natural fibres outlook for wool and cotton to 2011-12 anton wood, frank drum, ian shaw and dale ashton wool anton wood and dale ashton
The structure of the Australian sheep industry has changed significantly over the past decade. In particular, increased production of prime lambs and the movement of resources away from wool production in favour of cropping have reduced sheep producers’ reliance on income from wool. More recently, persistent drought in many regions has contributed to further declines in sheep numbers and wool production.
Looking ahead, the short term outlook for the sheep industry will depend heavily on seasonal conditions, particularly the timing and extent of any break in the drought. Assuming there is an improvement in seasonal conditions in 2007-08, sheep producers will be faced with a variety of choices concerning enterprise mix in both the short and medium terms. These choices will be influenced by a range of factors, including the relative returns available from various enterprises, and the current financial situation of individual farmers.
At the same time, longer term issues such as competition between wool and other fibres and changes in demand for wool and sheep meat will continue to be important factors influencing market outcomes.
prices reflect supply concerns
The Australian eastern market indicator of wool prices rose sharply in the first half of 2006-07. Between July and October 2006, the eastern market indicator averaged around 748 cents a kilogram clean, before rising to around 920 cents a kilogram in February 2007.
The sharp increase in wool prices was largely a result of growing concerns about the duration of the drought and its likely impact on future wool supplies, together with stocks of wool currently held on farms and in brokers’ stores being low. In December 2006, the Australian Wool Innovation Production Forecasting Committee revised its forecast of Australian shorn wool production to 420 000 tonnes in 2006-07, down 8 per cent from the previous year. Poor seasonal conditions through winter and spring 2006 contributed to lower numbers of sheep shorn and reduced average fleece weights.
In 2007-08, the Australian eastern market indicator is forecast to decline by 1 per cent to average around 830 cents a kilogram clean, as competition from alternative fibres remain strong and the outlook for wool supply improves.
Australian wool production to rise
Assuming seasonal conditions improve over the coming year and result in higher average fleece weights, Australian shorn wool production is forecast to rise slightly in 2007-08. Although the numbers of sheep shorn is forecast to be down, the Australian sheep flock is forecast to remain around 94 million by June 2008, largely through improved lambing rates. However, the rate of flock rebuilding is likely to be subdued as producers turn off greater numbers of lambs for slaughter in response to improved lamb prices.
The timing and extent of a seasonal break and the resulting prospects for pasture growth are likely to be important to wool outcomes. Sheep producers’ current decisions about joining ewes, including numbers and breeds, will be partly influenced by the likelihood of feed being available through winter 2007. Over the medium term, shorn wool production is projected to increase to 473 000 tonnes in 2011-12 as the sheep flock is gradually rebuilt.
wool outlook – Australia
2004
2005
2006
2007
2008
2009
2010
2011
Unit
-05
-06
-07
f
-08
z
-09
z
-10
z
-11
z
-12
z
Eastern market indicator (clean)
– nominal
Ac/kg
767
713
835
830
820
815
810
800
– real a
Ac/kg
816
736
835
810
781
757
734
707
Auction price (greasy)
Ac/kg
485
464
526
523
516
513
510
504
Sheep numbers b
million
101
100
94
94
96
98
100
103
Sheep shorn
million
104
103
101
97
98
100
102
105
Cut per head
kg
4.57
4.43
4.16
4.35
4.39
4.40
4.45
4.50
Wool production (greasy)
– shorn
kt
475
456
420
422
430
440
455
473
– other c
kt
45
53
52
43
45
52
53
51
– total
kt
520
509
472
465
475
491
508
524
Total closing stocks d
– weight (greasy)
kt
157
158
154
154
154
154
154
154
Wool exports (balance of payments basis)
– volume (greasy equiv.)
