Natural fibres: September quarter 2021
- Cotton and wool prices are expected to remain strong throughout 2021–22.
- Global economic recovery driving increased retail activity and demand for natural fibres.
- Favourable climatic conditions across Australia will promote sheep flock rebuilding and a large cotton crop.
Natural fibre prices to increase
The easing of COVID-19 restrictions, strong global economic growth and higher oil prices are expected to drive demand for natural fibres in 2021–22. The reopening of major economies will increase consumer spending on apparel, as people draw down on the savings accrued during the pandemic. Income growth will also give consumers more disposable income in 2021–22. Strong oil prices will push up the price of synthetic fibres, making natural fibres more competitive.
The Eastern Market Indicator (EMI) for wool is forecast to average 1,390 cents per kilogram clean for 2021–22, up by 16% from 2020–21 (Figure 1). Government stimulus packages in major advanced economies have encouraged consumer spending. Wool auction and export data show strong demand for fine and superfine wool in the first half of 2021, in preparation for the northern hemisphere winter. There are indications that wool stocks have been drawn down, following a build-up during 2020 due to COVID-induced disruptions and uncertainty. Wet conditions across Australian growing regions will result in increased flock numbers, wool cut per head and overall supply.
The world cotton price is forecast to average US95 cents per pound in 2021–22, up by 14% from 2020–21. In addition to strong economic conditions, tight global stock levels will maintain strong upward pressure on global cotton prices in the first half of 2021–22. Global production is expected to increase by 7% on 2020–21 levels but will not be enough to offset increased demand.
Global income growth driving demand for natural fibres
The global economic recovery is expected to continue throughout 2021–22, with the combination of vaccine rollouts and the easing of restrictions allowing greater mobility. The July 2021 IMF World economic outlook forecasts global economic activity to increase by 6% in 2021 and 4.9% in 2022, after contracting by 3.2% in 2020. In 2020, lockdowns and uncertainty resulted in increased saving rates in major economies. For example, in the United States the personal savings rate reached a record 33.8% in April 2020. As populations emerge from lockdowns, the accrued savings are likely to be spent on consumer goods, such as apparel.
The economic outlook has positively impacted consumer confidence and retail sales in major economies. Before the COVID-19 pandemic, June quarter apparel sales in the United States and China were stagnant or decreasing (Figure 2). In the June quarter 2021, US clothing and accessories sales increased by 166% compared with the June quarter 2020, and 13% compared with the June quarter 2019. US imports of men’s woollen suits increased by 152% in the June quarter 2021 compared with 2020, but are still down by 58% on the June quarter in 2019. In China, retail sales of garments, footwear, hats and knitwear increased by 16% in the June quarter 2021 compared with the same time last year. Sales were also up by 6.4% from the June quarter 2019. A recovery in retail apparel spending has also occurred in the European Union.
The June quarter surge in retail activity and the promising economic outlook have increased demand for raw wool and cotton. The EMI pushed above 1,400 cents per kilogram before the mid-year recess (a 3-week break for wool auctions in July), the first time since March 2020. The strong gains were driven by demand for fine and superfine wool (less than 21.5 microns), with average 17 micron wool prices pushing the EMI upwards. However, prices of coarser wool remained flat (Figure 3). Superfine wool attracted a strong premium in the first half of 2021. In particular, 17 micron wool averaged 988 cents above 21 micron wool and reached a high of 1,225 cents in July. This compares with an average premium of 363 cents between 2010 and 2019.
Demand for medium 21 micron wool also increased. The discount for 28 micron wool compared with 21 micron wool averaged 774 cents over the first half of 2021 (up from an average of 675 cents between 2010 and 2019). The high premiums are likely to drive substitution toward, and blending with, alternative fibres and coarser wool classes. This will restrain further upward movement in superfine wool prices and push up the price of broader microns, restoring long-run premiums.
Australian auctions cleared over 860,000bales in the first half of the year, up by 52% on the same period in 2020 and 9% on the same period in 2019. Much of the auctioned wool was likely classed as fine and superfine – 88% of Australian wool exports were below 24 microns in the first 6 months of 2021. The recovery in fine and superfine wool prices likely enticed many growers to bring to market the on-farm stocks built up over 2020 (see Agricultural Commodities: September quarter 2020). The large increases in wool prices, despite plentiful supply, indicates that demand for fine and superfine wool will continue to be strong.
Demand for cotton is likewise expected to lift with global consumption forecast to reach over 26 million tonnes in 2021–22, a 5% increase on 2020–21.
Global cotton supply improves but still tight
Global cotton production is forecast to hit 25.8 million tonnes in 2021–22, up by 7% on 2020–21 levels. Strong increases in production are expected for the United States and Brazil, the world's largest exporters. Cotton production in the United States is expected to be up by 18% on last season, owing to the easing of drought conditions in West Texas. The Brazilian cotton crop struggled through a second season of dry conditions but is likely to produce a 10% increase on last year.
A 9% decrease is expected for the Chinese cotton crop in 2021–22. Although the area planted was similar to 2020–21, China’s cotton crop has experienced waterlogging in eastern provinces and dry conditions in parts of Xinjiang. Dry conditions in some production regions of east India have prompted growers to shift away from cotton in favour of soybeans and ground nuts. However, the monsoon forecast appears promising and only a 1% reduction in cotton production is expected. Cotton plantings were down slightly in Pakistan this season, following a poor season last year. Good growing conditions this season in Pakistan are likely to result in strong yields and a 14% increase in overall production.
Even with an increase in cotton production, global stock levels will continue to decline by 4% in 2021–22. The drawdown in global cotton stocks will reduce the global stocks-to-use ratio to 75%, the lowest since 2018–19, putting upward pressure on prices.
