Can the U.S. Save Its Cottonseed Oil Farmers?
Cottonseed oil exporters may not profit as much as what the market trend reflects: geopolitical events and ongoing trade deals are to blame. Trump plans to revisit the NAFTA deal following the midterm elections in an attempt to lower trade deficits in the North American region. If negotiations fail, the prospects of NAFTA termination will severely damage the US cottonseed oil industry, as Mexico and Canada are US’ top two importers. With the escalating trade-war with China, however, Trump is pressured to take a more lenient stance on the new NAFTA deal.
In Asia, both India and China are the largest producers as well as consumers of cottonseed oil. China plans to reemerge as a major importer of cotton in 2019/20 to meet domestic demand. However, exporters that have recently harvested cotton of Bollgard 3 type¹, like Australia, will not benefit from the Chinese market in the meantime, as China has not yet approved import for this variety.² Exporters are about to face similar prospects in the trade with India, as the Indian government recently doubled import duties on cottonseed oil earlier in 2018.
The United States is the top exporter of cottonseed oil, having accounted for nearly 24.4% of the export market in 2016. Followed by the U.S., Brazil (13.65% share), South Africa (12.66% share), Malaysia (11.3% share), and Argentina (6%) make up the next largest exporters. Australia is the leading importer of cottonseed oil, making up 14.28% of the market, followed by Mexico (12.6%), Malaysia (10.03%), South Africa (8.95%), and Canada (5.6%).³
Major exporters of cottonseed oil (source: Tridge)
In July 2018, the U.S. issued another round of tariffs on Chinese goods, sparking speculation that the U.S. is determined to win the trade war. However, in order to minimize the damage to domestic industries from lost trade opportunities, Trump hopes to reach a consensus in the new NAFTA deal as part of a reasonable trade policy. This may help maintain a positive outlook on trade for cottonseed oil farmers, who export 74% of their production to Mexico and Canada. The new NAFTA deal may introduce new changes to tax policy on imported vegetable oil. Depending on where the consensus lays, the cottonseed oil market is expected to adjust accordingly.
The U.S. cottonseed oil farmers will be the ones to lose from NAFTA’s demise if Trump opts for a withdrawal. Mexico most commonly uses cottonseed oil in cooking. Although the U.S. is Mexico’s largest provider of cottonseed oil, Mexico has the ability to satisfy domestic demand for vegetable oil by crushing Canadian seeds for oil. This means Mexico can self-sustain without having to depend on U.S. imports.⁴
China Puts Cottonseed Exporters in a Limbo
The cotton plant produces three globally traded commodities, one of which is fiber. The rest, derived from cottonseed after it has been processed, are oil and meal, also known as cake. Rich in protein, cottonseed meal is a byproduct of oil extraction from cotton seeds. On average, cottonseed produces 18% oil and 82% meal when ground. Because the production of one affects the other, all three industries cannot but be mutually-dependent.
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In the edible industry, cottonseed oil is used to make salad dressing, mayonnaise, and other similar goods. Due to its neutral flavor and high smoke point, cottonseed oil is suitable for frying. Retail chains that make products like fries and chips use cottonseed oil as a cost-effective way to achieve mass production. Margarine, shortenings, whipped creams also contain cottonseed oil because of its ability to provide consistent texture.
Cottonseed oil is produced by extracting oil from cotton seeds. During its refining process, gossypol is removed from the oil which is a toxin that protects the plant from damage. Because cotton plants are grown in open fields, they are susceptible to infestation. Bt cotton, the genetically modified (GM) pest-resistant variety, was introduced in the 1900s as a solution to the problem to prevent profit loss and crop failure.
However, GM cotton plants are not greeted with open arms by all countries. China, for example, has been a long-time, hesitant advocate for GMOs. Even though the government sees GMO as the best solution to sustaining the world’s largest population, critics allege that consumption of such crops could have serious health consequences. Bt cottonseed has only recently been made legal by the Chinese government, but an exception to this regulation still applies, as producers periodically introduce new types of GMOs to the market. In 2015, Australia harvested its first batch of Bollgard 3 cotton seeds. However, exporters are facing an uphill battle penetrating one of the largest markets, as China has not yet approved the Bollgard 3 variety. Unabsorbed supply by the market may drive down the price of cottonseed oil in the short-run.
The Market Outlook
The global cottonseed market is expected to grow at a rate of 5%, which means we can expect the cottonseed oil market to grow at a similar pace.⁵ However, 2018 seems to be a difficult year for exporters, who wish to make bigger gains by targeting major consumer markets such as China and India.
Although India imported cottonseed oil for the first time in 2017--as foreign oil became cheaper than domestic asking-price on account of lower import duty--the government was quick to rectify this anomaly by issuing a tax raise on foreign cottonseed oil in February 2018. However, recent rumors of Pink Bollworm in most of India’s cotton growing areas like Maharashtra are expected to result in crop loss of roughly 10% - 30%. Affected cotton will experience a 5%-10% loss in oil content. Despite recovery from Pink Bollworm infestation, the overall reduction in production may provide exporters with a small window of opportunity.⁶
Exporters hoping to target China are echoing a similar sentiment. Australia expects to reach 4.7 million bales in production for 2018/19. 95% of its cotton is of Bollgard 3 type. China has not yet approved this type of GM variety, which means China would not import Australian cottonseed oil and cottonseed, as they are a byproduct of the cotton plant.
Despite its export initiatives, Australia will remain as the largest importer of cottonseed oil, accounting for almost 14.3% share in the market. Australia’s possession of only one cottonseed refinery for the entire nation puts the country in a position to import rather than export.
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References
1. “Products.” Monsanto , www.monsantoglobal.com/global/au/products/pages/bollgard3.aspx.
2. “Unresolved Cotton Seed Import Permit Issues Restrict Trade with China.” Grainews, news.agropages.com/News/NewsDetail---24607.htm.
3. “HS Code 151229 | Cotton-Seed or Fractions Simply Refined | Suppliers and Market Information - Tridge.” Global Trading Platform Tridge, https://www.tridge.com/hs-codes/151229-cotton-seed-or-fractions-simply-refined
4. Murray, Martin. “North American Free Trade Agreement (NAFTA) and Agriculture.” The Balance Small Business, The Balance Small Business, www.thebalancesmb.com/nafta-and-agriculture-2221153.
5. “Cotton Seed Oil Suppliers, Wholesale Prices, and Global Market Information - Tridge.” Global Trading Platform Tridge, www.tridge.com/intelligences/cotton-seed.
6. Farrell, Roger. “Australia: Cotton and Products Annual: April 2018.” USDA Foreign Agricultural Service, USDA, 3AD, gain.fas.usda.gov/Recent GAIN Publications/Cotton and Products Annual_Canberra_Australia_3-28-2018.pdf.