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Crops
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Livestock
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Energy
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Metals
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Cotton
Max Foster
Higher world cotton prices in 2008-09
The world indicator price for cotton (the Cotlook ‘A’ index) is forecast to average 76 cents a pound in 2008-09, 6 per cent higher than in the previous year. Substantially reduced world cotton production in 2008-09 is putting upward pressure on world cotton prices. However, uncertainty about the world economic outlook and plentiful supplies at the textile manufacturing stage is dampening the tendency for cotton prices to rise sharply.

The cotton indicator price surged to US90 cents a pound in early March 2008 under what appears to have been intense speculative activity, but has traded in a narrow band at around US78 cents a pound since the beginning of July 2008. Reflecting the expectation of a sustained period of lower world cotton production, US cotton futures prices in early September 2008 ranged from US67 cents a pound for October 2008 delivery, to US85 cents a pound for May 2010 delivery.

The recent weakening in the Australian dollar has increased the prices on offer to Australian cotton growers. In mid-September 2008, forward cash prices for Australian cotton growers for the 2008 crop were around $390 for a bale of standard quality Australian cotton, rising to $443 a bale for the 2009 crop, and $482 a bale for the 2010 crop.
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Cotton 1
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Cotton 2
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Substantial decline in world cotton production in 2008-09
Despite the higher prices for cotton, competition for land from other crops and adverse weather conditions in a number of major producing countries are forecast to cause a decline in world cotton production by

1.6 million tonnes in 2008-09, compared with 2007-08. Of the major cotton producers and exporters, cotton production is forecast to increase in only Australia and Pakistan.

The area of cotton to be harvested in the United States in 2008-09 is forecast to decline by 27 per cent compared to 2007-08. The decline reflects a reduction in cotton plantings of 15 per cent, because of competition for land from other crops, and an unusually high abandonment rate of 15 per cent, largely because of heatwave conditions in Texas in June 2008. US cotton production is forecast to be 3 million tonnes in 2008-09, down 1.2 million tonnes on the previous year, and the lowest US cotton harvest since 1998-99.

Cotton production is also down in most other countries, with exception of Australian and Pakistan. As with the United States, this mainly reflects higher returns from competing crops in addition to adverse seasonal conditions which have been a factor in many countries. In India, a late start to the Indian monsoon has reduced cotton plantings and lint yield expectations. In Turkey, shortages of irrigation water have contributed to lower cotton production.
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Cotton outlook
2006-07
2007-08
s
2008-09
f
% change
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World
Production
Mt
26.6
26.2
24.6
– 6.1
Consumption
Mt
26.9
27.0
26.7
– 1.1
Closing stocks
Mt
13.7
13.2
11.2
– 15.2
Stocks to
   consumption ratio
%
50.9
49.1
42.0
– 14.5
Cotlook ’A’ index
USc/lb
58.1
71.9
76.0
 5.7
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Australia
Area harvested
 ’000 ha
 144
 63
 141
 123.8
Lint production
kt
 274
 133
 272
 104.5
Exports
kt
 487
 266
 154
– 42.1
– value
A$m
 823
 466
 317
– 32.0
f ABARE forecast. s ABARE estimate.
Resistance to higher cotton prices in 2008-09
World cotton consumption is forecast to fall slightly in 2008-09. Higher cotton prices and uncertainty about the world economic outlook appear to be dampening demand for cotton for processing.

Weak growth in world cotton consumption is occurring despite world prices for the main competing artificial fibre, polyester, increasing in both real terms and relative to cotton. Higher oil prices are contributing to the increase because the main feedstock for polyester production is naphtha, a petrochemical derivative.

The factor which appears to be limiting cotton price increases despite much reduced cotton supplies is substantially reduced demand at the textile and clothing stage in world markets. An indicator of this reduced demand is that US imports of textiles and clothing during the first half of 2008 were 5 per cent lower in volume terms than in the first half of 2007.
World cotton stocks declining
Based on current expectations of substantially reduced world cotton production and a relatively static consumption, a substantial reduction of world carryover stocks of cotton of 2 million tonnes is forecast for 2008-09. The stocks to use ratio is expected to be around 42 per cent at the end of 2008-09.

Around 1 million tonnes of the decline in world ending stocks in 2008-09 is forecast to occur in the United States, reflecting the much smaller US cotton harvest.
Ongoing irrigation water shortages in Australia in 2008-09
Irrigation water storages in most cotton growing regions in Australia are low to date. Nevertheless, the irrigation water situation is somewhat better than in September 2007, particularly in parts of Queensland.

Gross margins (in per hectare and per megalitre of irrigation water) at currently expected prices in the cotton growing regions appear to continue to favour irrigated cotton. An important factor in the revenue from cotton production is cottonseed which is at very high prices.

Despite the shortages of irrigation water, Australian cotton production in 2008-09 is forecast to be 272 000 tonnes, more than double the severely drought affected harvest of 2007-08.