With a dampening of demand in traditional U.S. cotton export markets and more competition from low cost overseas producers, cotton prices have bottomed out.

Largely dependent on sales offshore, America’s cotton trade faces rough sailing in all sorts of waters:

China, the world’s biggest market, is importing far less cotton, as its textile industry slows and the country attempts to whittle down domestic stockpiles. A trade dispute with Turkey has severely diminished demand for US cotton from America’s second most important market. Increased competition from cotton producers Brazil and Australia come at a time when the US dollar is strong and the Brazilian real and Australian dollar are particularly weak. Low-cost suppliers such as India and Bangladesh are making waves. Textile manufacturers across the globe are looking more and more to just-in-time inventory for their raw materials, which translates into smaller shipments and tighter schedules for shippers. Polyester is once more giving cotton a run for its money.

Price Bottom Out The price of a bale of cotton these days is hovering around $350, which is less than American production cost, and about one-third the price four years back when the global economy recovered. And to top it off, massive rains in Texas and floods in Georgia and the Carolinas have stressed both the quality and quantity of cotton now being harvested.

“It’s a really challenging environment,” says Jordon Lea, an owner of Eastern Trading Co., a cotton-merchandising firm based in Greenville, SC.

Everyone from producers to shippers is scrambling to figure out how to tack in these choppy seas, with the prospect of more disruptive storms in the months and years to come.

“Global demand for cotton is down. Cotton consumption is flat or down worldwide,” says Les Lewis, executive vice president of agriculture at Memphis-based Mallory Alexander International Logistics. The almost century-old firm has been involved in cotton warehousing and distribution since the company began and is probably America’s largest logistics-related cotton handler today. “When was the last time you saw any kid go to a sporting event and he was wearing cotton? So, you have a fashion trend against you and you have this low-cost polyester and blends that are competing. That’s a big concern for the cotton industry.”

The US is by far the world’s biggest cotton exporter, accounting for almost one-third of cross-border trade, according to figures supplied by Cotton Inc., a trade and marketing group representing American cotton growers. While cotton export revenue pales in comparison to, say, wheat, even at currently depressed prices, cotton exports amount to more than $3.5 billion annually.

What’s more, American cotton growers have come to depend on exports as the country’s textile industry has shrunk to almost nothing. American farmers expect to grow about 13.3 million bales of cotton in the current marketing season, which began on August 1. The USDA and others project almost 80% of that production will be sold abroad. (One bale equals 480 lbs.)

“In the 90s, [cotton producers] switched to the export market as duties fell and they took advantage of an explosion in world consumption,” explains John Robinson, a professor at Texas A&M University’s Department of Agricultural Economics and an authority on cotton-related economics. That saved farmers. “They reinvented themselves,” he says.

Shipping cotton offshore has changed dramatically as well. It’s now almost entirely containerized - one 40-foot container holds 88 bales of cotton - and those in the industry believe it’s unlikely to return to bulk anytime soon.

“It is more expensive than trains and containerized,” says Lewis, who is based in Dallas. “Couple that with the buyer having less buying power or less credit line, they’re not wanting to in most cases receive 5,000 or 10,000 tons, they’d rather get 1,000.”

Containerization has helped reduce transportation costs. It’s possible now to ship a container of cotton to Asia for under $600. That works out to $30 a ton. In the case of exports to China, it provides a way to return containers that might otherwise make the journey west empty. “You’ve got to remember that a lot of the US agricultural products are the back-haul commodity, they’re not the huge revenue generator that these ocean carriers would like,” says W. Neely Mallory III, president of Mallory Alexander.

There are two exceptions. Mexico is an important export market and, with the uncertainty in China, is expected to become even more so. Cotton shipments to Mexico move by truck and sometimes by rail. Some cotton that is destined for Central America and Colombia still moves in bulk as well.

Cotton may be a commodity, says Robinson’s Texas A&M colleague Flynn Adcock, but it’s one with a difference. Quality varies considerably and many buyers demand a particular grade of cotton for their yarn. “They say, ‘I want this bale. I want that bale.’ And, with just-in-time inventory, they need the product now,” says Adcock. Few countries can match the US in terms of quality guarantee.

American cotton exports, however, have been falling for the past decade. The peak came in 2006, when the US exported 16.2 million bales. That’s dropped by more than one-third in the years since.

Cotton-related logistics have been caught up in the uncertainty and shifting demands. The West Coast dock strife last year only added to the difficulties. Because cotton isn’t perishable, it got stuck even deeper in the queue, with some shipments backed up two or three months. “The timing was unfortunate, with what was going on in China,” says Lea. “We were fighting tooth and nail for market share. We’d get some of that market share and then we couldn’t ship.”

