EXCEPTIONAL price strength, both at home and abroad, has been a mainstay of the global cotton market in recent seasons — with US futures trading well above five-year average price levels, while Australian cash prices have regularly touched $600/bale.
Speculation, drought and trade have all played their part in this market strength, but exceptional global consumption growth has undoubtedly been the largest contributor.
The world has been demanding more cotton —three per cent more in 2016/17 and a staggering six per cent more in 2017/18 — with South East Asian buyers leading the charge.
The 2018/19 season has been forecast to bring a more modest three per cent increase in world consumption growth.
However, there are significant headwinds to future demand growth with several developing risks which could sour consumption growth and, ultimately, global prices.
Uncertainty has crept into global markets through 2018, in the form of trade wars, geopolitical tensions and Brexit.
Emerging markets have felt this in the form of their domestic currencies versus the US dollar — the Turkish lira has slumped 29 per cent year-to-date, the Indonesian rupiah is down seven per cent year-to-date while the Chinese renminbi is six per cent lower year-to-date.
As major cotton consumers, these currency swings make imports far more expensive in US dollar terms— tightening manufacturing margins and likely stemming demand.
In addition to emerging market currency weakness, the broader macroeconomic outlook looks equally challenging.
This October, the International Monetary Fund revised its global economic growth prospects lower for 2018 and 2019.
For both years it’s now forecast at 3.7 per cent.
More worryingly, lower growth in developing economies — where textile demand grows most rapidly — was a major contributor to these global downgrades.
If this wasn’t enough, synthetic fibre prices have slumped in line with a 29 per cent fall in crude oil, since October.
Cotton prices fell 2.6 per cent during the same period, giving synthetics a price advantage.
Trade wars are another major threat for world consumption, as Chinese purchases of US cotton have dried up significantly — a factor keeping the Intercontinental Exchange number two futures in check.
From a global perspective, this trade tension threatens to lower overall Chinese usage this season, another threat to global consumption.
Of course, Australia and Brazil continue to be the real winners of this tension, as Chinese demand favours non-US suppliers.
And while the G20 appeared to bring some reprise to this trade war, the market is yet to see anything concrete to shift current trading habits.
Rabobank forecasts world cotton consumption to growth just two per cent (year-on-year) in 2019/20 – the lowest in four years—as the above factors “gather like clouds” above relatively strong price levels.
In many ways, Australia will be sheltered from these broader factors as the local short-term outlook remains focused on localised drought and water issues, plus benefits of the US-China trade war.
Still, these broader challenges will inevitably trickle down in the local domestic markets, which could limit major price upside and volatility.