As the Australian cotton harvest wraps up and growers look to next season, there is good reason for optimism, with Rabobank forecasting domestic prices to remain strong – above $520 per bale through 2017/18.
The agricultural banking specialist’s just-released industry report, Australian Cotton Outlook – Three good reasons for optimism, cites currency weakness, the premium for Australian cotton (largely due to its quality) and global economic recovery as the three factors underpinning the local sector’s profitability in the near-term.
And beyond the next 12 months, the report says, there is additional cause for optimism – largely due to the prospect of recovering Chinese import demand.
Report author, Rabobank commodity analyst Charles Clack says the near and medium- term outlook bodes well for growth and investment in Australia’s cotton industry.
“This is despite the anticipated softening in global cotton prices, with the recent run of high prices driving an expansion in global acreage,” Mr Clack says.
“The US is expected to drive much of the four per cent increase in global plantings that is foreseen in 2017/18, but production could also increase in India, Pakistan and China.”
Mr Clack says the increased global availability of cotton for export is likely to place downward pressure on world prices, despite strong demand which is forecast to increase as economic growth improves.
“In the next 12 months, we don’t see the increase in cotton demand exceeding the anticipated hike in global cotton production,” he says.
“However, Australian cotton prices are expected to be largely buffered from any fall in international prices, as the Australian dollar provides some offset.”
The cash premium for Australian cotton is also expected to remain high (over alternative origins), he says, due to Australia’s off-cycle export season and superior fibre quality and, to a lesser extent, Australia’s freight advantage into Asia.
Mr Clack says these factors, as well as strong hand-to-mouth demand from spinning mills as they replenish stocks, should support Australian prices above AUD 520/bale in 2017/18 – shoring up profitability for many growers next year.
“However, much will hinge on production prospects, with the current season throwing up many challenges and resulting in highly variable yields,” he says.
China key to medium-term outlook
With the world’s ‘cotton heavyweight’ China looking for imports by the end of the decade, a golden opportunity could open for exporters, and in particular Australia, the report says.
It cites Australian cotton’s superior quality, off-cycle export year, and market access as factors that should see it hold considerable competitive advantage over many other exporters.
“China currently holds 50 million bales in reserve,” Mr Clack says, “which is equivalent to 54 per cent of global cotton stocks. However at their current destocking rate, Rabobank anticipates China could reduce their stocks by close to 10 million bales per year.”
Mr Clack says this would see Chinese stocks return to a more manageable 20 million bales by 2019/20. At this point, with consumption remaining at a similar level, a supply deficit of around 10 million bales per annum would need to be filled by a substantial increase in local production or a change in government policy to allow for more imports.
“Although it is too early to call, it appears that a combination of both these factors will be required to fill this gap,” he says, “putting Australia in the ‘box seat’ to fulfil Chinese demand, given its geographic proximity, reputation for quality, and export focus.”
Rabobank Australia & New Zealand Group is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has nearly 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of approximately 8.6 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.
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Email: denise.shaw@rabobank.com
Skye Ward
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Rabobank Australia
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Email: skye.ward@rabobank.com