countries. This increase is most likely from Brazil. In 2023/24, China's imports of cotton from Brazil will account for 41%. With the gradual improvement of Brazil's cotton production and quality, It is possible to replace American cotton in the future.

In contrast, India's cotton consumption has gradually increased due to the development of its textile industry. Although its cotton output is high, its export volume has decreased year by year, accounting for only about 3% of China's cotton imports in 2023/24. However, due to the relatively low total output of Australian cotton, the import increment potential is also limited. In addition, the import quantity will also be limited by the import quota quantity.

In addition, Australian cotton, Central Asian cotton and Indian cotton have also achieved some supplement in quality and structure. It is expected that after China implements the counter-measures of imposing 15% additional tariff on American cotton, the basis price of Brazilian cotton to China may be increased to a certain extent, but the increase in the basis price of Brazilian cotton will not be so large compared with that of 2018-2019. Because the export task of Brazilian cotton is also heavy this year, China's demand for imported cotton is not as high as last time.

It is worth noting that the global cotton output has always been the focus of investors. In 2024/25, the global cotton output will be about 26.2 million tons, an increase of 1.63 million tons over the previous year, and the global cotton surplus will be about 1 million tons. In addition to China, other cotton producing regions have shown an obvious pattern of "two increases and two decreases". Brazil's cotton output in the southern hemisphere has increased significantly, and Australia's cotton output has stabilized at a high level for five consecutive years after increasing to more than 1 million tons. The overall output of the United States in the northern hemisphere declined significantly. In addition, the overall output of India and Pakistan in the northern hemisphere also declined due to cotton seed problems.

With the completion of processing and inspection of American cotton in 2024/25, the new cotton in 2025/26 has not been sown yet. In 2024/25, due to the high price ratio of cotton to grain, the planting area of American cotton increased, and the improvement of drought led to the decline of abandoned farmland rate. The output of American cotton increased by 510000 tons to 3.14 million tons year-on-year. In 2025/26, due to the low absolute value of ICE cotton season price and the lower than average cotton grain ratio price, it is expected that the US cotton planting area will decline year-on-year. Conservative estimates show a year-on-year decrease of 8%. The USDA report released at the Agricultural Outlook Forum in February is expected to show a year-on-year decrease of 10%. Follow up to the USDA report on the area of planting intention released at the end of March.

In addition to the changes in major overseas cotton producing areas, China's cotton production still maintained a growth trend. The main cotton producing area in China is Xinjiang, which accounts for more than 90% of the country's total cotton production. In recent years, Xinjiang's cotton output has increased steadily as a whole. Due to the higher utilization rate of water resources and the improvement of cotton planting management, the overall cotton planting area in Xinjiang has increased steadily, and the unit yield has basically overcome the sharp fluctuations caused by adverse weather. At present, Xinjiang's cotton output is basically stable at more than 5.6 million tons, and can be increased to more than 6.4 million tons under good weather conditions.

In 2025, domestic cotton has not yet started to be sown. According to the survey on cotton planting intentions by major institutions, the planting area is expected to increase slightly compared with last year, and the growth rate of cotton planting area in Xinjiang is about 1-3%. The output is expected to stabilize above 5.6 million tons. However, whether the future output can be further improved still needs to pay attention to the changes in the weather in the later period.

In addition, as the processing of new cotton in China has basically ended, the new crop will be planted as early as April. In terms of inventory, there was a certain increase in inventory compared with the previous year, but the stock accumulation period has ended, and the seasonal stock removal cycle within the year has now entered. As of February 15, the total commercial inventory of cotton nationwide was 5.6811 million tons, 65600 tons month on month; Xinjiang's inventory is 4.5226 million tons, with a month on month ratio of - 3.8 million tons; Mainland inventory was 685500 tons, with a month on month ratio of - 60600 tons; The inventory in the bonded area is 473000 tons, with a month on month ratio of+33000 tons.

In 2024, the accumulated retail sales of clothing, shoes and hats, knitwear and textiles in China will be 1469.1 billion yuan, up 0.3% year on year. The export volume of textiles and clothing was 301.1 billion US dollars, up 2.8% year on year. Seen from the data only, the absolute consumption quantity is not low, but the industry profit level has been significantly compressed. Therefore, downstream speculative demand was suppressed.

Seen from the current situation, the pressure above the cotton price cannot be ignored. In the future, or more around the realization of the expected difference, we can observe the intensity evolution of trade friction, the strength of macro policies, the degree of recovery in the traditional peak season of "Golden, Three, Silver and Four", and the disturbance of new cotton planting area and weather in April through the following dimensions.

The cotton market in 2025 will mainly deal with two contradictions. On the one hand, whether the global output will be significantly lower than that in 2024/25; On the other hand, under the trade background that the United States has repeatedly imposed additional tariffs on China, how much impact it has on global and Chinese cotton consumption. Judging from the current situation, global output may decline, but the overall estimate is still that supply exceeds demand.

Due to the less distribution of domestic import cotton quotas, the cotton resources in both domestic and foreign markets cannot be smoothly circulated. In addition, at present, the internal and external cotton yarns are also hung upside down, and the external yarn cannot flow into China in a large amount driven by profits. The price of domestic and foreign cotton will certainly be differentiated, which is mainly reflected in the weak external and stable internal price difference, and the expansion of internal and external price difference, which is suitable for internal and external reverse (multiple internal markets, empty external markets).

As the price of American cotton continues to decline, on the one hand, the imposition of tariffs on American cotton by China will benefit American cotton; On the other hand, the volume of unpriced purchase contracts of American cotton is high, American cotton is under pressure, and it is expected to continue the weak trend. In the future, attention should be paid to the expected planting area of newly planted American cotton, or it may be driven by profits. In terms of the internal market, China's reduction in imports of American cotton will lead to the contraction of imports in the short term and the reduction of supply, which will benefit the internal market in stages. However, in the long run, more changes are not in the total import volume but in the adjustment of the import structure. The decrease of American cotton imports will be supplemented by Brazilian cotton, Australian cotton and other foreign cotton.

In view of the later trend of cotton prices, we need to continue to pay attention to the changes in tariff policies between China and the United States. From the perspective of fundamentals, the processing of domestic new cotton has basically ended, and the commercial inventory has entered the de circulation cycle, and the supply pressure has gradually weakened. In March, we focused on the performance of downstream demand. Supported by traditional peak season expectations, it is expected that the price shocks in March will be strong, but there will be hedging pressure constraints above. Due to the relatively different impact on the internal and external market, it is expected that the internal and external cotton prices will have further room to expand. In operation, we can focus on the opportunity to callback the low internal market.

Although the price difference between internal and external cotton is expanding in the short term, the expansion of this price difference is not unlimited. Once the import window of cotton yarn is opened, the decline of external disk can be transmitted to the domestic market through cotton yarn, still exerting pressure on the domestic market. From another point of view, cotton is different from other edible agricultural products. The downstream of cotton has more attributes of industrial products. In particular, the downstream textile and clothing are highly dependent on exports. The deterioration of the economic and trade environment also affects the consumer side. Therefore, the stability of the internal market relative to the external market is only temporary. On the whole, before the improvement of the foreign trade environment, I also held a somewhat empty view of Zheng Mian.

From the perspective of the pattern of figured yarn arbitrage, the relatively certain opportunity lies in that once the window of cotton yarn import opens, it must first squeeze the cotton yarn link and then squeeze the upstream cotton link, so this process is the process of narrowing and then expanding the price difference of figured yarn. Now you can wait for the window of imported cotton yarn to open.