Dissecting the cotton value chain: Part 1 The farm level

Transcription

1 Vol 24, No 1, page 45 February-March, 2003 The Australian Cottongrower Dissecting the cotton value chain: Part 1 The farm level By Gillian Turco, Rabobank Are cotton farmers a part of an agricultural production system or are they part of the textile industry? Arguably, by tradition cotton is an agricultural commodity but by definition of its use it is a part of the textile industry. Cottonseed is a handy by-product yet remains a small contributor to the income profile of the majority of Australian farm operations. Generally speaking the lint represents 90 per cent of income, with the remaining 10 per cent generated from sales of cottonseed. This reliance on lint production implies that greater weight should be paid to understanding the whole value chain, particularly those links which bridge the gap between agricultural commodity and fabric input. The cotton value chain is complicated. There are many linkages and the split in the system is quite pronounced (Figure 1). Compounding the complication are external factors that effect profitability. These vary considerably when examining the system from a commodity perspective compared to a textile input perspective. During 2003, Rabobank will break the value chain into pieces and examine the factors that influence profitability throughout the chain. We will identify the strengths and weakness within each segment and see how this has, and continues to, influence the Australia cotton industry. In addition, we will draw comparisons to current competitors and the risk of new market entrants at each point. The obvious starting point is at the farm level. The farm level

2 The production of cotton in Australia is intrinsically linked to the availability of water. As much as 95 per cent of all Australia s cotton is produced under irrigation. This compares to a split of 55 per cent irrigated and 45 per cent dryland as a world average. One benefit of the high intensity of irrigated production is the overall higher yield performance of Australian cotton farms. This is particularly the case when compared to our largest competitors for export market share the US, Uzbekistan and combined African countries (Figure 2). Water is a scarce resource and its use effects the wider environment and other agricultural activities. The contentiousness of the water debate is unlikely to abate in the near term and the government plans will need far more clarification before producers can get comfortable with the proposed water use guidelines. Ironically, when compared to other countries water in Australia appears relatively inexpensive (Figure 3). The Australian industry is widely accepted as one of the most efficient in terms of megalitre per tonne of lint produced. Competitors from California have taken many lessons from Australian farmers and applied them to their operations in the US. This is particularly useful when their allocations are subject to government intervention (like ours). Yet cotton in California comes a distant fourth in the line for water resources. Urban demands, environmental requirements and other foodbased agricultural activities take precedence over cotton production, forcing producers to seek the most efficient use of their increasingly constrained water resources. Producers in California and Arizona have to deal with both naturally occurring and legislated drought. From a global perspective it is important to note that Australia, while among the most efficient water users, is threatened by producers like Brazil, where water is not nearly as big an issue as it is for Australia. Of the established producers, water is also becoming an issue for

3 China and for Uzbekistan. And there are increasing water constraints being placed on some cotton areas in the US. Alternatively, some countries are yet to fully explore the water/land mix. For example in Turkey, water is priced competitively (on a global comparison) and potentially the land dedicated to cotton production could increase significantly, raising their overall profile in the sector. Cotton is produced in both developed and developing countries. So it is not surprising that crop performance, farm management practices and investment into on-farm activities varies considerably between participants in the industry. The International Cotton Advisory Council (ICAC) has collected a vast amount of data comparing the cost of production across a number of countries. But simple comparisons may not always be appropriate since inter-country comparisons of sectoral performance can vary due to subsidies, various opportunity costs and intangible fixed costs in some regions. Also, since the last survey of , some costs would have risen due to normal economic principles. Some highlights of the ICAC survey show that Australian producers have a cost advantage in some segments and bear a cost disadvantage in others. For example, the Australian use and cost of insecticides is very high followed by Brazil (Figure 4). Insecticides are an expensive component of the cost of production. For Australia some of this cost is recouped through the significantly higher yield realised at harvest. This is particularly advantageous when compared to Brazil, where the average yield is 965 kg per hectare 831 kg per hectare less than Australia (ICAC, ). But over the long-term it may be economically unsustainable to continue to use such high amounts of insecticides. Genetically engineered crops are one method for alleviating such cost burdens from producers. Brazil is an important consideration for

4 Australian producers as the long-term expectation is that production will expand, cost economies will be realised and their participation in the export market will rise. One area where Brazilian producers bear a cost disadvantage to Australian producers is in the area of weed control. Total cost Total cost of lint production includes costs associated with land rent, planting seed, fertiliser, harvest and ginning. Australian producers have made significant and continuous improvements in their cotton production practices. But overall, the cost of production remains high compared to other key producing regions (Figure 5). As has been noted, the relatively high cost of production is partially recouped in higher yields. In this case, Australia is in the middle of the road territory among high yielding cotton countries (Figure 6). Countries to watch In examining who s who in Figure 6, there are two countries of interest China and Brazil. Both have the potential to be even larger producers of cotton, with Brazil not constrained by water issues as may be the case for China. Due to a number of factors, the switch towards high yield irrigated production systems has reached a bottleneck in most countries and the expectation is that this may have peaked at 55 per cent of total cotton production. That is not to say that production in Brazil is definitely going to expand at a rapid pace. For the Brazilian industry there are a number of industry and production obstacles to consider, namely: Reducing chemical use (and cost) in production; Remaining cost competitive after a potential scaling back of current tax-subsidies that are available to producers; Improve the profile of Brazilian cotton from the

5 low quality profile that it currently has; Develop viable marketing options to strengthen the prices paid to farmers; Seek new and significant investment in the ginning sector; and, Developing market awareness for Brazilian cotton exports in the face of difficult competition from established quality exporters like Australia. China is the other big player in the system to watch. In any one season, China can swing between being a net importer or exporter of cotton. This adds another degree of uncertainty to the whole market. As an interesting aside, when the ICAC conducted its survey it was found that China (out of all respondents) had the smallest average farm size just 0.1 hectare. This is in stark contrast to the Australian situation, where larger farms have been able to reach some scale economies as specialist cotton producers. If China can realise a higher degree of industrialisation in their domestic production and provided that on-farm technologies continue to improve, there could easily be a considerable jump in their overall production of cotton. But China, like Australia, faces considerable challenges in relation to the long-term sustainability of the industry and issues relating to water resource allocation. Global focus Overall, there are real limits to the expansion of cotton production on a global scale. But the factors that determine such limits vary considerably between producing regions. Australia is well placed in the sense of total cost competitiveness in production. Added to this is the quality profile of Australian cotton, which combined with the consistency of supply, have been critical in establishing Australia s position in the export market. There are weaknesses in the Australian production system including the relatively high cost of weed control and a high degree of irrigated production (which could arguably be

6 considered a positive from a consistency of supply point of view) subject to increasing environmental and cost concerns. For more information, contact: Gillian Turco, Analyst, Agribusiness Consulting and Research Services; phone: (02) ; gillian.turco@rabobank.com