The Australian cotton crop has a value in the order of three billion dollars and is the larger sibling to the older Australian textile of wool. Cotton is a big natural fibre, some twenty times the size of wool on a global scale. In addition, it has been the main staple fibre by volume and remains so although limitations to production are affecting its market share. With this in mind, we look at the current situation of cotton.
During the past decade cotton stocks, expressed as stocks to
use ratio, have been maintained at high levels (70-80%) with stocks in China
averaging 35% of global use and stocks outside of China averaging 43% of global
use. The price has ranged from US70 cents per pound up to US130 cents per
pound, in the aftermath of COVID. Figure 1 shows the annual opening stock level
(forecast by ICAC for 2024-2025) broken into Chinese stocks and ex-China
stocks, along with an average cotton price series. The high stocks-to-use ratio
is well above levels seen before 2011.
Historically changes in stock levels have been negatively
correlated to changes in price levels. This relationship appears to have
weakened during the past decade. Global cotton production, while varying from
year to year, has not trended higher during the past two decades. World cotton
yields have not been increasing, a phenomenon common at natural fibres
generally (DNFI https://dnfi.org/
). During the past decade, cotton production has shrunk by a compound rate of
1% while polyester staple has increased by a compound rate of 1.8% and
cellulosic fibres by 3.1% (IWTO https://iwto.org/resources/statistics/ ).
The outcome of these divergent growth rates is that cotton’s
share of staple fibres has been falling for the past 15 years. Figure 2 shows
the global stocks-to-use ratio for cotton from the early 1980s onwards along
with the cotton market share of staple fibres. During the past 15 years, the
market share for cotton has fallen from around 50% to around 40%. It is still
the largest staple fibre, but the trend is against it. As the market share has
fallen, the stocks-to-use ratio has lifted.
Another measure of cotton the industry has been interested
in historically is the price ratio to polyester staple fibre. Figure 3 compares
the market share for cotton (as in Figure 2) to the annual average price ratio
of cotton to polyester staple fibre from the early 1980s onwards. In the period
to around 2011, the price ratio ranged between 0.8 and 1.6. In the boom price
year of 2011, the price ratio averaged 1.63. Since then as the market share has
trended lower the price ratio has trended higher reaching a very high 2.3 in
2022.
So, in summary, as cotton’s market share has trended lower
the stocks-to-use ratio and price ratio to polyester staple fibre have trended
higher. This resembles the increased trend price ratio for broad merino wool as
production has fallen. In Figure 4 the change in market share over the past
decade (smoothed over three years) for major staple fibres is compared to the change
in price during the same period (and also smoothed over three years). There is
a solid trend where the price moves in the opposite direction to market share.
What does it mean?
Analysing a market, in this case, cotton, from the perspective of stock-to-use levels and or price ratios to polyester staples, relies on other factors being relatively constant. For cotton, the lack of growth in production in recent decades has meant its share of staple fibres has been falling (from around 50% to 40%). It is still the biggest staple fibre but change is afoot as polyester and viscose volumes continue to grow.
That change in market structure appears to be correlated to acceptable levels of stocks to use and price ratio to polyester staple – lower market share correlating to higher stocks and price relatively. The price change relatively matches what has been observed in broad merino wool in recent decades.
Key Points
- In price percentile terms cotton is tracking along with the bulk of the apparel fibres and feedstocks
- Cotton stocks are high (as a ratio to use) and the cotton price ratio to polyester staple is high.
- What appears to be changing is the falling market share of cotton, which is correlated to the higher stocks and price ratio
Click on figure to expand
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: ICAC, ABARES, CRB, Cotlook, Cotton Inc, PCI Wood Mackenzie, Emerging Markets, World Bank, DNFI, IWTO, ICS, Nutrien, Mecardo
