Hope on the horizon for Australian cotton prices?
The world has never had so much cotton on hand and outside of currency movements, there was little chance of higher prices for Aussie cotton growers. Now there are some glimmers of hope that could lift global cotton prices.
The Agribusiness Bulletin
The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise. To get more articles like this delivered straight to your inbox subscribe to the Agribusiness Bulletin.
This time last year, our Agribusiness Bulletin highlighted the fact that the world has never had so much cotton on hand. Outside of currency movements, there was little chance of higher prices for Aussie cotton growers until the Chinese textile mills worked through the collective stockpile. Indeed, there has been relatively little movement in cotton prices during the last year and so you might think that there is little to get excited about going forward. Not so.
We have uncovered, via recent updates, estimates and announcements from the United States Department of Agriculture, the International Cotton Advisory Committee, Cotton Research and Development Corporation and Cotton Australia, some interesting glimmers of hope that could lift global cotton prices as set out below.
But firstly, to global supply and demand influences to set the scene...
Global supply influences:
- The U.S. crop (by volume) has been downgraded and is expected to have the lowest average yield in a decade (partly a result of lower abandonment rates, therefore the final crop has retained a higher proportion of lower-yielding crops)
- India and China will collectively produce half of the global cotton crop, a massive 53 million bales between the two countries
- Global production will be 2 million bales lower as both total area and average yield reduce slightly.
Global demand influences:
- Global cotton consumption will rise by 1% year-on-year, but this rate of consumption growth is little more than half the long-run average consumption growth for cotton
- Global ending stocks will be 8 million bales lower than last year but the stocks-to-use ratio remains stubbornly high at 94%. The 30-year average stocks-to-use ratio is closer to 50%
- China will hold more than 65 million bales in closing stock; nearly two-thirds of the global closing stock
- China’s cotton imports are expected to be nearly 3 million bales lower than last year. The peak annual import volume for China was nearly 25 million bales in 2011/12, around which time Aussie cotton prices peaked (briefly) at $1,000 per bale.
- The international cotton price (typically measured in U.S. dollars) has been relatively stable over the last year. By contrast, the polyester price tends to track the oil price and is therefore markedly lower compared with recent years.
Global glimmers of hope:
- For the fourth year in a row, China’s domestic crop will be less than its total domestic consumption volume. With China’s imports also lower (see comments above), the China closing stockpile will reduce by almost 3 million bales
- Spinning capacity in Vietnam and Bangladesh is expanding and these countries could become increasingly important textile manufacturers (and hence, cotton importers)
- Bangladesh will become the largest importer (by volume) of cotton with imports in 2015/16 of nearly 6 million bales
- Consumers are reportedly taking an increased interest in the environmental and social sustainability of cotton production (however this same interest does not appear to apply to polyester and synthetic fibres)
- The demand for sustainably produced and certified cotton has resulted in the development of the Better Cotton Initiative (BCI) with certified Australian cotton reportedly realising a price premium (over non-BCI cotton) of $3 - $8 per bale last season
- Cotton’s share of agricultural insecticide use has fallen 25% in the last 25 years (but secondary pests such as whitefly are becoming increasingly important to manage from an agronomic and yield perspective, so we can expect to see even broader approaches to integrated pest management systems).
In Australia, expectations for the current crop include:
- An increase in the planted area compared with last year, up 75,000 hectares to 270,000 hectares, as a result of:
- Continued expansion of southern New South Wales cotton growing regions (and supported by additional ginning capacity
- Generally better soil moisture profiles at planting time
- Lower sorghum prices compared with last year; sorghum being the primary summer cropping alternative to cotton in many areas
- The area planted to dryland cotton has rebounded after a relatively small dryland crop area last summer.
- As a result of the higher proportion of dryland crop area, the average yield for the current crop will be around 20% lower than last year’s result (but still 30% higher than the decade low experienced in 2010/11)
- Despite the lower average yield, the Australian crop will still be the global yield leader; more than 20% ahead of the next best yielding nation (Mexico) and more than twice the expected U.S. crop yield
- The 2015/16 crop is estimated to be around 2.4 million bales (higher by 200,000 bales than last year), averaging just under 9 bales per hectare on average
- Half of the cotton grown in Australia is grown on farms participating in the myBMP program. Completion of the myBMP program (to level 3, which 10% of Australian cotton farms had achieved in 2014) opens up the opportunity to gain BCI-certification (and the associated price premium)
- Cotton Australia and the Cotton CRC estimate that insecticide use has fallen by 89% in the last decade or so, and water use efficiency has increased by 40%.
So, on the one hand, the world still has a LOT of cotton and the China stockpile will still dominate the global cotton price story over the medium term. But there are emerging glimmers of hope for Australian cotton growers including price premiums for BCI-certified cotton, further gains in farm input efficiency, and the potential for medium-term demand growth via expanding south-east Asian textile industries.