abare.gov.au - Australian commodities – June quarter . volume 15 . number 2 2008

Cotton

Higher world prices offset by stronger Australian dollar

The world indicator price for cotton (Cotlook ‘A’ index) is forecast to average 77.9 cents a pound in 2008-09, 8.3 per cent higher than in the previous year, largely because of the expectation of a sustained period of lower US cotton production.

The cotton indicator price surged to US90 cents a pound in early March 2008 under intense speculative activity, but has since declined to around US80 cents a pound in mid-June 2008. Reflecting the expectation of lower US cotton production, US cotton futures prices in mid-June 2008 ranged from US73 cents a pound for July 2008 delivery, to US94 cents a pound for May 2010 delivery.
However, the strong Australian dollar is weighing heavily on current and forward prices available to Australian cotton growers. In mid-June 2008, forward cash prices for Australian cotton growers for the 2008 crop were around $396 for a bale of standard quality Australian cotton, rising to $459 a bale for 2009 crop and $488 a bale for 2010 crop.

Small decline in world cotton production

Despite the higher prices, world cotton production is forecast to decrease slightly in 2008-09 to 26 million tonnes.

A further decline in US cotton production in 2008-09 is likely to be largely offset by small production increases in most other cotton producing countries.

US cotton plantings in 2008-09 are estimated to have declined by 13 per cent, following a 15 per cent reduction in 2007-08. Contributory factors to the sustained decline in US cotton plantings are competition for land from other crops for biofuel production and the removal of a particular subsidy arrangement (the Step 2 competitiveness provision) under the US farm program, following a successful challenge under the World Trade Organisation arrangements. US cotton production is forecast to be 3.2 million tonnes in 2008-09, down nearly 1 million tonnes on the previous year.

In response to improved prices, increases in cotton production are expected in most other cotton producing countries, with the exceptions of China, Brazil and Turkey. However the increases are being kept to modest levels by relatively high prices for competing cereal and oilseed crops being driven by demand for biofuels. The production increases in most countries are largely because of yield increases rather than area increases.

Limited growth in cotton consumption in 2008-09

World cotton consumption is forecast to grow by only 1.1 per cent in 2008-09, considerably slower than the average 4.2 per cent annual growth over the past decade. World cotton consumption has been increasing over the past decade, mainly because of strong growth in consumer incomes in China and India. However, the threat of slower economic growth in key textile consuming countries in 2008-09, particularly the United States, appears to be dampening the demand for cotton for processing.

The effect of higher cotton prices appears to be most marked in China where a recent survey by the China Textile Industry Association indicated nearly one-quarter of all mills were running at a loss because of the strong Chinese currency and the rising cost of labour and other production inputs. Given the increasing reliance of China on cotton imports, it is possible the Chinese Government will make cuts to the sliding scale of import duties currently applying to cotton imports.

Based on current expectations of world cotton production and consumption, a modest reduction of 5.9 per cent in world carry-over stocks of cotton is forecast for 2008-09. This represents a 6.3 per cent decline in the stocks to use ratio.

Cotton outlook

2006

2007

2008-09

% change

World

Production

26.6

26.1

26.0

– 0.4

Consumption

26.5

26.8

1.1

Closing stocks

13.7

13.5

12.7

– 5.9

Stocks to

consumption ratio

51.9

50.7

47.5

– 6.3

Cotlook ’A’ index

USc/lb

58.1

71.9

77.9

8.3

Australia

Area harvested

’000 ha

144

210

233.3

Lint production

274

126

428

239.7

Exports

487

240

206

– 14.2

– value

A$m

823

411

700

70.3

f ABARE forecast. s ABARE estimate.

Continuation of irrigation water shortages in Australia in 2008-09

Harvesting of the 2007-08 cotton crop in Australia has largely finished. Areas planted to cotton in Australia in 2007-08 were severely limited because of shortages of irrigation water. Growing conditions for the crop have generally been good, despite some periods of cooler weather unfavourable to cotton growth, achieving above average yields and fibre quality. Nevertheless, Australian cotton lint production in 2007-08 is estimated to have been only 125 800 tonnes, the smallest Australian harvest since 1982-83.

The stored water situation in the cotton growing regions of Australia has deteriorated over the past three months because of a lack of rain, but is still somewhat better than at the same time in the previous year. Although gross margins at current expected prices for the various crop production possibilities appear to favour cotton, irrigation water and land are being diverted to winter grain production in the traditional cotton growing regions to generate cash flow. Nevertheless, Australian cotton production (a summer crop) in 2008-09 is forecast to increase by more than 300 000 tonnes compared with the severely drought affected harvest of 2007-08.

The small cotton harvests in 2007-08 and 2008-09 mean Australian cotton exports in 2008-09 will only be around one-quarter of the record level of exports of 834 000 tonnes reached in 2001-02.