Record Breaking Year Ahead For The Australian Cotton Industry

Fitch Solutions / Agribusiness / Australia / Mon 06 Jun, 2022

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Key View

  • At Fitch Solutions, we are anticipating the Australian cotton industry to build on its record 2021/22 production, increasing to a new high.
  • Our forecasts are primarily driven by high rainfalls throughout 2022 filling the water irrigation dams to near capacity, well before the 2022/23 planting season, providing us with a high degree of confidence in water availability.
  • We are projecting that high global prices and strong futures prices will cause an increase in the planting area of cotton, while favourable weather conditions will both increase the planting area and lead to an 8.3% increase in the harvest area.
  • Following the adverse weather conditions in major cotton exporter the US, and a potential export ban by India, we expect Australian exports to remain strong despite a continuation of tensions with Mainland China, previously its largest export market.

With the 2021/22 cotton harvest already well underway, the Australian Bureau of Statistics is forecasting a record-equalling production level of 5.5 million bales in 2021/22, representing y-o-y growth of 96%. Here at Fitch Solutions, we are projecting Australian cotton production levels to increase again in 2022/23 due to several factors such as favourable weather conditions in 2022, increased planting area, global shortages and high prices. Firstly, we identify a likely increase in the planting area for 2022/23, driven by high confidence amongst cotton producers in irrigation water allocations. Decimating the crop in 2019/20, droughts are a constant concern to Australian cotton producers. Consequently, the planting area reflects the confidence cotton producers have in favourable weather conditions. Usually relying on water irrigation allocations throughout September-March, high rainfalls throughout this usually dry period have reduced the cotton producer’s reliance on irrigation water usage and have simultaneously increased inflows into the storage dams, meaning that irrigation storage dams throughout New South Wales are already at near capacity. Buoyed by the high confidence in water irrigation levels reaching 100% by October 2022 (beginning of 2022/23 planting season), we are projecting a significant increase in the planting area for 2022/23.

Record Breaking Cotton Production Forecast For 2022/23

Total Cotton Production, 480lbs bales

e/f = Fitch Solutions estimate/forecast. Source: USDA, Fitch Solutions

Additionally, we expect the increase in planting area to also be driven by cotton producers encouraged by current high prices and the strong futures prices of cotton. Processing no cotton domestically, Australia exports virtually all produced cotton, meaning global prices and supply levels substantially impact the domestic cotton industry. Posing a threat to the global supply levels, the widespread droughts throughout the US cotton-producing region of Texas, combined with speculation of an Indian export ban, have triggered high international cotton prices. Having recently sat at its highest level in 11 years and 65% above the previous 10-year average, cotton is currently trading 23.12% higher since the beginning of the year and 48.9% higher than they were a month before the last planting season in September 2021. The USDA anticipates a continuation of the current price levels, citing 14-month futures prices trading at just a 20% discount on current levels as an indicator of future solid demand levels. Assuming the high prices continue throughout 2022, leading up to the 2022/23 planting season, we anticipate cotton producers to further increase the cotton planting area.

Next, high rainfall and near capacity water irrigation dams provide us with greater confidence in the availability of irrigated water during the 2022/23 season, compared to the 2021/22 season, increasing harvest area forecasts. The USDA’s most recent forecasts indicate an 8.3% increase in the harvest area for 2022/23, compared to 2021/22, increasing from 600,000 ha to 650,000 ha. A substantial increase in the harvest area, combined with a projected maintenance of the average yield will lead to strong growth in total output.


Favourable Weather To Drive an 8.3% Increase in The Harvest Area

Harvest Area, 000's ha

f = USDA forecast. Source: USDA, Fitch Solutions

Lastly, we expect an increase in Australian cotton exports, despite continued trade tensions with China. Although almost no cotton was traded between China and Australia in 2021/22, the Foreign Agricultural Service is forecasting cotton exports totaling 5.8mn bales in 2022/23, a 23% increase on its revised forecast of 4.7mn bales in 2021/22. Increased exports to Vietnam, Indonesia, Turkey, Thailand and Bangladesh have reduced Australia's cotton exports dependence on China and provide us with confidence that a continuation of the political tensions between China and Australia will have a negligible negative impact on Australia's cotton exports.

Global Shortages Send Prices Upwards

Average Annual Cotton Prices, USD/lb

*Note 2022 average as of May 27 2022. Source: USDA, Macro Trends, Fitch Solutions

Nevertheless, the recent election of a new Labour government and Prime Minister, Anthony Albanese, in Australia offers hope of a de-escalation of tensions between China and Australia. Having previously accounted for 65.3% of Australian cotton exports, in 2019/20, a return to normal trade relations could boost demand for Australian cotton should China re-open their market to Australian exports, further increasing the price. At this stage, it is impossible to predict whether the election result will trigger an improvement in relations with a substantial degree of confidence. However, its potential impact on the cotton industry is significant and needs to be monitored closely as the situation becomes more apparent.

Exports To China Plummet Due To Political Tensions

List of importing markets for Australian Cotton

Source: Trade Map, Fitch Solutions

That being said, we have identified potential downside risks to our positive Australian cotton forecasts. Our production forecasts, as well as those of the USDA and Australian Bureau of Statistics, assume no extreme weather events, no widespread crop diseases, and lastly, an adequate supply of fertilizer and herbicide. With the global supply of fertilisers impacted by the events in Ukraine, this poses a threat to 2022/23’s cotton yields and total production levels.


Australian Cotton Production Outlook
Year 2017 2018 2019 2020 2021 2022f 2023f 2024f 2025f 2026f
Cotton Production '000 480 lb Bales Forecast 4090 4700 2200 670 2,546 5,500 6,000 5,700 5,871 5,700
Cotton Production '000 480 lb Bales Forecast, % change y-o-y 43.0 14.9 -53.2 -69.5 280.0 116.0 9.1 -5.0 3.0 -2.9
f = Fitch Solutions forecast. Source: USDA, Fitch Solutions

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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