They used to say in the South that “Cotton is King”.  Much of the early development of the Southern agriculture states was due to cotton.  It dominated US trade in the 19th century.  As settlers moved further west, land was bought and sold to wealthy plantation owners seeking to grow more cotton.  While cotton has seen its share of ups and downs, soybeans have gotten most of the attention in the pending trade wars.  Many may not be aware, that domestic cotton production is even more dependent upon exports than soybeans.  While over 50% of our soybeans went to export, almost 75% of our cotton went to export…mainly to China.  Much like the soybean market, the trade wars have begun eroding the US cotton export dominance as other countries like Brazil seek to fill the void.

According to Luis Dreyfus, Brazil cotton exports to China have tripled in the second half of 2018 from the year prior.  Brazil’s land development has several phases.  First comes the soybeans.  After several years, the land fertility has improved where it can grow other more nutrient demanding crops like corn and cotton.  The investment to cotton is so heavy, that once you make the commitment you have to stick with it.  You can’t switch between corn and cotton like you can corn and soybeans because it requires different equipment and it must be processed at a gin before sold.  Even if there is a truce called in the trade wars, Brazil has been posturing itself to have a more fortified position to supply more cotton to the world.  This may make it harder for the Chinese to go back to the US.  Brazil has been boosting production and investing in the necessary infrastructure like gins and harvesting equipment.

The Chinese have not done away with US cotton all together.  They have still maintained some short term sales when necessary, but still looking to avoid the tariffs as much as possible.  China has also been relying increasingly on its own domestic stockpile, which has lowered the need for imports.  Despite this, Luis Drefyus estimates that China will still need to buy at least 15 million bales of cotton by the 2021-2022 season, that is up from 11 million bales they are expected to import in 2019.  They will continue to buy more, the question is from whom?

This may be good news for US corn farmers, as some of this increased cotton area in Brazil will be taken from second crop corn area.  While soybeans are still the primary first crop, they have a choice of planting corn or cotton as the second crop.  While there may not be a huge drop in corn acres, there likely won’t be much of an increase either.  Roughly 88% of the cotton in Brazil is planted in Mato Grosso, where they experience some of the cheapest corn prices in the world.  This makes it an ideal candidate to swap corn for cotton.

Brazil’s acreage is expected to reach 3.46 million acres, while the US will plant roughly 14.5 million acres.  While the US plants over 3 times as much acreage as they do in Brazil, the United States only produces around 43% more cotton than Brazil.  This is because Brazil has some of the highest yielding cotton averages in the world, helping to close the gap. (It also has some of the highest cost of production too.)   Only Australia has higher average yields, although much of that is irrigated. While it may take a long time, Brazil’s cotton production will eventually surpass that of the United States.  They recently surpassed Pakistan, becoming the 4th largest cotton producer in the world.  China and India are still the first and second largest producers of cotton respectively with the US coming in third.

While global cotton consumption is expected to grow, the USDA’s projection for the 2019/2020 world cotton estimates that production will still exceed demand by roughly 1 million bales.  Brazil is not the only country that increased production.  When all other smaller countries are taken into consideration, world cotton production could rise nearly 7%.  This makes sense as China’s imports will continue to grow despite not doing as much business with the United States.  They still have to buy it from somewhere.

Vietnam and Bangladesh are next on the list for trading partners to replace China.  They are both import dependent countries that process the cotton and then ship out the final product.  The biggest influencing factors are how much cotton can China produce and how much are they willing to reduce their stockpiles.  The USDA expects stock levels to decline by 45% to roughly 9 million bales.  This will be the lowest level since 2010/11.   If China were to build back up those stockpiles, it would be a tremendous opportunity for whomever gets to supply them.  So far, these trade wars have helped introduce China to new trading partners like Brazil who are not about to let this opportunity slip by.