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Water and climate could limit Australian cotton’s ability to grow over next 10 years – Rabobank

A growing south-east Asian market, a good sustainability story around Australian cotton and the potential for expansion in the north of the country will underpin export growth, Rabobank says.

Australian cotton growers face a challenging period in the near term but should see their share of the global market increase over the next decade if production conditions do not limit growth, according to new analysis from Rabobank.

The coronavirus pandemic has hit the cotton industry, with global demand down 13 percent year-on-year for 2019-20, with consumption unlikely to fully recover until 2021-22, assuming the relaxation of restrictions.

After this period, Rabobank forecasts cotton demand will increase 1.1 percent per year through to 2029-30, equating to 13 million bales over the decade.

The limiting factor on Australian production will be the risk of drought and variable weather conditions, coupled with limited ability for the industry to expand in the southern Murray-Darling Basin, owing to relatively high water prices amid competition from permanent plantings.

“We see a real challenge in finding demand for cotton in the short term and we don’t see that fully recovering until next season at the very earliest,” Rabobank sugar and cotton analyst Charles Clack told Agri Investor.

“We see stocks building in every origin except Australia because of the drought. But beyond that, once we get into recovery, by the end of the decade we expect to have demand for 128 million bales of cotton globally.

“For major exporters that’s good news, but it’s obviously not going to be shared equally and there will be winners and losers.”

The biggest winner is expected to be Brazil, Clack said, with expansion in cotton planting forecast to continue growing over the next 10 years. India, where cotton growers are subsidized, is also expected to increase market share, as will Australia if production conditions allow.

The US is forecast to be the biggest loser as other nations eat into its current dominant market position.

Conditions in the southern Murray-Darling Basin will present challenges to the growth of Australia’s cotton industry, Clack said, with competition for high-value water ensuring that more growers will be squeezed out of the market in dry years.

“The Murray-Darling Basin will remain a key part of Australian cotton production, but it’s difficult to see consistent expansion in the region, because the purchasing power of cotton has been diminished by the popularity of permanent plantings,” Clack said.

“Cotton is competing with water-intensive summer crops like rice and corn, and cotton doesn’t necessarily have a convincing margin advantage over these crops, given those crops are also on contract. Cotton has the huge advantage of being able to use surplus water in years of high water availability, but when that water begins to dry up cotton will take that residual role [within the system].

“We see in the next decade that cotton fits into a more mixed farming system and will be used as and when margins and water availability allow.”

Despite this, Clack predicted that demand for cotton would remain strong around the globe once the current crisis passes, with Australian growers well-placed to meet some of that demand and potentially increase market share to 8-10 percent.

“As we go forward, there are certain negative associations with cotton around the environment and water use during a drought, but Australian cotton is very high quality and very sustainable, and is the most efficient globally in terms of its water use and inputs. It sits in quite a niche area when it comes to offshore marketing because of that high quality and sustainable credentials.”

Rabobank also mentioned the potential for the expansion of cotton plantings in northern Australia, but the lack of ginning infrastructure and the high capital costs to enter the sector in the region posed significant challenges.