Cotton set to face challenges

Cotton to face significant challenges ahead

Cropping
Aa

To better understand the impact of the current situation on cotton, it's worth looking back to previous downturns.

Aa

COVID-19 will mark a significant time in our history, a once in a generation event both in terms of its direct bearing on society and the response of the world to this modern crisis.

Sharp market reactions are seen from the top down, with equities, bonds and commodities falling at rates exceeding the global financial crisis (GFC). National governments have brought in increasingly restrictive lockdown measures, while market analysts - including Rabobank - forecast a global downturn in 2020.

There are few commodities which have come through unaffected, with some markets - including cotton - facing significant challenges ahead. To better understand the impact of the current situation on cotton, it's worth looking back to previous downturns - such as the GFC. Following the GFC, global cotton demand fell 11 per cent year-on-year, or almost 13 million bales, as diminished consumer confidence and incomes reduced sales in clothing, textiles and apparel.

While the COVID-19 outbreak is different in many ways to the GFC, both in terms of impact and reach, it provides a method of comparison.

Rabobank forecasts just a 3pc reduction in 2020 world cotton consumption with several Chinese, Indian and south east Asia spinning mills closing, or running at lower capacity, during respective periods of lockdowns.

While Chinese mills are now back operating, it could be a while before we see recoveries elsewhere. This is likely to cause a short, sharp shock to cotton purchases, as closed mills won't require raw material.

It's true that a short-term demand rise could occur post COVID-19 as millers and manufacturers refill their supply pipelines, but this will not be enough to offset losses expected during the outbreak.

Beyond the current season, there are more hurdles to overcome in the form of a broader economic downturn. Rabobank's base view is for global growth to fall towards 0.7pc through 2020 - down from 2.9pc in 2019 - with recessions appearing in nations such as the US, EU, Japan and Australia. Cotton demand tends to be quite elastic relative to other agricultural commodities and can rocket during times of strong economic growth.

However, during downturns the opposite is often true, as hard times cut purchases of non-essential clothing, or drive consumers towards cheaper synthetic fabrics. With that in mind, there is a real possibility that the industry faces a similar decline to the GFC. This will depend on how long, deep and widespread any economic downturn becomes, the impact of which will only be fully quantified in time. One thing is for sure, the medium-term outlook points to harder times for cotton.

So how does that leave Australian cotton? From a trade perspective, future Australian cotton exports should be somewhat insulated as world demand falls more broadly.

Going back to the GFC, a 22pc fall in global trade was felt most heavily by lower-quality, bulk exporters such as India, Uzbekistan and, to a lesser extent, the US. Australian cotton fared relatively well, amid both its high quality fibre offering and advantageous position into Asian markets.

However, this time around, there is a growing feeling that southern hemisphere competition from Brazil could erode Australia's advantageous market position. We have yet to experience the full extent of Brazil's cotton influence, given their rise occurred during the east coast drought - only time will tell.

Aa

From the front page

Sponsored by