World cotton market: Can growers expect prices to improve?
Cotton is Australia’s third largest agricultural export commodity. With the Australian dollar moving favourably for exporters in recent months, why are current cotton prices stuck around the mid-$400 range? Can growers expect prices to improve sooner or later?
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During the summer months, Australia’s annual crop heartland is found in Queensland and New South Wales. For each of the last 10 years across Australia, at least 900,000 hectares has been planted each year to summer crops, around 80% of which has been under cotton or sorghum. [The other 20% is planted to rice, corn, soybeans and sunflowers according to ABARES]. Whilst most of the sorghum crop will enter the domestic livestock value chain as feed, Australia’s cotton crop is almost exclusively bound for export. In fact, cotton is Australia’s third largest agricultural export commodity at a value of more than A$2 billion in recent years. As an export-exposed commodity, the financial returns to Australian growers tend to be closely tied to world cotton supply and demand drivers, and foreign exchange rates. With the Australian dollar moving favourably for exporters in recent months, why are current cotton prices stuck around the mid-$400 range (and consistent with the 20-year average price)?
Can growers expect prices to improve sooner or later?
In its latest World Agricultural Supply and Demand Estimates, the USDA data paints a picture of supply outpacing demand:
- Global production will increase slightly, world consumption will decline slightly
- China imports will be substantially lower than in recent years as a change in government policy comes into effect
- Overall world ending stocks are forecast to be higher this year by 7 million bales at nearly 109 million bales.
- In fact, the world has never had so much cotton on hand:
- 2014/15 ending stocks of 108 million bales will be twice that of 2010/11 which is 24 million bales more than the five year average world ending stock and 36 million bales more than the 10 year average ending stocks
- The USDA estimates that in the 2013/14 year, China’s ending stocks of cotton increased by 12 million bales and at the end of 2014/15 will have grown by more than 12 million bales to sit at more than 63 million bales. This is equivalent to more than two years of Chinese cotton demand. In 2014/15, the USDA estimates that the China stockpile will increase by less than 1 million bales
- China and India are again expected to grow around half the world’s cotton in 2014/15, 30 million bales each, compared with 16 million bales from the US and 10 million from Pakistan. So the big growers will continue to produce big crops this year and world ending stocks could be even higher come June 2016. In comparison Australia is forecast to grow around 2 million bales (which is less than 2% of world production).
In response to drier seasonal conditions and outlook during the planting window, a much smaller area (nearly half) has been planted to cotton this year in Australia compared with last year. Indeed, there are reports that some growers have switched to sorghum (due to better margin per megalitre, lower growing costs per hectare and the opportunity for a potential double-crop).
The Australian crop is almost exclusively irrigated with very little dryland cotton planted, and even less dryland cotton is expected to be picked if rainfall is not forthcoming over the next month. Assuming growers have sufficient water to finish irrigated crops this year, crop forecasters anticipate that the Australian crop will yield around 2 million bales from around 200,000 hectares, equating to an average yield of 10 bales per hectare.
Compared with the USDA data, the average yield per hectare of Australian cotton (for the last three years) has been at least 20% higher than the next best cotton producing country. In 2012/13 and 2013/14 that was Mexico. In 2014/15, Turkey is expected to have the next best yield after Australia, followed by China. The average yield is notably affected by the proportion of the planted area under irrigated management systems, as is typically the case for cotton from Australia, Mexico and increasingly in China.
The Cotton Research and Development Corporation estimates that Australian cotton growers have may significant productivity gains in the last decade:
- Doubled crop water use efficiency now producing more than two bales per megalitre of water, at the same time as yields have increased by a quarter – CRDC Annual Report 2013–2014 (page 9)
- The highest crop yield in the world, with annual productivity gains of around 4%
Source: CRDC Annual Report 2013–2014
- Reduced pesticide application by 95%.
So productivity gains have already played their part but so have favourable currency movements (with the Australian dollar around 20% lower against the USD since the GFC peak) to offset at least some of the global market headwinds. But unless and until world ending stocks track lower (either through price signals that reduce supply or elevate demand for cotton) there does not appear to be a magic bullet that will lift global prices anytime soon. In the meantime, productivity gains will continue to be the likely area of focus for Australian growers. Better than average growers will be achieving:
- 10 bales per hectare for irrigated crops
- Two bales per megalitre of water, particularly for irrigators drawing on water storages with diminishing water levels including Pindari (12%), Copeton (20%) and Keepit (9%) dams, pointing to limited irrigation entitlements in the coming season if dam-filling rain is not received in the next 4-6 months. Every megalitre counts given the current irrigation water situation and more water-efficient growers will be able to sustain larger planted areas and produce more bales
- An average price per bale in excess of the 20 year average of $485 per bale (excluding ginning, seed and GST) after any quality discounts. Price premiums can be more difficult to achieve in lower water years (such as the current season) as fibre length and quality can be checked by insufficient water through the final stages of the growing season.
So world cotton prices will remain under pressure at least until the Chinese cotton stockpile works through the textile mills.