Commodities: India’s Cotton Ban To Boost Australia’s Cotton Returns

A confident outlook forecast for the Australian rural sector yesterday has already been overtaken by the surprise ban by India on all exports of cotton, a move that has already started sending prices higher.

The ban, announced without notice by India's Commerce Ministry sent traders scrambling on concerns about global supplies, and lifted prices for the commodity by the daily limit of 4c a pound to 92.23 USc a pound in New York.

It is the second such ban in nearly two years by India. The first one helped (with the assistance of bad flooding in Pakistan and China) send world cotton prices soaring to an all time high of $US2.27c a pound in early 2011 and led to problems for processors and traders around the world.

Glencore, the huge commodities trader, revealed on Monday that it had lost $US330 million on cotton trading in its 2011 financial year.

Other traders and processors and clothing groups lost hundreds of millions of dollars as well on reneged contracts or trading losses.

In Australia, the surge in prices last year caused problems for the struggling Pacific Brands Group (ASX: PBG) which is the biggest consumer of cotton in the country.

If world prices charge higher again, it's more unwanted pressure for Pac Brands after its huge loss and write-down in the six months to December of more than $360 million.

There are fears these losses will be repeated in the next month or so because of the unexpected nature of the latest decision.

Any price rise will of course help cotton farmers in Australia earn more, if they haven't already sold forward their production.

Cotton returns have been forecast to rise 9% this year, according to the latest predictions from the federal government's main commodities forecaster, The Australian Bureau of Agricultural and Resource Economics and Sciences.

Returns are forecast to fall on a per bale basis, but production is seen rising over the rest of this year and into 2012-13, hence the higher overall returns.

While the latest floods in NSW could impact the 2012 cotton crop, it's too early to say according to comments yesterday at the 2012 Outlook conference in Canberra.

ABARES says Australian cotton output and plantings depend on the wet weather.

But its forecast for cotton returns (around $A551 a bale in 2011-12, down 25% from the 2010-11 year) was based on falling world prices. The Indian ban obviously changes that, especially if it remains in place for some time.

"Australian cotton production is forecast to increase by around 20 per cent in 2011-12 to a record 1.1 million tonnes," the group forecast yesterday.

"The forecast increase reflects a combination of high cotton prices at planting time and a second year of good supplies of irrigation water.

"Australian cotton exports are forecast to increase by 89 per cent in 2011-12 to a record 955 000 tonnes.

"This forecast is driven by strong export demand and forecast record cotton production in 2011-12.

"Cotton exports are forecast to increase by a further 12.5 per cent in 2012-13, to a record 1.1 million tonnes.

"If realised, Australia would become the third largest cotton exporter in the world, behind the United States and India and surpassing Uzbekistan," ABARES said.

India's ban seems to be an attempt to weaken domestic cotton prices which have been rising lately, putting pressure on the country's huge processing industry.

Indian production is forecast to dip this year to around 34.5 million bales from the first forecast of around 35.6 million.

India's ban came several weeks after it became public that China has been stockpiling huge amount of cotton with prices at low levels (It does the same thing with copper and other metals when prices dip).

By late January China had bought around 5 million tonnes of foreign cotton for its strategic reserve.

China consumes around 15% of world cotton production and is a significant producer in its own right.

This buying splurge seems to be behind a surge in Indian exports.

Industry reports say 12 million bales have been registered for overseas shipment, well above the suggested limit of 8.4 million bales, which seems to have panicked the government into the ban announced on Monday.

That means if completed there would be a big squeeze on domestic supplies, forcing prices higher and putting the local industry at a greater disadvantage to Bangladesh and Pakistan, which have been eating into Indian domestic and exports markets.

Looking at the rural sector as a whole, ABARES said in a forecast for the Outlook conference that, "assuming that favourable seasonal conditions continue, earnings from farm exports are forecast to be around $35.1 billion in 2012-13, after an estimated rise of 9.4 per cent to $35.5 billion in 2011-12".

"In 2012-13, agricultural commodities for which export earnings are forecast to rise include canola (2 per cent), raw cotton (9 per cent), wine (5 per cent), beef and veal (1 per cent) and sheep meat (22 per cent).

"Over the medium term, to 2016-17, the value of farm exports is projected to be maintained around the current level in real terms. By 2016-17, the value of farm exports is projected to be around $35.1 billion, in 2011-12 dollars.

"Export earnings for fisheries products are forecast to remain largely unchanged in 2012-13 at around $1.3 billion. For forestry products, export earnings in 2012-13 are forecast to increase slightly to $2.4 billion."

Wheat dominates and attracts the most attention and ABARES says production could fall 13% in 2012-13 (from record levels, so the fall isn't too big) as farmers switch to barley and canola which seems to have better prospects at the moment.

Wheat production could reach 25.7 million tonnes in the year from July 1, down from the expected record 29.5 million tonnes this year.

(If that figure is reached by June 30, Australia will be the second-biggest wheat exporter in 2011-12 after the US.)

The area sown to wheat could fall 2.5% to 13.7 million hectares as canola plantings rise nearly 5% and barley sowings rise 3%.

Canola production may increase 5.4% to a record 2.9 million tones next financial year and barley output could rise 5.1% to 9 million tonnes.

Wheat exports look like being steady (at this early stage), with a forecast of 21 million tonnes, down from the 21.2 million expected in the year to June 30 next.

Export earnings for crops are forecast to be around $19.8 billion in 2012-13, compared with $20.7 billion in 2011-12. The export value of livestock and livestock products is forecast to increase by 3.6% in 2012-13 to $15.3 billion.

ABARES said that for "fisheries products, export earnings are forecast to be around $1.3 billion in 2012-13, largely unchanged from the forecast value in 2011-12. Export earnings for forest products are forecast to increase by 1.1 per cent to around $2.4 billion in 2012-13.

"In total, the value of Australian agricultural, fisheries and forestry exports is forecast to be around $38.9 billion in 2012-13, compared with the $39.2 billion forecast in 2011-12.

"By 2016-17, the value of Australia's agricultural, fisheries and forestry exports is projected to be around $38.8 billion (in 2011-12 dollars)," it forecast.