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Outline

Long-term structural changes

Tariff timeline

Effects on supply chains

ChinaChinese production Chinese mill-useChina grows less cotton than its mills

consume

average gap is more than one third of mill-use

Source: USDA

Chinese production Chinese mill-use

ChinaChina grows less cotton than its mills consume

Government reserves been filling the gap, but stocks drawn down

Source: USDA

average gap is more than one third of mill-use

ChinaChina grows less cotton than its mills consume Gov’t stocks

at end of 2013/14 were over one and a half years of mill-use

gov’t stocksat end of 2018/19less than three months of mill-use

Sources: Cotlook, USDA

53 mil. bales

Government reserves been filling the gap, but stocks drawn down

ChinaChina grows less cotton than its mills consume

Gov’t stocks at end of 2018/19 should be less than three months of mill-use

Sources: Cotlook, USDA, 2018/19 forecast by Cotton Incorporated

53 mil. bales 9 mil. bales

Government reserves been filling the gap, but stocks drawn down

Gov’t stocks at end of 2013/14 were over one and a half years of mill-use

China

Stabilization of reserves requires imports to equal China’s production deficit- Recent imports near 5 million bales- Recent deficit near 15 million bales- Chinese imports will need to nearly triple

China grows less cotton than its mills consume

Sources: Cotlook, USDA, 2018/19 forecast by Cotton Incorporated

53 mil. bales 9 mil. bales

Government reserves been filling the gap, but stocks drawn down

Gov’t stocks at end of 2013/14 were over one and a half years of mill-use

Gov’t stocks at end of 2018/19 should be less than three months of mill-use

China

Where to get all that cotton?

- Recent imports near 5 million bales- Recent deficit near 15 million bales- Chinese imports will need to nearly triple

China grows less cotton than its mills consume

Sources: Cotlook, USDA, 2018/19 forecast by Cotton Incorporated

Stabilization of reserves requires imports to equal China’s production deficit

53 mil. bales 9 mil. bales

Government reserves been filling the gap, but stocks drawn down

Gov’t stocks at end of 2013/14 were over one and a half years of mill-use

Gov’t stocks at end of 2018/19 should be less than three months of mill-use

U.S. Lower corn and soybean prices boosted acreage

U.S. Lower corn and soybean prices boosted acreage

Weather conditions more favorable than last year

U.S. drought conditions (late July, 2019)

U.S. planted acreage

Sources: USDA, NOAA

U.S. drought conditions (late July, 2018)

U.S. Lower corn and soybean prices boosted acreage

Weather conditions more favorable than last year

U.S. drought conditions (late Aug, 2019)

U.S. planted acreage

Sources: USDA, NOAA

U.S. drought conditions (late July, 2018)

Near record crop forecast22 million bales of production3 million bales of mill-use19 million bales to move16.5 million bale export forecastRecord for exports is 17.7 million

U.S. Lower corn and soybean prices boosted acreage

Weather conditions more favorable than last year

Where to sell all that cotton?

0

5

10

15

20

25existing record

Source: USDA

U.S. cotton production

U.S.

Where to sell all that cotton?

ChinaWhere to get all that cotton?

tariffs U.S. Where to sell all that cotton?

ChinaWhere to get all that cotton?

tariffs July 2018 first pair of lists (list 1, both sides at $34 billion),

U.S. cotton faces a 25 point tariff increase

Sources: Peterson Institute of International Economics, Bloomberg, WSJ

December G-20 meeting, truce called

late June G-20 meeting, truce called

second pair of lists (list 2, both sides at $16 bil.)threats made to hit all U.S. imports from China with increasesJul-Aug 2018

third pair of lists (list 3, $200 & $60 bil.)Sep 2018

sharp reversal in expectations, tariffs on list 3 increase further,U.S. renews threats on all imports from ChinaMay 2019

U.S. raises tariffs on most imports from China not yet covered (list 4a), includes most Chinese-made apparel, China raises tariffsSep 2019

U.S. to raise tariffs on all imports from China not yet covered (list 4b), includes remaining Chinese-made apparel, US cotton hit again by ChinaDec 2019

Oct 2019 U.S. to raise tariffs on Lists 1, 2, & 3 China further (delayed two weeks), talks to take place

50

55

60

65

70

75

80

85

90

95

100 cents/lb.

sharp reversalin expectations

implementation for first list of tariffs set

Tariffs & Cotton Prices

implementation for third list of tariffs set

0

2

4

6

8

10

12

14

16

18

20

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

million balesU.S. export commitment to the world

Tariffs & Cotton Fiber Trade

2018/19

2017/18

5-year avg.

Source: USDA

0

2

4

6

8

10

12

14

16

18

20

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

million balesU.S. export commitment to the world

Tariffs & Cotton Fiber Trade

sales ahead of new crop year were 4th highest ever

still down about two million bales vs 2018/19

2019/20 sales

2018/19

2017/18

5-year avg.

Source: USDA

0

2

4

6

8

10

12

14

16

18

20

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

million balesU.S. export commitment to the world

Tariffs & Cotton Fiber Trade

with 2018/19 carryover, down one million bales

2019/20 sales + carryover

2019/20 sales

2018/19

2017/18

5-year avg.

Source: USDA

still down about two million bales vs 2018/19

sales ahead of new crop year were 4th highest ever

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

U.S. export commitment to Chinamillion bales

Tariffs & Cotton Fiber Trade

0

2

4

6

8

10

12

14

16

18

20

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

million balesU.S. export commitment to the world

2019/20 sales + carryover

2019/20 sales

2018/19

2017/18

5-year avg.

