AUSTRALIAN FARMERS ARE MAKING hay from Gossypium hirsutum. That's cotton to you and me.
Few people know that Australia has a cotton growing industry, still fewer realise it is the third biggest world exporter after the United States and Uzbekistan. Cotton plants thrive in the hot, dry conditions Down Under, but they also need a lot of water. So the prime areas are 452,000 hectares around the river valleys of Northern New South Wales and Queensland. Recently, they almost got too much of a good thing. Torrential rain brought the worst floods in 50 years, devastating wheat fields and marooning livestock.
But cotton is a counter cyclical crop, planted in November and harvested in May. Not only did most producers get their seeding done in the nick of time, but the deluge filled up water storage tanks, ensuring supplies for the next two seasons. The 1,500 farmers who grow the crop are enjoying something of a boom. A bumper harvest this year produced a record 3.2 million bales of cotton - a bale is 227 kilograms - and the value of sales is closing in on US$1 billion, making cotton the fourth largest farm export after wheat, wool and beef.
The price of the commodity on the New York Cotton Exchange, where 70% of the world's production changes hands, has been moving up sharply after several years in the doldrums. Demand for cotton is on the rise for the first time in almost a decade, helped by the impact of soaring oil prices on the cost of petroleum-based synthetic fibres.
It is not just firming prices that are cheering farmers. The slump in the Australian dollar to near record lows just above US$0.50 is bringing a bonanza. Cotton is selling at around US$270 a bale, but that is worth over A$500 to Australian suppliers. They have been able to sell the 2001 and 2002 harvests on the US forward markets for A$550. With average production costs put at A$350 a bale, that is very good business.
The cotton producers are currently enjoying a big competitive advantage over their US counterparts. That is just as well. Australian growers receive no government assistance to encourage the industry. By contrast 60% of the world's cotton production is subsidised by governments. The US pays out US$2 billion a year to help its growers, and this year China offered US$1.5 billion in subsidies. Australia remains a small player in the total world production of 84 million bales. China is the biggest at around 17 million bales, although both its production and consumption of cotton has fallen this year. The US comes next with 16 million bales, followed by India, Pakistan and Uzbekistan. These countries are very large consumers of their own cotton and have major textile and garment industries. By contrast, Australia exports more than 95% of its output. One third of its raw cotton goes to Indonesia, where many of the spinning mills are owned by Japanese or South Korean textile exporters. The next biggest taker of Australian cotton is Japan, followed by Thailand, South Korea and Taiwan. Altogether nine bales in every 10 are sold to Asia.
Cotton seeds arrived in Australia even before sheep, coming out with the convicts from England on the First Fleet in 1788. Little was grown until the American Civil War in the 1860s. When the cotton fields of the deep south were decimated by the fighting, Australia filled the gap with exports, in what must have been one of the earliest examples of globalisation. The product is much older than that. Oliver Cromwell ordered cotton shirts and linen for his troops on a campaign in the Bahamas. And archeologists have found cotton fabric 5,000 years old at the ancient town of Mohenjo Daro in West Pakistan. In order to combat man-made fibres that have been gradually overtaking the natural fibre market for 20 years, cotton growers have to compete on quality and raise productivity to hold prices down. Australia achieves very high cotton yields. Farmers produce 6.6 bales per hectare, compared with the average 2.5 bales in the rest of the world. The quality is such that the farmers can sell all they grow. US and other foreign buyers are flocking in. Thomas Mueller, president of Savcott, a Savannah-based cotton merchant says: "Australian cotton is one of the most advanced agricultural products in the world."
The US agribusiness giant, Cargill, is the latest arrival, joining companies like Dunavant of Memphis, Volcot and Weill Bros. This influx is good for the farmers, but bad for the Australian companies that buy and process cotton - their margins are being squeezed.
Queensland Cotton, the only publicly listed company of note, blames hot foreign competition for its forecast 10% profit decline to A$14 million this year. It is the market leader in the "ginning" of cotton, which involves using drying and cleaning machines to remove dirt and excess moisture, and then high-speed circular saws to separate the cotton fibre from the seeds. The company has operations in the US as well as Australia, giving it the ability to source cotton from both the northern and southern hemispheres the year round. But Queensland Cotton company has not fulfilled its potential since it floated in 1992, and its share price has slithered from A$4.60 to A$3.60 this year. The only reason to buy the stock would be its high yield of 13%.
It is ironic that Australia has little or no secondary textile industry. So it is in the position of selling high-grade cotton to Asia and then buying it back in finished products like shirts and socks.
Kim Morrison, general manger of major producer Colly Cotton explains: "There are spinners in India that pay 80 cents an hour for labour, and some Indonesian textile workers get US$40 a month. We will never be able to compete with that."
Australian farmers will be spending their cotton-picking time hoping and praying that the Australian dollar remains at bargain-basement levels for a long time.