On cotton

The Australian cotton industry, with its strong foundation and reputation for quality, is well-positioned to navigate the current global economic challenges, with a focus on sustainability, technological innovation, and market diversification set to help the sector maintain competitiveness and ensure future growth.

Despite being thousands of kilometres away from Australia, this is a sector that can find itself impacted to some degree by shoppers in Beijing browsing Wangfujing Street for new curtains, or consumers in New York exploring Fifth Avenue for summer clothing.

As global consumer behaviour fluctuates, these decisions ripple through the cotton supply chain, affecting everything from planting decisions to export strategies. The Australian cotton industry is long accustomed to these fluctuations in global demand and has always approached these cycles with positivity.

Uncertain

The uncertain global economic outlook has affected demand for cotton. The dampening of consumer activity is expected to continue working its way back up the supply chain from store shelves, potentially putting downward pressure on prices.

Rising interest rates and tighter economic conditions are causing consumers to purchase fewer cotton products – not just clothing, but furnishings, bedroom and bathroom accessories.

A slowing down of purchasing can lead to oversupply in the supply chain, including larger unsold inventories, more bales in storage, and reduced demand from major buyers looking ahead to the next season.

The impact on the supply chain is felt most through a consumer slowdown in major economies. In China, slower growth has led to cautious consumer spending, and a 4 per cent fall in imports of Australian cotton.

In the United States, concerns around inflation and interest rates have squeezed household budgets, reducing expenditure on non-essential items such as new clothing and home textiles, resulting in a 5 per cent decline in demand for cotton products.

In Europe, economic uncertainty and high energy costs have led to broad reductions in consumer spending, further impacting the demand for cotton products.

Global cotton prices continue to be volatile. In February, prices reached a seventeen-month high of around 100 Us cents per pound (USc/lb), based on concerns about a drought in US cotton producing regions, and well as intensified purchasing by China to replenish its strategic reserves.

In the months since then, prices sank to a four year low of around 60 USc/lb, on a combination of ample global supply, as well as reduced demand and increased inventories. This volatility reflects broader economic uncertainties and shifts in global consumer behaviour.

Production

A strong global production forecast has contributed to lower prices. According to the US Department of Agriculture, the global cotton crop for 2024/25 will grow 5 per cent to about 26.2 million tonnes, reflecting a balance between increased production in the US and decreases in other regions like India.

In the US, the world’s largest cotton exporter, production is forecast to increase by 3 per cent to around 3.7 million tonnes. In India, the world’s second-largest producer, production is expected to fall by 5 per cent to 5.4 million tonnes, on the back of challenges from pest infestations and irregular rainfall.

In China, the world’s biggest cotton producer, production is forecast to remain stable at around six million tonnes, assisted by government policies supporting domestic cotton farming.

In Australia, ABARES projects cotton acreage to fall slightly to 445,000 hectares in 2024/25, the lowest in five years. Production is expected to hit 0.97 million tonnes – a decline of over 10 per cent on the previous year, but a return to the long-run average since 1986/87.

While the outlook remains strong, disruptions in global supply chains, including container shortages and port congestion, have created challenges in exporting cotton efficiently.

The industry also faces further challenges in finding sufficient seasonal and full-time labour, impacting all stages from farming to ginning. Fluctuating costs of inputs like fuel, fertiliser and pesticides are squeezing margins, while the rising costs of machinery, irrigation systems, and building materials are also adding pressure.

Australia’s cotton exports as a percentage of production averages at over 90 per cent, making the sector one of the world's largest exporters. The primary markets for Australian cotton include China, Vietnam, and Bangladesh.

Relatively higher prices have made impacted Australian cotton’s competitiveness compared to synthetic fibres such as polyester. The relative strength of the Australian dollar in comparison to export competitors has further complicated dynamics by making Australian cotton more expensive.

Opportunities

Despite ongoing challenges, the Australian cotton industry continues to make the most of its opportunities. The industry continues to explore new markets in south-east Asia and Europe, helping reduce reliance and concentration risk on a smaller number of traditional markets.

The increasing adoption of sustainable farming practices plays a major role in aligning with global consumer trends and enhancing market appeal. Importantly, advances in precision agriculture and genetically modified crops continue to improve yields and reduce costs.

One major example is water-efficient technologies, including the use of drip irrigation and soil moisture sensors, which optimise water usage and improve crop performance, and lead to an increase in yields while reducing costs.

As the global economic landscape evolves, the resilience and adaptability of the Australian cotton industry will be crucial in meeting the demands of a dynamic global market.

With this innovative and positive approach, the Australian cotton industry is poised to not only overcome current challenges but capitalise on current and new opportunities. This resilience and forward-thinking approach will be key to sustaining the industry's success and contributing to the broader agricultural economy in the coming years.

Michael Whitehead is Executive Director for Food, Beverage and Agribusiness Industry Insights at ANZ

This is an edited version of an ANZ Agribusiness Industry Insights report.