kt
515
498
472
472
475
491
508
526
– nominal value
A$m
2 838
2 544
2 829
2 810
2 794
2 867
2 951
3 020
– real value a
A$m
3 021
2 624
2 829
2 741
2 660
2 662
2 673
2 669
a In 2006-07 Australian dollars. b Closing sheep and lamb numbers at 30 June. c Includes wool on sheepskins, fellmongered and slipe wool. d Privately held stocks of unsold wool. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Australian Wool Exchange; ABARE.
modest growth in wool consumption
With world economic activity and consumer incomes assumed to continue to grow over the next few years, demand for textiles and apparel is forecast to be stronger. However, the degree to which this is translated into higher wool consumption will be affected by how wool producers and textile manufacturers respond to the recent higher prices. The extent to which stronger consumer demand for textiles and apparel translates into stronger demand for any particular fibre — such as Australian raw wool — will depend largely on competition among fibres at intermediate processing stages.
Apart from the particular attributes of individual fibres, competition among fibres at intermediate processing stages is largely based on price. Prices for synthetic fibres, the main substitute for wool, have trended downward in real terms since the 1960s. Because of the ready substitutability of synthetic fibres for wool in most apparel, wool prices have also trended down, thus maintaining their overall competitiveness. Continuing productivity improvements in synthetic fibre manufacture means that synthetic fibre prices can be expected to continue trending down over the longer term.
The ratio of wool prices to synthetic fibre prices provides a guide to wool’s competitiveness relative to synthetic fibres. Following the recent sharp rise in wool prices, the ratio of wool prices to synthetic fibre prices was 3.7:1 in January 2007, compared with the long term average of around 3:1.
In making production decisions, processors will attempt to minimise the cost of combining raw fibres with other inputs to meet the requirements of apparel retailers. Substitution of fibres will occur in response to relative price changes, depending on the extent to which different fibres can be spun into yarns with similar end use characteristics.
wool prices to ease from current highs
Over the medium term, competition from other fibres will continue to place downward pressure on wool prices. At the same time, modest economic growth in key wool consuming markets is expected to result in improvements in overall demand for textiles and apparel, some of which will include increased demand for items made from wool.
In the five years to 2011-12, the eastern market indicator is projected to fall by 15 per cent to around 710 cents a kilogram (in 2006-07 dollars). However, there is likely to be considerable volatility in wool prices from time to time resulting from periodic supply shocks, given the current situation of low wool stocks and uncertainty about seasonal impacts over the medium term.
There are a number of risks associated with the outlook. On the production side, the timing of an end to the current Australian drought remains uncertain. In particular, the duration and geographic spread of the drought will have important implications for the size of the sheep flock and the volume of wool production over the next few years.
On the demand side, some potential downside risk is posed by developments in world economic growth, consumer incomes and demand for textiles and apparel in major wool consuming countries. Also, because of the decline in Australian wool availability over the past year, the extent to which increased spending on textiles and apparel as a whole will translate into increased demand for raw wool remains unclear.
From a longer term perspective, the major reduction in availability of wool in recent years may mean a largely permanent shift out of wool by some processors. Lower supplies of wool (compared with availability over the past decade) are likely to mean that there is a substantial excess of wool processing capacity. As currently underutilised wool textile machinery is converted to processing other fibres, the demand for raw wool will decline until it eventually reaches a more sustainable supply–demand equilibrium.
changes in Australian wool export destinations
A feature of the Australian wool market over the past decade has been some major shifts in the destinations of Australian wool exports. — in particular, the increased importance of China in the world wool market, both as an importer of raw wool and an exporter of finished woollen apparel. Despite declines in Australian shorn wool production, shipments of Australian wool to China in 2005-06 are estimated to have been around 9 per cent higher than in 1999-2000. In percentage terms, China accounted for 58 per cent of Australian wool exports in 2005-06, compared with 34 per cent in 1999-2000.
China is also a significant producer of raw wool and has a large domestic market for woollen textiles and apparel. Australian Wool Innovation Limited has estimated that around 65 per cent of Australia’s raw wool exports to China are absorbed by China’s domestic market. Reflecting assumed strong income growth over the medium term, China’s domestic demand for woollen textiles and apparel is expected to strengthen.
