Natural fibres: March quarter 2021
Cotton prices to rise and steady, wool prices to rise
The world cotton indicator price is forecast to average US83 cents in 2021–22, up from US80 cents in 2020–21. Strong import demand from China and recovering global demand more generally are forecast to support prices throughout 2021. However, high stock levels and competition from synthetics are expected to keep cotton prices near current levels in real terms over the outlook period.
The Eastern Market Indicator (EMI) price for wool is forecast to average 1,300 cents per kilogram clean in 2021–22. This is a 12% increase from 2020–21 but remains 33% lower than the peak in 2018–19. Lower consumer demand and supply-chain disruptions throughout 2020 reduced demand for wool in textile manufacturing. As a result, wool prices reached near 11-year lows in late 2020. High price volatility throughout 2020 is consistent with the niche role that wool plays in world fibre markets.
Stronger global economic growth over the medium term to 2025–26 is forecast to lead to higher wool prices, especially for superfine and fine micron wools used in woollen apparel.
Medium-term scenarios for forecasts
Medium-term forecasts from 2022–23 to 2025–26 for Australian cotton and wool are based on the average outcomes of 4 possible seasonal climate scenarios. A very dry season in the wheat-sheep zone is likely to occur in one of the 4 years. Each scenario places this dry season in a different year, with other years assumed to receive rainfall of deciles 3 to 4. For a more detailed explanation see the Agricultural overview.
The range of outcomes forecast to result from each scenario are then averaged. Unless otherwise indicated, these average forecasts – or their ranges – are discussed in this note.
Upside and downside scenarios are also considered. The upside scenario combines a faster economic recovery from the COVID-19 pandemic with another high rainfall year in 2021–22. A very dry year is still assumed in 2022–23. Because it follows an assumed wetter year, negative effects on production are reduced. The downside scenario combines a slower than expected economic recovery with very dry years in 2021–22 and 2025–26.
Demand to grow after a disrupted year
Recovery in textile demand mostly via synthetics
COVID-19 containment measures disrupted textile manufacturing operations throughout 2020 and reduced consumer demand. Growth in global incomes is projected to drive recovery in textile demand to pre-COVID-19 levels by 2022, increasing further over the outlook period to 2025–26.
Stronger income growth in emerging and developing economies is expected to drive more of this recovery in demand, particularly for synthetics. In advanced economies, income recovery is expected in the short term, but slower growth is assumed over the medium term.
Natural fibres form a larger share of textile consumption in advanced economies, but synthetics occupy a larger share of textile demand in emerging and developing economies. Assumed stronger economic growth in emerging and developing economies over the medium term is expected to further decrease the share of natural fibres in world textile demand.
Global consumption of cotton is projected to increase by an average of 2% per year from 2021 to 2026, to reach 26.9 million tonnes. Global consumption of wool is projected to increase on average by 1% per year, to reach 1.1 million tonnes by 2026. In contrast, global consumption of chemical fibres (synthetic and cellulosic) is projected to increase by an average of 4% per year, to reach 89.9 million tonnes by 2026.
Niche wool demand subject to variability in key markets
Wool is a high-value niche product in world textile markets, contributing 1% of world textile consumption. The low share of wool consumed relative to other fibres – and the availability of cheaper substitutes for many uses – means that the price of wool is volatile and highly sensitive to small changes in demand and supply. Demand for Australian wool is mostly driven by consumer demand for woollen apparel in China and by demand in global markets for Chinese textiles. Small volumes of Australian wool are also exported to OECD countries. Throughout 2020, shifts in consumer sentiment and disruptions along the supply chain – including closures of manufacturing operations and across retail sectors – significantly affected Australian wool prices and export volumes.
The United States is the world's largest importer of woollen textiles and apparel. Data from the US Office of Textiles and Apparel indicate that US imports of wool products (including apparel, blankets and carpets) declined by 32% year-on-year in 2020. US imports from China, the largest source (with a 37% share in 2019) were down by 42% year-on-year. Disruptions to economic activity in the United States, including job losses and the closure of clothing retailers, contributed to lower consumer demand for woollen apparel. A combination of pessimistic consumer sentiment and widespread working from home arrangements contributed to lower US suit imports. For example, imports of men's and boys' woollen suits were down by 62% and synthetic fibre suits by 55% in 2020.
In September 2019, US import tariffs on woollen apparel from China rose by 15% as a result of the US–China trade dispute. The phase one agreement between the 2 countries left this tariff arrangement unchanged. This will continue to dampen US demand for imported woollen apparel from China when economic recovery commences in the United States.
China is a major consumer of woollen products, with domestic consumption estimated to account for between 50% and 60% of China's total raw wool imports. In China, the economic and consumer disruption caused by COVID-19 containment measures pushed retail sales of garments, footwear, hats and knitwear down by 11% year-on-year in 2020.
In the eurozone, resurgences of COVID-19 have dampened consumer confidence and forced renewed lockdowns, reducing demand for fibres across the value chain. This is on top of the weak consumer demand and slow income growth faced by advanced economies in the eurozone prior to COVID-19.