Currently, cotton destined for Asia is exported from the West Coast, while Turkey- and South America-bound cotton tends to ship from Houston, Savannah and Charleston. Los Angeles/Long Beach is by far the major port, handling more than double Houston and Savannah combined, which service Latin America and Turkey. Lewis calls these “the natural gateways.”

Panama Canal Impact

However, the expansion of the Panama Canal could eventually alter those shipping patterns, boosting Savannah, Houston and possibly Norfolk, while diminishing dependence on the congested Los Angeles/Long Beach facilities.

A study by Texas A&M some three years back predicted that with the canal expansion, cotton shipped from West Coast ports could decrease by as much as two-thirds, while Gulf and Atlantic ports could see business almost double. While demand for cotton from China has lessened considerably and the canal project has experienced problems in the interim, researchers continue to believe transportation patterns will change once post-Panamax ships can traverse the Panama Canal.

“If indeed the pie gets smaller, you still might have even more shifting. It might even cause a larger shift percentage-wise,” says Adcock, international program coordinator at the university’s agricultural economics department and one of the authors of the study. “You’re going to get some movement over to these ports instead of training all the way to California.”

“We’re definitely looking forward to it,” says Lea, of the Panama Canal extension.

Others question whether the East Coast ports can narrow the cost gap. They stress that the combination of lower price via the West Coast and a longer sailing time – about 13 days more - to Asia from Atlantic ports will be hard to overcome. “I just don’t see it being that big of a deal,” says Lewis of the expansion.

Even the question of how shippers get paid becomes part of the calculus, with down payments and letters of credit negotiated vigorously, and longer carrying costs being factored in for both shippers and importers.

Add to this the changing demands of the textile industry as manufacturers increasingly move to just-in-time production. Coupled with low container rates, that translates into much smaller shipment sizes. “Just a few years ago, mills would buy big amounts of bales per letter of credit. That has really changed,” says Mallory. “They’re getting ten containers a week versus a shipload at once.”

In this complicated equation, China is the biggest variable. While its textile industry may be declining, China continues to stand far and away as the world’s biggest cotton consumer. Chinese consumption of cotton has fallen about 4.5 million bales since the 2011-2012 marketing season, a modest 12% decrease. Imports, on the other hand, have fallen 76%. To put it another way, China this marketing season is relying on imported cotton for less than one-fifth its needs. The latest figures show that in September, China’s raw cotton imports fell almost 60% year-on-year, according to statistics provided by Yuan Associates.

The reason for this steep decline can be traced in part to decreased Chinese textile production, but far more to Chinese government policies and subsidies, a system that a recent study for the US Department of Agriculture termed “highly volatile” and “a significant source of uncertainty for the rest of the world.”

In 2011, the Chinese government set a price floor for what cotton farmers would be paid. This was artificially high compared to world markets. In 2014, the government moved to a system of subsidies. The result of all this market tinkering was the same: a huge stockpiling of domestic cotton. Textile manufacturers either moved offshore where production costs are less or they bought imported cotton that was cheaper.

In an effort to reduce stockpiles, the government one year back instituted a strict import quota system, with steep 40% duties on anything more than World Trade Organization mandated minimum imports. However, this whole reduction process could take years. According to the International Cotton Advisory Committee, the Chinese government “still holds about 11 million tons in its reserves.”

“It’s a big number,” says Mallory.

There’s another wrinkle. While authorities have put the kibosh on imported raw cotton, Chinese textile manufacturers can still import yarn at low duties, a legal loophole. “They’re not totally out of production of cloth and textiles, says Robinson. But “it’s a bit of a shuffle game.” India is the biggest beneficiary and its manufacturers are selling yarn for close to the price of raw cotton, although Lea points out American mills are exporting yarn to China as well.

Production Shift

As textile production moves elsewhere in Asia, cotton producers can, in theory at least, shift markets as well. Vietnam in the past five years has leapfrogged ahead of Turkey and Indonesia and now trails only China and Bangladesh in terms of cotton imports. However, production in Vietnam doesn’t begin to make up for the dip in China. Vietnamese importers tend to go for low cost, not high quality. American producers can easily lose out to India and Pakistan. And few believe Southeast Asia can make up for the decline in China.

“I don’t see a shift. I see lost exports,” says Lewis.

Then there’s Turkey. A year back, the Turkish government launched an anti-dumping probe against American cotton producers, a retaliatory move against a US probe of possible Turkish steel pipes dumping. Ankara’s tit-for-tat action forced Turkey’s textile industry to source cotton elsewhere, against their will. Forward sales of US cotton to Turkey are less than 30% of what they were in November last year.

When and how this will be settled is anyone’s guess. That’s proving especially frustrating to suppliers such as Lea. “Turkey likes US cotton,” he says. The Turkish government is “kicking us where they know it hurts.”