In contrast, although the European Union remains an important final consumer of woollen products, movement of processing capacity to lower cost countries has meant a significant reduction in the volume of Australian wool exported to the European Union — down from 256 000 tonnes in 1999-2000 to around 84 000 tonnes in 2005-06.
Since 1999-2000, there have also been significant declines in Australian wool exports to Japan and the Republic of Korea, both formerly major destinations for shipments of Australian wool. Total shipments to these two countries fell from 81 000 tonnes in 1999-2000 to around 14 000 tonnes in 2005-06.
potential for rebuilding the flock
An issue of critical importance to the future of the Australian sheep industry is the ability of the national flock to recover from the effects of the drought. In particular, present flock numbers cannot be maintained if the slaughter of adult sheep and lambs continues at present rates. The number of lambs marked, minus sheep and lambs slaughtered, live exports and deaths defines the change in sheep numbers during any given year. In recent years, the number of sheep and lambs slaughtered plus live exports and deaths has exceeded the number of lambs marked and resulted in declining sheep numbers.
Despite an overall decline in sheep numbers, the proportion of breeding ewes in the flock is estimated to have risen over the past year as wethers would most likely have been the first animals turned off as the drought worsened. If this was the case, the current flock would be well positioned to increase lambing numbers once seasonal conditions allow.
Also, lamb marking rates have generally increased over the past decade. With increased emphasis on first and second cross lamb production, the trend toward higher lambing rates for the flock as a whole is expected to continue over the medium term. Increased lambing each year will better allow both higher lamb slaughter and a greater number of lambs to be retained for the adult flock.
Total sheep slaughterings will also be important. With the trend toward increased prime lamb production occurring over the past decade, any reduction in slaughterings is more likely to be from the adult sheep population as returns from wool and prime lambs encourage flock rebuilding.
enterprise mix will be important
The amount of resources (including land) devoted to wool, beef and crop production in Australia has varied over time. Resource use in the different broadacre agricultural enterprises is influenced by many factors, including changes in the relative prices of the commodities being produced, and different rates of productivity improvement among each enterprise.
In deciding on strategies for recovering from the drought, Australian broadacre agricultural producers will be faced with important decisions on how best to allocate resources between various production activities. The many individual decisions that will be made, when aggregated across the sector, will have important implications for how the farm sector develops over the next few years.
Among the most critical decisions, in terms of their aggregate effect, may occur on mixed livestock–cropping farms. In deciding on the mix and scale of farm activities, producers take into account returns from a range of enterprises, such as wool, lamb, mutton, beef cattle and crops.
Over the next five or six years it is likely that the area under grains and other crops will be largely maintained or increased to some extent from predrought plantings. This is not surprising given the large on-farm investment in grain growing equipment and infrastructure in recent years and prospects for continued relatively good returns from grains.
Nevertheless, with wool prices projected to remain relatively attractive to producers over the medium term there are likely to be increased incentives for some movement of resources back into sheep and wool production.
Within the sheep industry itself, the likelihood that production costs in many areas may not vary much between the different types of sheep enterprises means that prices received by farmers for wool and sheep meat will be the most important determinant of incomes from these enterprises. Relative movements in wool and sheep meat prices influence the breed, age and sex composition of the flock. Prices will therefore have a strong effect on the types of sheep run and, hence, on the production of wool, lamb and mutton.
cotton frank drum and chloe haseltine
prices to rise in early 2007 and over the medium term
Growth in world cotton consumption in 2006-07 is forecast to exceed production, leading to a decline in stocks. Reflecting this, the Cotlook ‘A’ price index is forecast to increase by 5 per cent in 2006-07 to average US59 cents a pound. In 2007-08, the Cotlook ‘A’ index is forecast to increase by 4 per cent to average around US61 cents a pound, underpinned by a forecast increase in demand for cotton in China, India and Pakistan. With world cotton production forecast to remain relatively unchanged in 2007-08 at 25.3 million tonnes, world cotton stocks are forecast to fall to around 9.2 million tonnes, the lowest in four seasons.