Recovery in demand for woollen apparel in these key markets will continue to be uneven and subject to containment or vaccination measures to control COVID-19. This means that the forecast increase in Australian wool prices is expected to be relatively modest, at least until export demand for Australian greasy wool returns to pre-COVID levels.
Wool production to recover with sheep numbers
Australian shorn wool production is forecast to rise by 2% in 2020–21 to 288,000 tonnes. Continued favourable seasonal conditions throughout 2020–21 are forecast to lift fleece weights close to the 10-year average, offsetting the reduced number of sheep to be shorn nationally. Australian wool supply is forecast to continue increasing gradually from 2021–22 onwards, driven largely by flock rebuilding. Low auction offerings and clearance rates relative to the volume of wool tested throughout 2019–20 and 2020–21 resulted in stock accumulation both on-farm and in storehouses. In the short to medium term, wool price growth is expected to also be dampened by the supply of wool exceeding demand until stocks are cleared.
World cotton production to grow slowly and stocks to fall
World cotton production is forecast to be 7% lower in 2020–21, at 24.3 million tonnes. This is largely driven by reduced area planted in most producing countries, and below average yields in the United States and Pakistan. World cotton stocks are forecast to reach 21.2 million tonnes by the end of 2020–21 – a rise of 3.7 million tonnes since mid-2019 due to COVID-19 related milling disruptions. A strong rise in import demand throughout 2020–21 by major world processors China and Pakistan has supported international cotton prices. Both countries are importing to fill deficits in useable supply. For Pakistan, stronger import demand is the result of 2 consecutive poor crop seasons. China's import demand stems from the combined impact of the phase one agreement with the United States and bans on cotton exports from the Xinjiang region.
World cotton production is projected to grow to 26.2 million tonnes by 2025–26, driven largely by yield improvements in producing countries such as the United States, India, China and Brazil. Area planted to cotton in China is forecast to decrease over the medium term, scaling down production in line with a long-term declining trend in domestic mill use. Chinese mill use peaked in 2007. Since then, increasing labour costs and stricter environmental regulations have led to a gradual shift of spinning capacity to lower-cost countries such as Bangladesh and Vietnam. World cotton consumption is projected to grow to 26.9 million tonnes by 2025–26 as a result of increased textile demand. The largest growth is expected in India, Bangladesh, Vietnam and Indonesia.
World raw cotton trade is projected to increase to 10.2 million tonnes by 2025–26. Exports are expected to increase from the United States, Brazil, Sub-Saharan Africa and Australia as production grows in each of the regions. World cotton markets will continue to face potential disruption from changes in trade and support policies in major producing countries. Imports are expected to increase in developing economies such as Bangladesh, Vietnam and Indonesia. These countries do not produce much cotton, but they are increasingly using cotton as an input to manufacture and export yarn, textiles and clothing.
Australian cotton production to rise
ABARES forecasts for cotton production over the medium term are based on a scenario that reflects climatic conditions similar to those experienced over the last 20 years. Alternative scenarios are considered in the Upside and downside scenarios for natural fibres section in this note.
Australian cotton production is forecast to reach 2.4 million bales in 2020–21. This is a significant recovery from 2019–20, but still 28% below the 10-year average to 2019–20. Above average rainfall over much of New South Wales throughout autumn and winter 2020 increased dam storages, soil moisture and general security allocations in time for the growing season. Similarly for Queensland, large rainfall events early in 2020 are expected to have recharged groundwater aquifers and boosted on-farm storages in cotton regions. As a result, areas planted to cotton in New South Wales and Queensland are forecast to have increased significantly in 2020–21.
Australian cotton supply is forecast to increase further in 2021–22 due to significant water carryover in New South Wales and assumed improvements in water storages for northern New South Wales and southern Queensland.
This forecast assumes a low likelihood of the recurrence of favourable climate drivers, such as a La Niña or a negative Indian Ocean Dipole, over the next 5 years. In the absence of these drivers, water storage drawdown is expected to exceed water inflow in each projection year. As a result, cotton area is projected to fall in the traditional growing regions of the Murray–Darling Basin over the medium term from 2022–23 onwards.
Given the level of uncertainty affecting the supply of and demand for Australian cotton and wool, upside and downside scenarios can highlight potential trajectories of production, consumption and prices over the medium term.
Cotton area heavily reliant on water inflows
In the upside scenario, continued favourable seasonal conditions are forecast to increase area planted to cotton to 500,000 hectares in 2021–22, representing almost full plantings in most irrigated cotton regions. Over the medium term, area planted is projected to fall, with water storages in 2025–26 nearly reaching those of the forecast (baseline).
In the downside scenario, assumed dry conditions in 2021–22 are forecast to decrease area planted, particularly in dryland cotton. Some water storage or carryover is expected to remain available from the wet 2020–21 season, which will initially support area for irrigated or semi-irrigated plantings. Area planted is then projected to remain below average over the medium term, falling over time to reach 100,000 hectares in the final assumed dry year.