Favourable climatic conditions a boon for Australian wool and cotton growers
High rainfall totals across many parts of Australia have proven favourable for cotton and wool growers. A La Niña event over summer and a negative Indian Ocean Dipole through winter have brought significant rainfall to most cropping and grazing regions of Australia. The subsequent pasture growth has spurred flock rebuilding across Australia, with the Australian sheep flock expected to reach 68.2 million head by the end of 2021–22. The good conditions are also anticipated to increase wool cut per head to 4.54 kg, up from 4.13 kg during the worst of the drought in 2018 and 2019. Mean fibre diameter of shorn wool is increasing steadily too, from 20.5 microns in 2019–20 to 20.8 microns in 2020–21. Australian Wool Testing Authority data from the first 6 months of the year indicates that 74% of the wool clip was classed as fine or superfine (less than 21.5 microns). However, the distribution of Australian shorn wool will continue to shift to coarser microns as drought grown wool is cleared. As a consequence, growers will receive a lower relative price. Australian shorn wool production is forecast to increase to 310 kt for 2021–22, a 6% increase from 2020–21.
The Australian cotton crop is expected to reach 1,044 kt (4.6 million bales) in 2021–22, a 72% increase on 2020–21, and a 10% upward revision on the June Agricultural Commodities forecast. The wet conditions across the Murray-Darling Basin have recharged on- and off-farm storages, triggering a large planting of irrigated cotton for the upcoming season. According to the Bureau of Meteorology August forecast, wet conditions will continue into spring and early summer, with a negative Indian Ocean Dipole and the possibility of another La Niña event. The promising conditions are forecast to prompt a large dryland cotton planting over the coming months and lead to strong yields (Figure 4).
Alleged Chinese import restrictions on Australian cotton impacting trade
Since October 2020, the Chinese government is reported to have discouraged importers from buying Australian cotton, and the impact has become evident. In 2019 China accounted for 63% of Australian cotton exports, but its share of exports declined significantly in the first six months of 2021. The dislocation from traditional Chinese buyers has been a challenge for the Australian cotton industry. China is the largest processor of raw cotton in the world, home to 37% of the world’s yarn spinning machines in 2019. Chinese buyers have also paid a higher premium compared with other markets (see Agricultural Commodities: December quarter 2020). The withdrawal of Chinese buyers has resulted in a sharp drop in the Australian cotton basis (the difference between the cash price of a bale at a specific location and the New York Futures price).
On the positive side, the fall in cotton basis has helped Australian cotton find a market in alternative processing countries, especially those markets vacated by the United States as it increases its exports to China under their Phase 1 trade deal. In the first 6 months of 2021 Australian cotton exports were redirected to Vietnam, India and Bangladesh. Australian cotton exports to non-Chinese markets are expected to increase further in 2021–22, with total cotton exports forecast to reach 749 kt. Despite the challenges, Australia's high-grade cotton and reduced cotton basis will facilitate trade to alternative markets. However, the lower basis means lower returns for Australian cotton growers.
Opportunities and challenges
Cotton gin in northern Australia the catalyst for expansion
The cotton gin at Tarwoo Station, outside Katherine in the Northern Territory, is on track to become operational within the coming months. Expansion of the cotton industry in northern Australia has been stymied by transport costs. Growers in the region currently ship cotton to gins on the east coast, and this severely cuts into grower returns. The gin is intended to support expansion of the cotton industry in the Northern Territory and across the border in the Ord River region. The Ord River Irrigation Scheme has been promoted as a potential regional food bowl, but previous attempts to establish substantial sugar, rice and cotton industries have struggled for various reasons. The combination of GM cotton and a local gin may prove successful.
Flystrike vaccine a potentially invaluable innovation
CSIRO and the University of Melbourne are collaborating on a vaccine for flystrike in Australian sheep flocks. The project is funded by Australian Wool Innovation. Flystrike costs wool growers hundreds of millions of dollars each year through disease management and productivity losses. The practice of mulesing to prevent flystrike has also attracted increasing criticism, with growing consumer concerns about animal welfare and the impact of purchasing decisions. Developing a new vaccine is a difficult undertaking but would be extremely valuable for the industry. An effective vaccine would decrease costs, improve productivity and significantly bolster the marketing of Australian wool as an ethical fibre choice.
Global shipping capacity severely constrained
Over the first half of 2021, constraints on global shipping capacity have pushed up shipping costs significantly. One aspect of the crisis is a shortage of shipping containers. The Freightos Baltic Global Container Index rose from $3,452 on 1 January 2021 to $10,519 on 3 September. The impact from shipping costs is being felt across all commodities, whether shipped by container or in bulk, increasing transaction costs and dampening global economic activity. Cotton exporters have the added challenge of finding shipping capacity between Australia and non-Chinese ports, and India is proving particularly difficult to access.
COVID-19 pandemic still poses significant threat to natural fibre industries
The pandemic has disrupted consumer demand for natural fibre-based apparel and Australian farmers' access to labour. As seen during 2020, discretionary spending is one of the first casualties of lockdowns and economic contractions. As a result, demand for cotton and wool decreases. The threat of sustained future lockdowns and disruptions in major economies remains. Supply chains proved resilient over the past year, but labour shortages on-farm have remained a challenge. For much of the year travel restrictions have prevented NZ shearers from entering Australia. The cotton industry is not immune to labour shortages either. Travel restrictions have significantly decreased the number of backpackers in Australia – a major traditional source of on-farm labour. However, increasing intakes under the Pacific Labour Scheme and the Seasonal Worker Programme, as well as the recently announced Australian Agriculture visa, could provide reliable long-term supply.
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