abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Cotton

Outlook to 2013-14

Max Foster

A recovery in world cotton demand and tight world cotton supplies are forecast to result in steadily improving world cotton prices over the next two years.

Cotton consumption is forecast to contract sharply in 2008-09, because of the global financial crisis, but is expected to return to its strong growth path of the past decade over the medium term as a result of growing consumer incomes, most importantly in China and India.

Nevertheless, ongoing productivity improvements in cotton production are projected to result in some decline in cotton prices in constant (2008-09) dollar terms from 2010-11.

Cotton is expected to remain the most profitable irrigated crop in its traditional growing areas in Australia over the medium term. As a result, average cotton production is projected to increase to around 719 000 tonnes by 2013-14.

Short-term outlook

World cotton prices supported by low supplies in 2009

The cotton indicator price is forecast to average US65 cents a pound in 2008-09, 11 per cent less than in the previous year, despite a large decline in world production in 2008-09 and the expectation of only a modest rebound in world cotton production in 2009-10.

World cotton supply, disposal and prices

The cotton indicator price declined from around US78 cents a pound in early September 2008, to US51.8 cents a pound on 21 November 2008, but has since recovered to US54 cents a pound in mid-February 2009. With the recovery in prices expected to continue as buyer confidence returns to the market, the currently expected tight supply-demand balance suggests the cotton indicator will improve to average around US72 cents a pound in 2009-10.
World cotton production is forecast to decline to 23.9 million tonnes in 2008-09, down 2.3 million tonnes on 2007-08. The production decline occurred mainly in the United States, but production was also smaller in most other major producing countries with the exception of Pakistan.

US cotton plantings are forecast to decline by a further 11 per cent in 2009-10. However, assuming a trend improvement in lint yields and a return to more normal abandonment rates, US cotton production in 2009-10 is forecast to be down only slightly compared with 2008-09.
In the rest of the world, the decline in world cereals and oilseeds prices from the high levels of 2008 will likely see some land return to cotton production in 2009-10. Assuming trend yield improvements, world cotton production is forecast to increase by 0.7 million tonnes in 2009-10, to 24.6 million tonnes.

World consumption of cotton is forecast to decline by 9 per cent in 2008-09, as annual world income growth slows to a forecast 0.6 per cent, but then grow by 1.4 per cent in 2009-10, as world income growth recovers. Despite the lower world cotton demand, lower world cotton production means world cotton carryover stocks are forecast to decline by 0.4 million tonnes in 2008-09. Virtually no change in world cotton carryover stocks is forecast for 2009-10, as production is expected to match consumption.

Reflecting the expectation of tight world cotton supplies over the next two years, US cotton futures prices in mid-February 2009 ranged from US44 cents a pound for March 2009 delivery contracts, to US59.2 cents a pound for Dec 2010 delivery. Although the futures price is not a forecast at some point in the future, it does represent an opportunity for growers and processors to lock in a forward price. For example, forward cash prices on offer to Australian growers in mid-February 2009 for 2009 crop were $399 a bale of standard quality Australian cotton, rising to $440 a bale for 2010 crop.

Australian cotton harvest to more than double in 2008-09

While shortages of irrigation water have again limited cotton plantings in Australia in 2008-09, the shortages are less severe than in 2007-08 in most cotton growing regions. Although Australian cotton production is forecast to more than double in 2008-09 to 315 000 tonnes, this is still 22 per cent lower than the five year average ending 2007-08 of 405 000 tonnes.

On a production-weighted average basis, the irrigation dams supplying water to the Australian cotton growing regions were around 32 per cent full in mid-February 2009, compared with 35 per cent at the same time in 2008. Assuming average seasonal river flows in the water catchment areas for the Australian cotton industry in 2009, an increase in irrigation water availability for the 2009-10 cotton crop can be expected. However, there is still likely to be less than full allocations in some parts of New South Wales and Queensland. Reflecting an assumed increase in irrigation water, Australian cotton plantings in 2009-10 are forecast to increase to 255 000 hectares, yielding a lint harvest of 494 000 tonnes.

Medium-term outlook

Recovering global demand and lower US cotton production are projected to support world cotton prices at relatively high levels in 2009 and in 2010. However, prices are projected to decline in constant (in 2008-09 dollars) dollar terms from the second half of 2009, as global cotton production moves ahead of consumption and stocks begin to rise again.

World cotton demand expanding

World cotton consumption is projected to grow at around 2.5 per cent a year over the medium term, driven mainly by strongly growing incomes in less developed countries.

