A quotient of the global cotton supply chain has gone into a state of shutdown, with governments requiring citizens to undertake only essential work.
This has left apparel manufacturers experiencing the burden, with a number of large brand owners cancelling partially complete or ready to ship orders.
Major brand owners and retailers have been cancelling their garment orders, forcing disruption down the supply chain back to origins.
Spinning mills, integrated mills undertaking weaving, knitting, producing and finishing cloth, and/or producing garments with sales direct to major retailers are now facing a halt to the supply chain. These cancellations have caused a liquidity crunch for our spinning mill customers, as income rapidly slows.
USA, Brazil, Mexico and West African exporters have bales on the water destined to disembark vessels with spinning mills in the past two weeks frantically requesting international merchants to delay shipments and store at origin - and negotiating three to four-month delays in shipments until governments relax their lockdowns. In addition, many banks in Pakistan, Bangladesh, India, Indonesia and Vietnam are operating with minimum staffing levels, making payments for shipments a difficult task.
It is indeed a very bad situation for the cotton supply chain to face. Globally, cotton growers are getting less and less for their physical cotton as ICE cotton futures have dropped around 30 per cent from 70 US cents per pound in February to a low of 48 US c/lb at the end of March as markets price in reduced global consumption.
Spinning mills are stuck with high priced contracts, inventory and limited consumption to offtake their stocks. There is obvious concern about customers with high priced contracts, contract performance and the potential default risk for international merchants.
Governments have initiated global shutdown of all activities, except essential services for the most part until the end of April 2020, forcing many spinning mills, knitters, weavers and finishing mills to close.
Governments have been responding with support packages to help businesses navigate issues of the shutdown. An impressive example of this is in Bangladesh, where Prime Minister Sheikh Hasina provided a $8.56 billion package to assist paying wages and allowances of export-oriented industries' workers; provide low-interest loans and working capital.
The decline in ICE cotton futures prices leads one to question how much cotton will be planted in the USA and Brazil with cotton prices at 10-year lows. The recent USDA planting intentions report estimated projected acreage at 13.7 million acres but when analysing individual regions (Texas increasing to 7.3 million acres and declines in the Mid South, South East and West), many participants in the market are forecasting an end result of 12.7 million acres.
Brazil acreage is suggested to drop 25pc if futures are in the 40 cent range. Of course, the market is doing what markets are meant to do, lowering the price to find some equilibrium between demand and supply.
However, no one knows what the other side of this looks like when governments are able to move to relax lockdown measures. Will it be a V-shaped recovery, a U-shaped recovery or something we don't have an alphabet letter to describe? Time will tell.
