With demand not rising to meet rebounding global production predictions, cotton prices are expected to remain subdued for Australian growers. Photo: Cottton Australia

AN EXPECTED rise in global cotton supply for the 2024-25 season is putting pressure on Australian prices, as export markets look to absorb large volumes from the US and Brazil, according to Rabobank.

It is currently predicted 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.

In a recently released report, RaboResearch commodities analyst Paul Joules said the improved world supply outlook was already being felt on markets, with global prices trending down since this year’s second quarter 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 $600/bale mark,” Mr Joules said.

“Local cotton prices have been largely tracking US futures lower, but the decline in Australia has not been as sharp.”

Mr Joules said, while the prospects of Brazil’s record crop alongside the US’ recovery were the overarching themes surrounding current market sentiment, potential upside for prices exists if weather-related issues were to arise.

“Weather risks to production remain, with Texas the primary concern amid prolonged dryness.

RaboResearch commodities analyst Paul Joules

“Global pricing will remain sensitive to any signs of further deterioration, as this could lead to cuts in crop estimates.”

Aus production pegged at 5Mb

Current expectations are for another strong cotton production year for the 2024-25 season at about 5 million bales (Mb), according to the latest figures from the United States Department of Agriculture.

“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 percent, which is purely driven by outstanding production increases seen in the 2020-21 and the 2021-22 seasons.”

Ending stocks of Australian cotton for the season are expected to fall by 235,000 bales to 3.91Mb, according to the USDA forecasts, the lowest since 2020-21.

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

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.

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

Global supplies to recover

The USDA has forecast global cotton production to strongly increase on last year, led by higher output in US and Brazil.

After prolonged dry weather in key regions cut the total crop to about 12Mb, the lowest output since 1986-87, US cotton production looks set to reach a three-year high in 2024-25.

Mr Joules said Brazil may be on track to produce its largest cotton crop on record, if the USDA’s current forecast at 16.7Mb for its 2024-25 production prove correct.

“Brazil has increased production rapidly over the past five years, with a CAGR (compound annual growth rate) of 12pc.

“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.”

Uncertain demand

While production appears strong across key growing countries, Mr Joules said the market needs to see clear signs of strengthening global demand in order for prices to strengthen.

“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.

“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.”

Mr Joules said 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.”

Source: Rabobank