Wool prices highly sensitive to changes in demand
In the upside scenario, faster suppression of COVID-19 and earlier easing of associated restrictions are forecast to result in improved global demand. For wool, this is likely to result in higher consumer demand for woollen apparel and textiles leading into and during the 2021–22 northern hemisphere winter. In this scenario, Australian greasy wool export volumes are forecast to be significantly higher, with exports resuming to previously significant markets such as Italy and India. As a result, prices received for wool at auction are forecast to be much higher than in the baseline scenario. Continued recovery in wool demand over the medium term is forecast to drive further growth in wool prices, which will continue to be higher than the forecast out to 2025–26. This more favourable outlook for wool prices would be expected to drive producers' joining intentions towards merino and crossbreed, as opposed to the increased joining of terminal sires employed throughout 2020.
In the downside scenario, further COVID-19 outbreaks and lockdowns are forecast to slow economic recovery and dampen consumer sentiment. For wool, this is likely to result in continued weak consumer demand leading into and during the 2021–22 northern hemisphere winter. In this scenario, Australian greasy wool export volumes are forecast to remain at 2020–21 levels, driving further stock accumulation and resulting in minimal price growth during 2021–22. Wool demand is then forecast to grow in the medium term at a similar pace to that of the forecast. This slower outlook for growth in wool prices would be expected to support more meat-focused flock intentions in the short-term while wool remains relatively less profitable.
Opportunities and challenges
Cotton and textile industry support policies to continue setting the agenda
Changes in support policies can have a substantial influence on world markets and are difficult to predict. Higher levels of government support can insulate producers from shocks to world markets. However, this can also reduce competition in global export markets.
China's cotton stocks have had a major influence on the world cotton market for the past 9 years. Stock accumulation and drawdowns have had a significant effect on world cotton prices due to the size of China as an importer and consumer of cotton. The timing of further stock drawdowns remains a source of uncertainty over the outlook period. Significant stock drawdowns reduce import demand in what is otherwise one of Australia's largest export markets.
Support for China's domestic cotton industry has come in the form of direct subsidies and trade restrictions. This support was estimated by the International Cotton Advisory Committee to equate to US37 cents per pound of cotton (a total of US$4.7 billion) in 2019–20. OECD estimates of producer single commodity transfers suggest that in 2019 China's cotton farmers received government support representing 46.5% of their incomes. Trade barriers, such as quotas and sliding-scale duties, protect China's cotton industry from international competition. The effective out-of-quota tariff on cotton is 40%.
The world's largest raw cotton exporter, the United States, also employs support programs for its cotton industry. Examples of US support measures include price and revenue loss insurance, subsidised crop insurance and a marketing loan program. The OECD estimated that in 2019 US cotton farmers received government support equivalent to 9.6% of their incomes, down from 19.5% in 2018.
The Indian Government supports cotton production through floor prices and programs to develop the domestic textile industry. The OECD estimated that in 2019 India's cotton farmers received government support representing 5.7% of their incomes. India is largely self-sufficient in cotton. It is the largest producer and one of the largest consumers of raw cotton, and imports very little. Its exports are principally cotton yarn and textiles and to a much lesser extent raw cotton. As a result, its support programs pose less of a threat to Australia's competitiveness in world markets compared with support in Brazil and the United States. This is due to Australia's comparative advantage in producing and exporting high-quality cotton, rather than manufacturing yarn or textiles like India.
Textile industry developments in India
The release of India's new National Textiles Policy 2020 has been delayed as a result of the COVID-19 pandemic. This policy is expected to prioritise the production and export of textiles over raw cotton and yarn. Significant investment will be directed towards the creation of new textile manufacturing infrastructure in the form of integrated textiles parks. The recent 2021–22 budget announcements included a scheme to produce 7 'mega investment textiles parks' in the next 3 years. The budget also included a new 10% import duty on Australian raw cotton, which may further reduce the small volume of Australian cotton exports to India.
Investment that focuses on development of new textile industry infrastructure in India presents an upside over the medium term for Australian wool exports, with potential for India to import more.
Xinjiang cotton banned in several high-income consumer markets
Xinjiang cotton comprises around 90% of the Chinese cotton crop, representing 5.5 million tonnes of the country's forecast 6 million tonne 2020–21 production. During 2020–21 the United States, Canada and the United Kingdom announced that products containing Xinjiang cotton would be banned from crossing their borders for the foreseeable future. These restrictions put pressure on China's textile industry to source cotton from other nations such as the United States and Brazil. As a result, China imported large volumes of cotton, reportedly around 1.1 million tonnes from August to December 2020 alone, compared with 1.6 million tonnes for the full 2019–20 marketing year. This strong import demand is expected to continue throughout 2021, supporting world cotton prices despite high global stocks. There is uncertainty about the duration of these restrictions and whether they will be adopted by other advanced economies that import cotton products from China.
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