Rabobank Australia, Media Release, 26 August 2024

An expected increase in global cotton supply in the 2024/25 season is weighing on prices for Australian producers, as export markets look to absorb large volumes from the US and Brazil, Rabobank says in a recently-released report.

The agribusiness banking specialist says expectations are that world cotton stocks will rise in the coming season – largely driven by a recovery in production in the US and a potential record crop in Brazil.

Meanwhile, global demand for cotton is not expected to grow enough in the year ahead to absorb the additional supply, it says.

Report author, RaboResearch commodities analyst Paul Joules says the improved world supply outlook is already being felt on markets, with global prices on a downward trajectory since quarter two this year and ICE #2 cotton futures now trading around levels not seen since November 2020.

“In terms of local price, Australian cash markets have also been in a state of decline in recent months, with prices for the 2024 crop notably below the AUD 600/bale mark,” he said. “Local cotton prices have been largely tracking US futures lower, but the decline in Australia has not been as sharp.”

However, while the “prospects of a record Brazilian crop alongside US recovery are the overarching themes surrounding current market sentiment” in cotton, there is some potential upside for prices, the report says, if weather-related issues were to arise, putting a dent in crop expectations.

“Weather risks to production remain, with Texas the primary concern amid prolonged dryness,” Mr Joules said. “Global pricing will remain sensitive to any signs of further deterioration, as this could lead to cuts in crop estimates.”

Global production

For now though, the report says, the United States Department of Agriculture (USDA) forecasts are pegging global cotton production to strongly increase on last year.

US production is expected to recover, after prolonged dry weather in the country’s cotton-growing regions last year saw the 2023/24 season total just over 12 million bales, the lowest output since 1986/87.

Prospects for the 2024/25 US season indicate a strong year-on-year recovery, with weather having improved dramatically for much of the US growing area this year, Mr Joules said, and the USDA forecasting production to reach a three-year high

Meanwhile, Brazil may be on track to produce its largest cotton crop on record, if the USDA’s current forecasts for that country’s 2024/25 production prove correct – at 16.7 million bales.

“Brazil has increased production rapidly over the past five years, with a CAGR (compound annual growth rate) of 12 per cent,” Mr Joules said. “This impressive growth means the country is now competing with the US to be the world’s third-largest producer of cotton globally, behind China and India.”

‘Murky’ demand

On the global demand side, the “picture is murky”, according to the Rabobank report.

And the market needs to see clear signs of strengthening global demand in order for prices to strengthen, Mr Joules says.

“After global demand hit a seven-year low in the 2019/20 season due to the pandemic, demand has increased over the past four seasons,” he said.

“However, demand has struggled to return to its pre-pandemic baseline. And economic headwinds in major cotton-consuming countries are contributing to the market expectation of muted growth in global demand.”

The USDA anticipates global demand to rise modestly year on year in the 2024/25 season.

“But this level of demand growth won’t be enough to prevent global ending stocks for cotton from rising on the previous year,” Mr Joules said.

Australia

For Australia, the report says, another year of strong cotton production can be expected, with “an impressive” five million bales forecast for the 2024/25 season by the USDA. This is in line with last year’s production, Mr Joules said.

“Although the year-on-year comparison in production is nothing to get excited about, the five-year growth has been very impressive, with a compound annual growth rate of 74 per cent, which is purely driven by outstanding production increases seen in the 2020/21 and the 2021/22 seasons,” he said.

Ending stocks of Australian cotton for the season are expected to fall by 235,000 bales to 3.91 million bales, according to the USDA forecasts – the lowest stock level since 2020/21, Mr Joules said.

Australian cotton exports are forecast to decline by 400,000 bales year on year to 5.4 million bales.

Mr Joules said “unsurprisingly”, the predominant export markets for Australian cotton in the first half of the 2024 calendar year were China, Vietnam, Indonesia and Bangladesh.

“The reemergence of strong Chinese import volumes of Australian cotton has been a huge bonus for demand,” he said.

“Other positive factors for Australian prospects are the growing markets in Vietnam and Indonesia.”