Cotton prices in the domestic Australian market will remain strong at above AUD 520 per bale through 2017-18, according to a report by Rabobank. The report 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.
Beyond the next 12 months, there is a cause for optimism, largely due to the prospect of recovering Chinese import demand, says the Australian Cotton Outlook – Three good reasons for optimism report by Rabobank.
Report author, Rabobank commodity analyst Charles Clack said 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."
"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," added Clack.
He said that 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. However, Australian cotton prices are expected to be largely buffered from any fall in international prices, as the Australian dollar provides some offset," stated Clack.
The cash premium for Australian cotton is also expected to remain high (over alternative origins), due to Australia's off-cycle export season and superior fibre quality and, to a lesser extent, Australia’s freight advantage into Asia.
Clack added that 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. However, much will hinge on production prospects, with the current season throwing up many challenges and resulting in highly variable yields.
The report adds that 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. 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," Clack said, "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."
Clack added that 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, putting Australia in the ‘box seat’ to fulfil Chinese demand, given its geographic proximity, reputation for quality, and export focus," concluded Clack.