The correction in cotton prices is past its worst, Abares said, even as the bureau cut its forecast for world consumption of the fibre, citing a “sluggish economic outlook” and growing inventories.
The official Australian agriculture bureau forecast cotton prices, as measured by the Cotlook A index of physical values, tumbling by 26% year on year to average 98 cents a pound in 2022-23, on an August-to-July basis.
However, the forecast implies limited scope for further declines, with the A index having already tumbled from an August high of 135.25 cents a pound to a low of 89.20 cents early last month.
The index as of Monday stood at 101.35 cents a pound.
Abares, while flagging “sharp declines in the Cotlook A index through the second half of 2022”, said that “futures contract prices suggest further significant downside price movements are not expected over the coming months”.
New York cotton futures – which trade at a discount to the A index, which is exposed to transport costs – suggest prices easing to some 79 cents a pound by the end of the season, from a value of 84.50 cents a pound for the March 2023 contract.
Cotton was the best performer among major agricultural commodities on futures markets last month, reversing its bottom-of-the-table position in October.
The comments came even as the bureau lowered by 1.1m tonnes to 24.6m tonnes its forecast for global cotton consumption this season, ditching expectations held three months ago of a small increase.
“A mix of macroeconomic factors is depressing demand for cotton garments across major economies,” the bureau said.
“Inflation, increasing interest rates and the prospect of slowing economic growth in the US and the European Union are expected to reduce discretionary spending, including on clothing.
“Meanwhile, Covid-19 related lockdowns and ongoing problems in the real estate sector are squeezing consumer spending in China,” the top cotton consumer.
Abares added that the “decreased demand is being felt right along the supply chain”, among the likes of mills, weavers and textile manufacturers “also contending with higher energy costs”.
Furthermore, they are suffering a hangover from the peak of the global logistical crisis, in terms of dealing with a “build-up of more expensive inventories due to over-ordering when freight dislocations were far more pronounced.
“Consequently, many mills are operating at reduced capacity,” Abares said.
It forecast that “demand for cotton lint is unlikely to improve markedly until economic conditions improve in major economies and retail activity recovers”.
The scope for the growth in world cotton stocks was at least tempered by a worsened production outlook, downgraded by 200,000 tonnes to 25.1m tonnes, leaving it in line with last season’s result.
“A dry season across major cotton-producing regions in the southern US decreased US production by 20% compared to last year,” Abares said, noting too a plunge of one-third in Pakistan’s output thanks to “major flooding and subsequent pest damage”.
Abares also cut its forecast for Australia’s cotton production prospects by 165,300 tonnes to 981,000 tonnes, on a lower area estimate.
“Wet conditions and flooding across major cotton producing regions in New South Wales and Queensland prevented some growers from planting their intended cotton programmes, decreasing forecast production volumes.”