World cotton consumption has grown very strongly since the mid-1990s, after having been relatively flat in the previous decade. This is partly explained by lower cotton prices resulting from on-farm cotton productivity improvements and the shift of processing to lower labour cost countries. However, the main driver has been strong income growth, particularly in the emerging economies of China and India.

The long-term trend is for mill consumption of cotton to shift from industrialised countries to less developed ones, particularly away from the United States toward China. This shift was given impetus by the phasing out from 1995 of the Agreement on Textiles and Clothing, also known as the Multi Fibre Arrangement (MFA), which imposed quotas on the amount of textiles developing countries could export to developed countries. The phasing out was provided for under the WTO Agreement on Textiles and Clothing and was completed on 1 January 2005. Despite the phasing out of the MFA, important trade barriers, including quotas and high tariffs, still hinder world trade in cotton products.

Output rising as farm productivity improves

World cotton production is projected to grow steadily to around 28 million tonnes by 2013-14, 1.6 million tonnes higher than the record production to date set in 2004-05. This increase reflects some return of land to cotton production throughout the world and steady improvements in on-farm productivity, resulting importantly from increasing adoption of GM cotton varieties.

In 2008-09, an estimated 48 per cent of world cotton plantings consisted of GM varieties with insect resistance and herbicide tolerance traits. There are also GM cotton varieties which offer additional productivity improvements which have already been adopted in the United States and Australia which will spread to other countries over the medium term. Since India adopted GM cotton varieties in 2003-04, it has gone from being a substantial net importer of cotton to being the second largest exporter of cotton.

By 2013-14, US cotton production is projected to be more than 0.8 million tonnes higher than in 2008-09, despite strong competition for available cropping land in the United States. The new US farm program which governs US farm program benefits through to crop year 2012 will be an important influence on the level of US cotton production over much of the medium term.

Brazil also has the potential to markedly increase cotton production, but land shifted out of cotton production in 2008-09, mainly because of high soybean prices. With some easing in world soybean prices from the high levels of 2008-09, Brazilian cotton production is projected to begin growing again, reaching 2.2 million tonnes by 2013-14. This is more than 75 per cent higher than in 2008-09.

Increased cotton yields, resulting mainly from better integrated pest management, are also expected to boost cotton production in India and China. A factor in the increased cotton yields in these countries (and other countries) is the adoption of improved GM cotton varieties with two genes conferring protection again insect pests.

There is also potential for increased cotton production in Pakistan over the medium term. While GM cotton is not approved for commercial use in Pakistan, illegal GM varieties are believed to have made up 60 per cent of Pakistani cotton plantings in 2008-09. However, these illegal varieties are not adapted to Pakistani conditions and it will probably be two years before suitable GM varieties are available.

Australia cotton production to recover over the medium term

Most cotton production in Australia is irrigated but there is also some dryland cotton production, mainly in Queensland. Australian cotton production has been severely affected in recent years by drought which has substantially reduced water availability for irrigation.
Irrigated cotton remains the most profitable irrigated broadacre crop in most areas where cotton is traditionally grown in Australia. This was even the case in recent years when prices were very high for the other summer crops (sorghum, sunflowers and soybeans) which can also be grown in the same areas. For example, for north-west New South Wales in 2008-09, estimated gross margins (expected gross revenue less variable costs) were better for cotton than for the various production alternatives, on both a per hectare and per megalitre of water basis.

Despite the succession of droughts, a recent ABARE survey of irrigated farms in the Namoi region of the Murray-Darling Basin showed cotton farms earned the rate of return of 5.3 per cent in 2006-07.

When irrigation water is abundant, there is potential to plant more than 500 000 hectares of cotton (both irrigated and dryland) in Australia. However, given an assumption of average seasons in terms of water availability, cotton plantings in Australia are projected to be 345 000 hectares by 2013-14, producing 719 000 tonnes of cotton lint.

Improved integrated pest management systems, particularly systems based on the use of insect resistant GM cotton varieties, have raised the possibility of the introduction of cotton production into tropical regions of Australia. In particular, some expansion of cotton production into the Burdekin region of Queensland is possible over the medium term. Plantings in this region in 2008-09 were around 1050 hectares, increasing from around 700 hectares in 2007-08. Cotton is planted in the Burdekin region considerably later than in the more southern growing areas and is likely to be grown in rotation with sugar cane. Plantings of up to 3000 hectares are possible by 2013-14.

