Water uncertainty, global trade tariffs and unprecedented volatility on the futures market makes for an uncertain outlook when it comes to the Australian cotton price outlook.
Taking into account the international Intercontinental Exchange (ICE) number two futures market, local basis and vagaries in the Australian dollar (versus the US dollar), Rabobank recently released its latest forecast for Australian cotton prices - with both good and bad news for domestic cotton growers.
Let's start by focusing on the international cotton outlook and with a US-China trade deal now off the table, the ICE number two futures price sits well and truly in the doldrums.
December 2019 prices are currently facing 32 month lows, given a particularly challenging demand outlook for US cotton.
With a prolonged trade war anticipated into the foreseeable future, Rabobank forecasts the ICE number two to trade around an average of US65 cents a pound into late 2019 - in itself setting a negative tone for the Australian price outlook.
In addition to trade developments, the 2019/20 season is set to bring production hikes across the US, Brazil and India - a factor set to raise World (excluding China) production to a record 98.7 million bales and, subsequently, weigh on global prices.
Strong output prospects follow strong relative cotton margins last season, particularly in the US and Brazil. With global demand only set to grow marginally next season - up by just two to three per cent - the net result is a likely swell of exportable global cotton stocks in 2019/20.
Now for the good news, which surrounds Australian basis levels.
This premium for Australian cotton over the ICE number two currently sits at an unseasonably high 1400 points (equivalent to almost $100 a bale), driven predominately by rising demand from China - the world's largest importer.
Chinese buyers are already switching away from now heavily tariffed US cotton, which should continue as China hikes 2020 imports a further 25pc (year-on-year).
Australia should continue to benefit from access to the Chinese market coupled with a relatively short freight route.
Closer to home, domestic drought also continues to support the local basis. Rabobank expects this basis to stay strong through Q3 2019 - averaging 1200 points - before slipping slightly to 1000 points by Q4 2019, with the arrival of Brazil's six million bale exportable new crop and further details over a near 22 million bale US crop.
Finally, domestic cotton prices will benefit from depreciation in the AU dollar. Rabobank forecasts the Australian and US dollar to fall to US67c in the next six-months, supporting prices in the cotton industry which sees virtually all production bound for export.
Consolidating the factors above, Rabobank forecasts Australian cash prices of just over $600 a bale to stick around through Q3 2019.
Prices are then set to dip to AU$560 a bale in late 2019, predominately driven by weakness in futures markets as weighty 2019/20 supplies become available.
Longer-term, prices are set to touch $576 a bale by Q2 2020. Despite the outlook looking bearish - when compared to the $640 to $650 a bale prices experienced through mid-May 2019.
Rabobank's latest outlook remains exposed to multiple risk factors, such as improving US-China relations, currency shifts and global weather shocks - particularly US hurricanes, Australian drought and Brazilian frost. And these could pose significant risks to our local forecast.