World cotton consumption is projected to exceed production over the five years to 2011-12, leading to a decline in stocks and some increase in prices in real terms. However, the increase in cotton prices is expected to be constrained by two key factors — the price competitiveness of cotton relative to synthetic fibre substitutes, and increased availability of lower quality cotton, particularly from India, Pakistan and China. In 2011-12, cotton prices in real terms (2006-07 dollars) are projected to average around US63 cents a pound, around 7 per cent above the current estimate for 2006-07.
world production to change little in 2007-08
World cotton production is forecast to remain relatively unchanged in 2007-08 at 25.3 million tonnes, with forecast higher production in India and Pakistan likely to offset lower production in China and the United States.
China
Cotton production in China is estimated to have increased by 17 per cent in 2006-07 to 6.7 million tonnes, underpinned by an increase in both the area planted and yields. Ideal growing conditions and the increased adoption of genetically modified cotton varieties contributed to increased yields to an estimated record 1.25 tonnes per hectare, 6 per cent above the previous record in 2002-03.
The area planted to cotton in China is forecast to increase by 4 per cent in 2007-08 to 5.6 million hectares, as farmers responded to the increased returns from the crop in 2006-07. However, with an assumed return to average yields, cotton production in China is forecast to fall by 3 per cent in 2007-08 to 6.5 million tonnes.
India
High domestic cotton prices in the leadup to planting of the 2006-07 cotton crop, resulted in the area planted to cotton in India increasing by 5 per cent to 9.2 million hectares. Reflecting this, and a 4 per cent increase in cotton yields, cotton production in India is estimated to increase by 9 per cent in 2006-07 to 4.6 million tonnes.
In 2007-08, cotton production in India is forecast to increase by a further 9 per cent to 4.8 million tonnes, driven largely by an increase in planted area and expected higher yields. Underpinning the improvement in yields, will be the continued adoption of genetically modified (GM) cotton varieties. The area planted to GM cotton increased from 1.35 million hectares in 2005-06 to 3.5 million hectares in 2006-07 (38 per cent of Indian cotton area).
United States
US cotton production is estimated to have fallen by 9 per cent in 2006-07 to 4.7 million tonnes as relatively poor seasonal conditions in some regions resulted in lower yields and a higher abandonment rate (the percentage of the area planted that is abandoned before harvest), compared with recent seasons.
In 2007-08, expected lower returns from cotton production, relative to alternative crops such as corn and soybeans are likely to lead to some reduction in the area under cotton and, hence, to lower production. In the Mississippi Delta region, for example, it has been estimated that US cotton prices would need to average US67 cents a pound and US72 cents a pound, respectively, to be as profitable as corn and soybean production. To the extent that such estimates are reflective of likely relative returns across areas of the United States with broadly similar growing environments, it is likely that, with domestic cotton prices in the United States having averaged around US47c/lb in the first five months of 2006-07, growers will be moving some of their land from cotton into these more profitable crops where agronomically feasible.
Consistent with the above estimates, a recent National Cotton Council of America acreage survey has found that producers plan to reduce US cotton areas by 14 per cent in 2007-08. The largest reductions are expected in the south east and the midsouth, with producers expected to plant 20 per cent fewer hectares. Smaller declines are expected in the south west and far west. With yields assumed to be consistent with recent averages, cotton production in the United States is forecast to decline by 9 per cent to 4.3 million tonnes in
2007-08.
