The pull back by China from global cotton markets has “triggered a swift change in the nature of global cotton trade”, according to a new industry report, with import demand now increasing in the emerging processing hubs of Vietnam and Bangladesh.
The report, Australian Cotton: All about the basis, no trouble, released by agribusiness banking specialist Rabobank to coincide with the Australian Cotton Conference, says the “pendulum swing” away from China has seen Australia increase its cotton exports to alternate markets, particularly Vietnam.
Report author, Rabobank commodity analyst Georgia Twomey says the expansion of the Vietnamese textile industry is having the most profound implications for Australian cotton, with Vietnam’s total cotton imports increasing by 195 per cent over the four years to 2015/16.
“In contrast, China – which has been Australia’s largest cotton customer since 2004 – have reduced their total cotton imports by 82 per cent over the same period – as they work through their extensive stockpile following the implementation of the national reserve stockpile policy in 2011,” she says.
With Chinese cotton stock levels at their peak, reaching a high which is equivalent to two years of domestic use, Ms Twomey says it will take China a number of seasons to run down stocks to a more sustainable level.
“With Chinese import demand expected to remain subdued in the short term, this is expected to limit the upside for the premium of Australian cotton, which is now back around its longer-term average,” she says.
Australian value proposition
The report says while Australian cotton has an “edge” in global markets, with superior fibre quality and speed of delivery to Asian ports, “moving Australian cotton in the new trade environment”, has been a little more challenging due to the price sensitivity in lower-cost manufacturing centres.
“In light of this increasingly competitive marketplace, it is imperative for the Australian cotton industry to demonstrate its value proposition to buyers in a more diverse array of markets,” Ms Twomey says.
“This will really come to the fore when Australia’s export volumes increase, should water availability improve to return the national crop to capacity levels, compared to the 2.5 million bales produced in 2016.”
Ms Twomey says the cotton market saw a 12 per cent price jump in July, fuelled by a bullish USDA World Agricultural Supply and Demand Estimates market report highlighting a bigger-than-anticipated decline in global stocks, as well as increased mill demand and speculator buying.
While these factors are expected to support current price levels in the low to mid US70c/lb range in the near term, Ms Twomey says challenges of competitiveness for cotton relative to competing fibres and production uncertainty may limit the upside potential for global benchmark prices.
”Strategies to increase the value offering of Australian cotton to processors, such as further quality gains, will therefore continue to be important to help buffer Australian growers from improved yet still subdued market conditions,” she says.
This will not only see cotton growers continue to focus on yield growth, with the Australian industry recording strong efficiency gains over the past decade, but Ms Twomey says it is increasingly likely to entail involvement in sustainability programs.
“We are starting to see a retail-driven call for more sustainable cotton and while this doesn’t yet equate to a clear premium in the market, the opportunity for Australia to leverage its credentials as an efficient and low-impact cotton producer are becoming apparent,” she says.
“For example, the Better Cotton Initiative (a global and whole-of-supply chain approach to growing a more sustainable mainstream commodity) may become a useful point of differentiation to secure market share in the future.”