FALLS in global cotton production during the 2015 season were more ‘good luck’ than planning with low crop yields accounted for much of the decline. And Commonwealth Bank director of Agri Commodities Strategy, Tobin Gorey, says declines in 2016 might even be greater.
“Global income growth is slow and so is fibre consumption, cotton included,” Mr Gorey said.
“The fashion cycle has yet to respond to cheaper cotton prices – fashionably late.
“This holds out some hope that cotton might gain some market share over the next year or so.”
Mr Gorey said Australia’s cotton growers had suffered from lower prices and intermittent water availability.
However, he said Australia’s high yields had cushioned profitability at low prices. Those high yields also drive the modest expansion in Australia’s cotton capacity, he said.
Mr Gorey said CBA’s Agri-Insight’s survey had captured this continued trend.
“China’s mountainous cotton inventories – still about two years of their consumption – have cast a shadow over the cotton market for many years,” Mr Gorey said.
“Our view is that the passage of time is, effectively, eroding that cotton mountain and so reducing the threat to the market.
“Time means that the quality of the cotton – not high to begin with – has declined.
“The degree of the decline means much of the inventory can probably only be used via blending.
“Quality control means much of China’s reserve cotton is off market and longer a threat to prices.”
Mr Gorey said cotton prices were probably near the low point for this cycle.
“We are a little sceptical of the recent rally,” he said. “Should that peter out though, there’s a good chance that any fall in prices will only be to (or just slightly below) levels we have already traded this year.
“The outlook for 2017 is brighter. We expect that China will probably be importing more the cotton by then.”
