Australian cotton prices facing decline as global pressure is felt

Rabobank cotton analyst Charles Clack.

Rabobank cotton analyst Charles Clack.

Australian cotton prices could be set to see a decline in the coming 12 months as global pressures begin to be felt in the local market, according to a recently-released commodity outlook from Rabobank.

Australian basis (the premium for Australian cotton) is currently sitting at an unseasonably high level, despite international cotton prices in a period of stagnation and facing 32-month lows, while a US-China trade deal is off the table.

While local prices have largely enjoyed shelter from these global trade woes, Rabobank's Australian Cotton Price Forecast - The Start of Softer Cotton report predicts a combination of swelling global supplies and a tepid demand outlook will see local prices decline from their mid-May highs.

Despite this softening though, these prices should continue to provide positive margins to domestic growers.

The report says there are a number of positives for Australian prices, including demand interest from the world's single-largest cotton importer China (as it seeks to secure non-US supply), weakness in the Australian dollar and current local drought conditions.

Report author, Rabobank cotton analyst Charles Clack said the good news surrounds the Australian basis (the difference between the cash and futures price), which currently sits at an unseasonably high 1500 points.

"Rabobank sees short-term basis remaining strong at 1200 points through Q3, but softening later this year ahead of the arrival of Brazil's predicted six million bale exportable new crop," he said.

The bank forecasts Australian ex-gin cotton cash prices at just over AUD600 a bale through Q3 2019, though this figure is predicted to fall in late 2019, predominantly driven by weakness in both cotton futures and basis "as weighty 2019/20 (global) supplies become available". Longer term, prices are set to touch AUD576/bale by Q2 2020.

Mr Clack said this forecast comes amidst a backdrop of slowing global cotton demand growth, an uncertain trade flow outlook and the incoming 2019/20 new crop.