Outlook for cotton
2004
2005
2006
2007
2008
2009
2010
2011
Unit
-05
-06
-07
f
-08
z
-09
z
-10
z
-11
z
-12
z
World a
Production
Mt
26.25
24.88
25.31
25.28
25.82
26.56
27.14
28.04
Consumption
Mt
23.72
25.26
26.30
26.85
27.10
27.51
28.06
28.73
Closing stocks
Mt
11.79
11.73
10.74
9.18
7.89
6.94
6.03
5.34
Stocks-to-consumption
ratio
%
49.7
46.4
40.8
34.2
29.1
25.2
21.5
18.6
Cotlook ’A’ index
– nominal
USc/lb
52
56
59
61
64
66
68
71
– real b
USc/lb
56
58
59
60
61
62
62
63
Australia c
Area harvested
’000 ha
321
336
143
190
222
260
304
356
Lint production
kt
645
597
250
335
400
477
569
679
Value of production
– nominal d
A$m
1 222
1 105
419
607
780
1 000
1 265
1 611
– real e
A$m
1 301
1 140
419
592
743
929
1 146
1 424
Export volume
kt
410
650
482
279
357
426
508
606
Export value
– nominal
A$m
770
1 137
815
499
694
890
1 126
1 434
– real e
A$m
820
1 173
815
487
661
827
1 020
1 268
Export unit value
– nominal
A$/kg
187.96
174.91
169.20
179.12
194.49
209.12
221.76
236.83
– real e
A$/kg
200.07
180.41
169.20
174.75
185.12
194.19
200.90
209.32
a August–September years. b In 2006-07 US dollars. c July–June years. d Includes cottonseed value. e In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; US Department of Agriculture; ABARE.
production of genetically modified cotton increasing
Average global cotton yields are projected to rise over the outlook period, driven largely by the increased adoption of GM cotton varieties and improvements in growing techniques — particularly in India, Pakistan, Brazil and Africa. Reflecting these trends, world cotton production is projected to increase by 11 per cent over the next five years to reach 28 million tonnes in 2011-12.
In 2006-07, the proportion of world cotton area planted to GM cotton varieties increased by 7 per cent to 12.5 million hectares (around a third of the total world area planted to cotton) — the largest annual increase since the introduction of GM cotton varieties ten years ago. Although adoption of GM cotton in India represented the vast majority of this growth — increasing from 1.35 million hectares to 3.5 million hectares in 2006-07 — a number of other key cotton producing countries made significant steps toward legalising the commercial cultivation of Bt cotton.
In Pakistan, a biotechnology safety commission has been created by the government to assess the benefits of genetically modified cotton varieities — with around 200 000 hectares of GM cotton planted in trials in 2006-07. Assuming the commercial cultivation of GM cotton in Pakistan is legalised, cotton yields in Pakistan are projected to increase by 22 per cent over the outlook period to around 0.8 tonnes per hectare.
Prior to the planting of the 2006-07 cotton crop, the Brazilian Government implemented laws allowing the planting of GM cotton. This resulted in around 13 per cent of the cotton area being planted to GM varieties. The use of GM cotton varieties is not expected to affect yields significantly over the medium term, but their use is likely to reduce production costs for some farmers. Lower production costs combined with stable cotton prices and hence potentially higher returns from the crop are projected to result in the area planted in Brazil increasing by 17 per cent over the five years to 2011-12.
In Africa, where yields were estimated to be 53 per cent below the world average in 2006-07, the impending adoption of GM cotton varieties has the potential to dramatically improve cotton yields. Field trials of GM cotton have been conducted in a number of countries including Burkina Faso (formerly Upper Volta), Egypt, Kenya and Senegal. Commercial releases of GM cotton are expected to be approved in Burkina Faso and Egypt in time for planting the 2007-08 cotton crop.
cotton consumption is growing
World cotton consumption is forecast to increase by 4 per cent in 2006-07 to 26.3 million tonnes, driven largely by a 9 per cent increase in consumption in China, India and Pakistan.
In 2007-08, world cotton consumption is forecast to increase by 2 per cent to around 26.9 million tonnes. The lower rate of growth in consumption reflects easing demand for raw cotton in China and lower assumed world economic growth. Moderating this slowing in growth in consumption of raw cotton will be continued government support and investment in clothing and textile production, particularly in China, India and Pakistan. World cotton consumption is projected to increase to 28.7 million tonnes by 2011-12
Import restrictions on Chinese textiles imposed by the United States and European Union are likely to constrain growth in Chinese textiles production in the short term. In 2007-08, reduced growth in textile production, combined with changes to the sliding scale duty system (see box), is likely to restrict growth in Chinese imports of raw cotton.
