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Max Foster
The world indicator price for cotton (Cotlook ‘A’ index) is forecast to increase to US72.5 cents a pound in 2009-10 (August to July), compared with US62.5 cents a pound in 2008-09. This forecast increase reflects a rebound in world demand because of an assumed recovery in the world economy and relatively tight world cotton supply. The cotton indicator price has been volatile in 2008-09 in response to the effects of the global financial crisis. The indicator declined from a season high of US80.35 cents a pound in early August 2008, to a low of US50.15 cents a pound in March 2009, before recovering to US60.35 cents a pound on 17 June 2009.
The temporal price pattern in the key futures market for cotton reflects the expectation of improving world cotton demand and continuing tightness of world cotton supply, particularly in the United States. At 17 June 2009, cotton futures prices on the International Commodity Exchange were US52.03 cents a pound for July 2009 delivery, rising to US61.52 cents a pound for May 2010 delivery.
The relatively low value of the Australian dollar and favourable cottonseed prices are maintaining returns to Australian cotton growers. At 17 June 2009, the cash price for Australian cotton growers was $350 for a 2008-09 (227 kilograms) bale of lint, with a forward price for 2009-10 crop of $404 a bale.
World production of cotton is forecast to increase to 24.2 million tonnes in 2009-10, compared with 23.5 million tonnes in 2008-09. While low current world prices for cotton on their own mean there is no strong incentive to increase cotton production in 2009-10, returns to alternative land uses (soybeans and corn) have also retreated from their buoyant levels in the previous year. Production increases are expected in 2009-10 in the United States, India, Brazil and Australia, with low current prices deterring plantings in China.
US production is forecast to increase slightly in 2009-10, despite a further fall in the area planted, because of the assumption of a return to more normal abandonment levels compared with 2008-09. The 2008 US farm program operating from 2008 to 2012 will continue to provide benefits which insulate US cotton growers from low world cotton prices.
Cotton plantings in China in 2009-10 are nearing completion and are estimated to be down by 7 per cent. In India, cotton plantings are up slightly in 2009-10, because of the expectation of lower returns for alternative crops. Higher cotton yields are forecast for India in 2009-10, because of an increased adoption of improved cotton varieties arrived at through genetic modification.
The effect of the global economic downturn on the demand for apparel fibres resulted in a fall in world cotton consumption of 8.2 per cent in 2008-09, the largest annual decline on record. A relatively weak recovery in cotton demand is forecast for 2009-10, reflecting an assumed return to modest growth in the world economy. However, because of tighter world cotton supplies, higher cotton prices will restrict consumption growth to a forecast 1.2 per cent increase in 2009-10.
Buyers of apparel fibres in world markets are adopting a cautious approach to their purchases. The global economic downturn has also led to low prices for the synthetic fibres which compete in the world fibre markets with cotton.
Price aspects of the 2008 US farm program for cotton
The 2008 US farm program operating from 2008 to 2012 is set out in the Food, Conservation and Energy Act 2008. As with previous US farm program legislation, the 2008 farm program provides for direct payments, marketing loan benefits and counter-cyclical payments. A new feature of the 2008 farm program is a form of crop revenue insurance, called the average crop revenue election (ACRE) program, which begins operating at the start of the 2009 crop year on 1 August 2009.
For each grower, all direct and counter-cyclical payments are made on a specified proportion of their eligible historical cotton area and yield bases. For direct payments, the specified proportions are 85 per cent in crop years 2008 and 2012 and 83.3 per cent in crop years 2009 to 2011. For counter-cyclical payments, the specified proportion is 85 per cent in all years from 2008 to 2012.
For growers of upland cotton, direct payments in the period 2008 to 2012 are made at the rate of US6.67 cents a pound. The direct payments are made even if growers do not produce cotton, provided they do not plant fruit, vegetables or wild rice.
In effect, the marketing loan arrangements provide US cotton growers with a first advance as well as a subsidy when cotton prices are low. Even in years where farm-gate cotton prices are above the loan rate, large quantities of US cotton are put under loan. US cotton growers can receive marketing loan benefits in either of two ways.
The first marketing loan arrangement is that growers can put their cotton under loan at the loan rate. The base quality loan rate for upland cotton is US52 cents a pound for the period 2008 to 2012, a level unchanged from the previous farm program. Cotton under loan can be forfeited to the Commodity Credit Corporation (CCC, a government agency), rather than the loan being repaid. The loan can also be repaid at the adjusted world price (AWP), which is related to world prices by a formula specified in the farm program legislation, when the AWP is less than the loan rate. The difference between the loan rate and the AWP is called the marketing loan gain (MLG).
The second marketing loan arrangement is that participating growers can opt, instead of putting their cotton under loan, to receive a one-time payment on eligible production when the AWP is below the loan rate. This loan deficiency payment (LDP) is calculated as the difference between the loan rate and the AWP.
Counter-cyclical payments are made whenever the target price is greater than the effective price for cotton. Under the farm program legislation, the target price for upland cotton is set at US71.25 cents a pound for the crop years 2008 to 2012, which was reduced from US72.1 cents a pound with the previous US farm program. The effective price is equal to the direct payment (US6.67 cents a pound) plus the higher of the loan rate (US52 cents a pound) and the national average farm price.
Growers can elect to receive payments under the ACRE program, but this extinguishes their right to receive counter-cyclical payments from the date of signup in the ACRE program through to 2012, the last year covered by the 2008 farm legislation. ACRE participation also means 20 per cent lower direct payments and a 30 per cent lower marketing loan rate.
