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Global demand determines fortunes of Aussie cotton sector
03
Jan '13
The fortunes of the Australian Cotton Growing industry are largely determined by global cotton demand, the world price of cotton and domestic growing conditions. Australia is a small cotton producer on a global scale; however, nearly all ginned cotton is sold abroad due to the small size of the domestic textile manufacturing industries and the increasing penetration of fabric and garment imports.

According to IBISWorld Industry analyst Suzannah Rowley, "trading conditions for Australian growers have fluctuated over the past five years, due to increased volatility on the global cotton market." Added to this were fluctuations in climatic conditions such as prolonged drought, severe water shortages, and flooding. These factors pushed up the cost of growing cotton and forced smaller, less-viable operators out of the industry.

Fortunately, the industry rebounded well due to recent hikes in global cotton prices and the positive effect of increased rainfall and improved growing conditions. These factors have contributed to the expected annualised revenue growth of 53.3% over the five years through 2012-13.

However, as farmers increased plantings around the world in response to the high prices, global production has increased, causing world prices to tumble over the past two years. A continued decline in cotton prices over 2012-13 is expected to push industry revenue down by 5.4% to $2.27 billion.

Australian cotton producers will face difficult trading conditions over the next five years due to declining global cotton prices and a possible return to drought-like conditions. ‘The forecast decline in prices in the short term will be the main reason for the declines in domestic production and revenue’, says Rowley.

Added to this will be a likely decline in annual rainfall and water availability for irrigation over the next five years, which is expected to put downwards pressure on domestic production and negatively affect revenue growth. On a brighter note, increasing global demand from developing countries is likely to sustain demand for the industry and prices are expected to remain elevated. Overall, industry revenue is expected to decline over the next five years.

The majority of agricultural operators are family-run farms and so market shares are often highly fragmented across the sector. The Cotton Growing industry is no different in this respect; although a handful of major players do run sizeable operations.

Most of these major players are also vertically integrated, running their own ginning operations, as well as marketing and exporting. Structurally, the industry is highly fragmented, with large players wielding all market power and determining the market price. The largest players in the industry are Cubbie Group, Kahlbetzer Investments, Auscott and Tandou.

IBISWorld

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