The National Australia Bank’s price and production forecast report expects wool and cotton prices to generally rise in Australian dollar terms.
The NAB report provides production and price forecasts for 2015-16 for seven major commodities within NAB Rural Commodities Index including wool and cotton. The overall NAB Rural Commodities Index AUD forecast track is forecast to flat-line in the September quarter 2015 before increasing until the September quarter 2016.
After this point, the report forecasts a rising Australian dollar to dent the index somewhat. In US dollar terms, the NAB expects the index to remain relatively stable over the forecast period. The production outlook is more clouded, underscored by the Bureau of Meteorology’s declaration of El Niño in May 2015.
According to the report, wool has rallied since April, with the Eastern Market Indicator at its highest level since mid- 2011. Demand has jumped, with good competition among buyers and reports of stockpiles being cleared. With the wool industry now heavily reliant on exports to China, an uptick in demand from Chinese wool mills on account of easing credit conditions and signs of higher global demand has seen prices increase significantly.
Production in the wool industry has been in decline since the collapse of the reserve price scheme in the early 1990s, compounded by a long term shift from wool to synthetic and cotton substitutes in clothing, says the report.
These trends have led to many producers switching from wool to more profitable lamb operations. However, if the recent higher prices can be sustained, wool grower profitability should improve somewhat. Overall, the report forecasts the Eastern Market Indicator to rise 11.7 per cent in 2015-16 but for production to decline 4.4 per cent over the year.
The report says cotton prices have stabilised and even moderately increased in AUD terms this year after falling in mid-2014. However, decent supply and signs of sluggish Chinese demand have weighed on sentiment.
In 2014-15, Australian cotton production was estimated to have declined 43.5 per cent on markedly lower plantings due to reduced irrigation water availability. Last season’s yields were quite strong however. ABARES forecasts Australian cotton lint production to increase 4 per cent on the back of a 7.1 per cent increase in area planted.
The report predicts a downside risk as a result of continued below average inflows into dams in the Murray Darling basin, and consequently look to a 2 per cent increase in production. The report forecasts prices to rise 9.3 per cent in 2015-16.