In India, the government has announced plans to secure $20.5 billion in new investment in the Indian textile industry over the next five years, as it aims to increase India’s share of world textile production to 10 per cent (currently around 3 per cent) by 2015. In addition, Pakistan recently established a National Textiles Strategy Committee aimed at lowering production costs in its domestic textile industry.
Toward the end of the outlook period, growth in cotton consumption is expected to increase, underpinned by two key factors — increased demand for textiles and clothing from developing countries and increased availability of lower value cotton fibre. With developing countries accounting for around 53 per cent of textile fibre consumption (end use) in 2006, growing incomes in these countries, in line with stable economic growth, is expected to lift demand for clothing and textiles, thus increasing the demand for raw cotton.
Australian production to recover
Below average rainfall in most areas of northern New South Wales and southern Queensland over the past twelve months has resulted in water storages in key cotton growing regions falling to historically low levels. Reflecting this, the area planted to cotton in 2006-07 is estimated to have fallen by 57 per cent to 143 000 hectares — the smallest area planted since 1983-84. In addition, lower water availability and extreme temperatures have affected the development of crops in many areas and is likely to lead to a reduction in yields. As a result, Australian cotton production is forecast to fall by 58 per cent in 2006-07 to 250 000 tonnes.
Assuming a return to average seasonal conditions in 2007-08 and an associated improvement in water storage levels, the area planted to cotton is forecast to increase by 33 per cent to 190 000 hectares. However, it must be emphasised that such an increase will be critically dependent on inflows into water storages. Any significant increases in water allocations to cotton producers for next season are likely to be contingent on the receival of above average rainfall over the next six months.
China changes duties on cotton imports
In 2005, the Chinese Government implemented a sliding scale duty system for imports of raw cotton other than that imported under the tariff rate quota system. Under the system, a reference price was set at US56.86 cents a pound, whereby imports at or above the reference price attracted an import duty of 5 per cent. Imports below the reference price attracted increasing amounts of duty up to a maximum tariff of 40 per cent — providing an economic incentive for Chinese mills to import higher grades of cotton.
Under the new sliding scale system, from 1 January 2007, two reference prices have been set — at US66 and US47 cents a pound. Prices above US66 cents a pound attract fixed duties of 6 per cent, while prices below US47 cents a pound will attract fixed duties of 40 per cent. A sliding scale duty will apply to prices within that range. For prices between US57.5 and US66 cents a pound (the current range of international prices) the cost to the importer after tax will be greater then under the old system. As a result, the margin between domestic and international prices will need to increase significantly to stimulate increased import demand by Chinese mills for imports additional to those under the tariff rate quota which attract a duty of 1 per cent.
water availability a likely constraint on industry growth
Over the medium term, availability of water will be a key constraint on cotton plantings in Australia. Any major increase in the area planted to cotton will be contingent on a number of factors including: increased water allocations to cotton producers, outcomes from the National Water Initiative and the returns from cotton relative to substitute crops.
Reflecting these factors, research into and development of more water efficient irrigation technology will be a key component in achieving expanded areas under cotton. Currently, significant research is being conducted into methods designed to improve water use efficiency in the cotton industry. However, the cost of implementing this technology relative to the potential benefits is currently constraining the adoption of some existing water use efficiency technologies on a wider scale. As the market for trading water use entitlements develops and competition for available water grows and its price rises, some of these technologies will become economically profitable to use.
The returns from cotton relative to substitute crops, may also constrain the area planted to cotton over the medium term. Increased feed grain demand from an expanding feedlot sector and the potential expansion of ethanol production over the medium term, can be expected to place upward pressure on grain prices — especially for grain sorghum. With returns from cotton production expected to remain relatively constant in real terms over the outlook period, some cotton producers may switch part of their land to growing irrigated sorghum crops.