ACRE provides participating growers with a revenue guarantee each year based on national market prices (average of past two years) and state-level planted yields (a five year ‘Olympic’ average, whereby the two years with the highest and lowest yields are dropped). ACRE payments are made when the actual state-level revenue falls below the state guarantee per acre, and the actual farm revenue per planted acre falls below the farm benchmark revenue per acre.
The subsidy effect of the US farm program in 2008-09 in periods of low prices is illustrated in this following hypothetical example based on actual prices published by the US Department of Agriculture. A grower of base quality upland cotton puts their cotton under loan in September 2008 and receives the loan rate of US52 cents a pound, plus the direct payment of US6.67 cents a pound, implying a minimum effective price of US58.67 cents a pound. The grower repays the marketing loan in January 2009 at the adjusted world price of US38.6 cents a pound, making a marketing loan gain of US13.4 cents a pound. The grower then immediately sells the cotton at the farm-gate price of US46.1 cents a pound. Based on the current forecast by the US Department of Agriculture for a national average farm-gate price in 2008-09 of US49 cents a pound, the grower will also receive a counter-cyclical payment in 2008-09 of US12.58 cents a pound. In total, the US cotton grower has realised a farm-gate price in 2008-09 of US78.75 cents a pound on 83.3 per cent of their historical production base. This US farm-gate price is roughly equivalent to a Cotlook ‘A’ indicator price of US86 cents a pound, in a year when the Cotlook ‘A’ indicator price is estimated to average around US62.5 cents a pound.
Given the average US farm price for upland cotton forecast by the US Department of Agriculture for 2009-10 of US54 cents a pound, the average US grower of upland cotton in 2009-10 is guaranteed a minimum price of US71.25 cents a pound on their eligible upland cotton production. They will also receive a direct payment of US6.67 cents a pound. Depending on the seasonal pattern of US prices, the grower may also realise a marketing loan gain, but not if the farm-gate price remains above the loan rate of US52 cents a pound throughout the season.
World closing stocks of cotton are forecast to decline by 5.6 per cent, to 11.8 million tonnes in 2009-10. This represents a stocks to use ratio of 48 per cent, which is the lowest level since 2002-03.
A consequence of the global economic downturn and, hence, weaker cotton prices, was unusually large interventions by governments in China and India to buy cotton from their 2008-09 cotton harvests to support domestic prices. These intervention stocks are now being sold off again as buyers reappear in world cotton markets and are expected to be largely disposed of by the end of 2008-09.
Despite the decline in world cotton prices, the devaluation in the Australian dollar and a relatively high price for cottonseed have provided support for returns to Australian cotton growers. The value of lint and associated cottonseed, net of ginning costs, is forecast to increase to the equivalent of $506 a bale in 2009-10, compared with $480 a bale in 2008-09.
Australia’s 2008-09 cotton harvest has just been completed, with improved supplies of irrigation water enabling slightly better than average cotton yields. Australian cotton production in 2008-09 is forecast to be 315 000 tonnes, 137 per cent higher than in 2006-07.
Cotton remains the most profitable crop to grow in the traditional cotton growing regions of Queensland and New South Wales. Forecast returns to alternative irrigated crops in 2009-10, mainly wheat in winter and sorghum in summer, are likely to be less favourable compared with 2008-09.
The irrigation water situation in Australia’s traditional cotton growing regions in 2009 is slightly better than at the same time last year, mainly in Queensland and the Namoi region in New South Wales. On a production weighted basis, the main irrigation dams serving the cotton growing regions in New South Wales and Queensland are 32 per cent full, compared with 29 per cent at the same time in 2008. However, the Murray-Darling Basin irrigation water situation deteriorated further from June 2008, because of record low winter run-offs. Moreover, relatively high prices for wheat in 2008 favoured increased use of available irrigation water with wheat production. Assuming more normal winter run-offs into the irrigation dams in 2009, Australian cotton plantings in 2009-10 are forecast to be 230 000 hectares, 41 per cent higher than in 2008-09. Assuming an increase in yields, Australian cotton production in 2009-10 is forecast to be 427 000 tonnes, 112 000 tonnes more than in 2008-09.
The increase in Australian production also means a recovery in Australian cotton exports in 2009-10 from the low levels of 2008-09. Because Australian cotton is largely harvested in the period February to June each year, the level of exports in any one financial year reflects production from two harvests. Australian cotton exports in 2009-10 are forecast to increase by 47 per cent in volume terms, reflecting higher forecast production in both 2009-10 and 2010-11. Nevertheless, forecast Australian cotton exports of 332 000 tonnes in 2009-10 will still be only around 40 per cent of the record exports of 834 000 tonnes in 2000-01.
| Cotton outlook | ||||||||
2007-08 |
2008-09 |
s |
2009-10 |
f |
% change |
|||
|
||||||||
| World | ||||||||
| Production | Mt |
26.2 |
23.5 |
24.2 |
3.0 |
|||
| Consumption | Mt |
26.7 |
24.5 |
24.8 |
1.2 |
|||
| Closing stocks | Mt |
13.6 |
12.5 |
11.8 |
– 5.6 |
|||
| Stocks to consumption ratio | % |
50.8 |
51.0 |
47.7 |
– 6.5 |
|||
| Cotlook ’A’ index | USc/lb |
72.9 |
62.5 |
72.5 |
16.0 |
|||
|
||||||||
| Australia | ||||||||
| Area harvested | ’000 ha |
63 |
163 |
230 |
41.1 |
|||
| Lint production | kt |
133 |
315 |
427 |
35.6 |
|||
| Exports | kt |
266 |
226 |
332 |
46.9 |
|||
| – value | A$m |
466 |
464 |
727 |
56.7 |
|||