Source: USDA

2018/19

2017/18

5-year avg.

current commitment to China-900k bales (-33%) year-over-year

2018/19 shipments to China are down 1.5 million bales (-35%)

with 2018/19 carryover, down one million bales

still down about two million bales vs 2018/19

sales ahead of new crop year were 4th highest ever

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

U.S. export commitment to Chinamillion bales

Tariffs & Cotton Fiber Trade

0

2

4

6

8

10

12

14

16

18

20

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

million balesU.S. export commitment to the world

2019/20 sales + carryover

2019/20 sales

2018/19

2017/18

5-year avg.

Source: USDA

2019/20 sales + carryover

2019/20 sales

2018/19

2017/18

5-year avg.

current commitment to China-900k bales (-33%) year-over-year

2018/19 shipments to China are down 1.5 million bales (-35%)

2019/20 sales and carryover down 7%with 2018/19 carryover, down one million bales

still down about two million bales vs 2018/19

sales ahead of new crop year were 4th highest ever

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0Chinese fiber imports from world+0.9 million bales (+70%) year-over-year 2018/19

Tariffs & Cotton Fiber Trade

Sources: USDA, CN Customs

change in million bales year-over-yearChinese cotton fiber imports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar Ap

r

May Jun Jul

U.S. export commitment to Chinamillion bales

2019/20 sales + carryover

2019/20 sales

2018/19

2017/18

5-year avg.

current commitment to China-900k bales (-33%) year-over-year

2018/19 shipments to China are down 1.5 million bales (-35%)

2019/20 sales and carryover down 7%

+1.8+480%

+1.3+100% +1.0

+200%+0.7

+130%

AustraliaBrazil IndiaOther(mostlyAfrica)

Uzbek-0.0-4%

-0.9-35%

Chinese fiber imports from world+3.9 million bales (+70%) year-over-year 2018/19

U.S.

Tariffs & Cotton Fiber Trade

Source: CN Customs

Chinese cotton fiber imports Exporter outlooks for 2019/20

U.S. forecast to export near record 16.5 mil. bales in 2019/20

Brazil forecast to export 8.5 mil. bales,prices to influence acreage

India forecast to export 4.0 mil. bales, early weather not favorable

Australia forecast to export 1.9 mil. bales, drought affecting planting

W. Africa forecast to export 5.2 mil. bales, steady at 2018/19 levels

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0 change in million bales year-over-year

+1.8+480%

+1.3+100% +1.0

+200%

AustraliaBrazil IndiaOther(mostlyAfrica)

Uzbek-0.0-4%

-0.9-35%

U.S.

Chinese fiber imports from world+3.9 million bales (+70%) year-over-year 2018/19

+0.7+130%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

all fibers

cotton-dominant

volume in billion SME (SA)U.S. apparel imports from China

Source: OTEXA

0%

10%

20%

30%

40%

50%

60%

Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

all fibers

cotton-dominant

Chinese volume over global volume (SA)China’s share of U.S. apparel imports

+0.8+80%

+0.5+200%

Tariffs & Apparel Trade

Source: Cotton Incorporated analysis

Tariffs & Apparel TradePass-through

Of 2010/11 price spike

+150%

+70%

+25%

+8%

RatioRoughly

3:1

+15 ppt

from 17% to 32%

from 20% to 35%

landed costs +9-10%

Theoretical look atImpact of tariffs

retail costs +3%China 40% market share

exchange rates

0

5

10

15

20

25

30

35

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

mmfcotton

Sources: OTEXA, Cotton Incorporated analysis

Tariffs & Apparel TradeU.S. import volume

raw cotton equiv. of US apparel & home imports, mil bales)

1 2 3 45

+15 ppt

from 17% to 32%

from 20% to 35%

landed costs +9-10%

Theoretical look atImpact of tariffs

retail costs +3%China 40% market share

exchange rates

Sources: USDA, IMF

Tariffs & Apparel Trade

0

5

10

15

20

25

30

35

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

mmfcotton

U.S. import volumeraw cotton equiv. of US apparel & home imports, mil bales)

Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

IMF forecasts for 2019 world GDP growth released at different timesGlobal economy weaker

3.2

3.9

1 2 3 45

Headwinds Abating

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5Cotton prices stabilized vs polyester

ratio of Chinese cotton to Chinese polyester prices

Sources: Emerging Textiles, IMF

Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

IMF forecasts for 2019 world GDP growth released at different times

3.9

3.2

Global economy weaker

Headwinds Abating

40%

45%

50%

55%

60%

65%

70%

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5 ratio of Chinese cotton to Chinese polyester pricesCotton’s share of U.S. apparel

based on raw fiber equivalence of U.S. imports

Sources: Emerging Textiles, USDA

Cotton prices stabilized vs polyester

Headwinds AbatingGarment weights stabilized Cotton’s share of U.S. apparel

based on raw fiber equivalence of U.S. imports

Sources: Cotton Incorporated analysis, gov’t trade agencies

85

90

95

100

105

110

115

120

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

U.S.

E.U.

Japan

indexes of garment weight in the U.S., the E.U., and Japan (apparel of all fibers, 2006-07=100)

40%

45%

50%

55%

60%

65%

70%

40

50

60

70

80

90

100

110

120

130

Outlookmillion bales

Global demand back on trendTime of transition- Chinese reserves drawn down- U.S./exporter production higher

Tariffs adding uncertainty- U.S. fiber exports to China- U.S. apparel imports from China- Global economic growth

Source: USDA