Drought Drags Cotton to Decade Lows – Australian Cotton Faces Toughest Outlook Since 2007/08

All major production regions will feel the pinch with southern Queensland, northern NSW, and central NSW being hardest hit.

Lack of water for irrigation remains the key driver for the fall. Consequently, dryland cotton will increase to 14% of total output, versus 8% to 10% in a 'normal' year.

Production could still recover in 2020/21 in the event of significant water inflows but would be limited to 2m to 3m bales. A full recovery is only anticipated in the 2021/22 season.

The Australian cotton sector finds itself a victim of domestic drought for the second consecutive season in 2019/20 among several other sectors, including grains, oilseeds, livestock, and dairy. With less water available for irrigation in the Murray-Darling Basin (MDB) for a third consecutive year, the volume of cotton grown in 2019/20 has slumped. This Rabobank article looks at Australia’s potential to grow cotton in the coming season, how and where that cotton will be grown, and the impact on broader markets.

In short, Rabobank sees Australian cotton production diminishing rapidly in 2019/20. We anticipate just 735,000 new season bales (227kg) to be picked against broader market expectations of 720,000 to 800,000 bales. If realized, this would be just 16% of Australian production two seasons ago in 2017/18 and the lowest domestic output in over a decade – the 2007/08 drought produced about 680,000 bales.

All major production regions will contribute to this downfall, including central Queensland, southern Queensland, northern NSW, central NSW, and the Riverina. This largely correlates with all regions – with the exception of the Riverina – facing zero general-security water allocations, tightening the procurement of irrigation water to high-security allocations, carryover, bores, and/or the temporary market. Very little winter/spring rainfall across key production regions in 2019 also ruled out surface water to a large degree. This need to prioritise water use simply means less irrigation of cotton. One example of this is the selling of temporary water in the Riverina region, often to highermargin permanent crops such as almonds. The prioritising of cereal crops is noted across the Darling Downs and southern Queensland, with growers planting less thirsty – and hence less risky – alternatives.

We expect dryland area to shrink at a slower pace in 2019/20, versus their irrigated counterparts. With dryland output making up between 8% and 10% of national output normally, this new season may see dryland take a 14% share. This share will depend heavily on in-season rainfall and whether crops receive the moisture needed to establish and develop.

Rainfall remains scarce in the three-month outlook across Australia’s east coast, highlighting ongoing dryness risks for planted crops – particularly dryland systems. Looking further ahead, Rabobank highlights crop implications in 2020/21 at each end of the spectrum in the following two scenarios:

Scenario 1: Extensive rainfall in early/mid-2020

Our first scenario assumes heavy rainfall across Australia’s east coast through the autumn and/or winter of 2020. These dam-filling events would enable a significant recovery in 2020/21 production, potentially to 2m to 3m bales. A lack of seed availability and uncertainty about water allocations, coupled with current on-farm commitments, would likely limit a full recovery back to 2017/18 levels (4.5m bales). Naturally, irrigated production would make up the lion’s share of this recovery – bringing the irrigated-dryland ratio back to a more normal 90/10 split. Historically, domestic cotton crops have recovered up to 140% following a significant drought event. This theory would mark 2020/21 output at just 1.8m bales. Any recovery to ‘full output potential’ (+4m bales), in Rabobank’s view, would only be observed in the 2021/22 season.

Scenario 2: Persistent drought conditions

Continued drought would bring further production cuts in 2020/21. These further cuts, in our view, would be limited to near 500,000 bales focused mainly in southern NSW. This would be a consequence of smaller domestic acreage – particularly in the Riverina – on lower-water allocation coupled with an increasing profitability in temporary water sales. In this scenario, the percentage of dryland production may also exceed 14%, as further area cuts are linked to the lack of irrigation water.

Looking ahead, Rabobank expects that developing supply tightness in the domestic cotton market will lead to a significant 50% YOY cut in 2019/20 export availability and support price levels, particularly basis, in the AUD mid-500 to AUD 600/bale mark. This is particularly true amid the US-China trade war, as China looks to non-US origins to purchase cotton. However, this will also provide other major exporters, namely Brazil, with an increasing share of Chinese import demand. Longer term, this poses a risk for Australia, as there will likely be additional rivalry with Brazilian supplies – and hence a more competitive price environment – once production recovers.

Please refer to Rabobank’s Outlook 2020: Supply Slide Saves Grounded Demand for our latest fundamental analysis and price forecasts on the global cotton market.