There is also the potential for cotton to be grown in other tropical regions, such as the Ord River area of Western Australia and the Northern Territory. Field trials of GM cotton varieties in the Ord region over the past decade appear to indicate a dry season irrigated crop may be profitable in rotation with other crops already grown on the Ord. A change of government in Western Australia has seen a lifting of the moratorium on commercial production of GM cotton in Western Australia. In December 2008, the state and federal governments announced the intention to expand the area of irrigated agriculture on the Ord, provided a feasibility study to be released in March 2009 indicates the expansion is viable. A viable cotton industry on the Ord would require substantial additional releases of land in excess of the 13 000 hectares already available. Despite the potential, the lags associated with development suggest commercial scale cotton production on the Ord River is unlikely to occur during the projection period.

Climate change and its implications are an emerging issue for the Australian cotton industry. In the five years to 2006-07, cotton crops accounted for 26 per cent of the irrigation water applied for agricultural purposes in New South Wales and 11 per cent in Queensland. For the industry generally, climate change may mean reduced rainfall and, therefore, reduced irrigation water from surface and groundwater resources. However, for some more northerly growing regions, climate change could mean more rainfall.

The current assessment of reductions in surface water availabilities in the main cotton growing regions are shown in the table below.

Although such estimates are of longer term concern to the Australian cotton industry, for the projection period to 2013-14, the effects of climate change on the Australian cotton industry are assumed to be minimal. Any climate change related reduction in water availability is assumed to be largely offset by improvements in water use efficiency.

Cotton in the Ord River Irrigation Area (ORIA)

The ORIA is 90 kilometres from the port of Wyndham and is closer to Indonesia, Australia’s second largest export market for cotton, than the existing cotton producing regions in New South Wales and Queensland.

The existing irrigated area in ORIA is 13 000 hectares. Land releases of up to 30 000 hectares are possible with Stage 2 of the Ord River development, 47 per cent of which is in the Northern Territory. The recent announcement by the Western Australian Government of plans to proceed with Stage 2 of the ORIA involves 14 000 hectares on the Western Australian side of the border.

There was a cotton industry in the ORIA in the 1960s, but it was abandoned because of insect control problems.

In 2006-07, the main uses of land in the ORIA were cane growing, tropical forestry (mainly sandalwood) and horticulture (mainly mangoes, melons, pumpkins and grapefruit). Commercial cane growing in the ORIA ceased in 2007 with the closing of the sugar mill.

Cotton in the ORIA would likely be a dry season crop, planted at the end of the wet season in March/April. This compares with a planting time of September to November in New South Wales and Queensland (with the exception of the Burdekin region).

The yield performances from field trials of GM cotton in the ORIA generally compare favourably with existing cotton producing regions in Australia and the rest of the world. The exception is 2007-08 when cool weather and crop management issues adversely affected yields.

However, the quality of the cotton produced on the ORIA in these GM trials generally has been poor in terms of fibre length and micronaire, though there has been some improvement in recent trials in response to breeding and improved crop management.

The minimum economic size of a cotton gin is generally believed to be at least 60 000 (227 kilogram) bales. The average cotton ginning charge in New South Wales and Queensland in 2007-08 was around $55 a bale. Financial analysis suggests the estimated ginning cost for a gin handling 70–100 000 bales a year in the ORIA is $60 a bale.

Based on field trials, there is reason to believe the on-farm costs of cotton production in the ORIA will be low by world standards, just as they are in New South Wales and Queensland.

Areas planted of crops and forestry, ORIA, 2006-07

However, a key factor with the failure of both the rice and sugar industries in the ORIA was throughput was not large enough to ensure the viability of processing plants. For example, with sugar, an annual throughput of one million tonnes of cane was required, while only around 450 000 tonnes of cane was produced. Therefore, the provision of cotton ginning facilities, particularly during the development stages of the cotton industry, will be crucial.

The availability of skilled labour in the ORIA will also be an issue. Cotton is a technically difficult crop to grow, typically requiring each grower to hire crop consultants to advise on crop management, particularly control of insect pests. The ability to attract cotton consultants to the ORIA will be important to the sustainability of cotton production in the region. Skilled labour is also needed for the ginning and classing processes.

A factor which will assist the development of the cotton industry in the ORIA is that the cotton crop is virtually grown and harvested in the off-season for the eastern states cotton industry. This could mean necessary skilled labour can move between the eastern and western areas, according to season.

Average lint yields, ORIA, Australia and world

ORIA

Australia

world

kg/ha

2003-04

1 907

1 763

652

2004-05

1 930

2 011

740

2005-06

2 133

1 779

731

2006-07

1 612

1 910

761

2007-08

931

2 120

790

2008-09

2 610

Sources: Ministerial GMO Industry Reference Group (2007); Department of Agriculture and Food, Western Australia 2008; ABARE.