Summary
As a staunch bearer of the cotton market in the past six months, the author did not expect Zheng Cotton’s decline to be so violent. In the hot article “Policy Expectations Failed, Cotton Prices Return to Downtrend” on June 16, the author preset two bear market decline target levels, one is the direct subsidy price of 18,600 yuan/ton, and the other is the planting cost of 17,500 yuan/ton. tons. At present, both target levels have fallen below. With the market running at this point, predicting the market outlook has become even more difficult. The author believes that the long-term bear market has not ended yet. There may be a bear market of more than 3 months in terms of average duration, and the extreme low in space points to around 15,000 yuan/ton. However, in the short term, Zheng cotton has oversold, and spot spinning profits continue to expand. If the market outlook encounters policy intervention or weather speculation, it can easily trigger a rebound of more than a thousand points. After the rebound, a new empty spot will be formed.
1. Bear market duration and low point calculation
Each bear market has its own unique features, and we can only get some inspiration from the commonalities of history. Although the Federal Reserve is raising interest rates and shrinking its balance sheet, the money stock in the financial system will still be at a historically high level in the coming year, and all commodities are more or less supported by a liquidity premium. In other words, the predicted price we obtained through the balance sheet analogy can basically be characterized as the extreme low point of this bear market.
Figure: Relationship between global cotton prices and inventory-to-consumption ratio
Data source: Compiled by USDA, WIND, and COFCO Futures Research Institute
In June, USDA estimated the global cotton inventory-to-consumption ratio in 2022/23 to be approximately 68%. The corresponding times and prices for the inventory-to-consumption ratio of 68% in the past ten years are: July 2012, corresponding to 75 cents/pound; May 2018, corresponding to 87 cents/pound; September 2019, corresponding to 59 cents / pound; in February 2020, it corresponded to 69 cents / pound; the average value was approximately 73 cents / pound. However, the market generally believes that USDA’s consumption estimates are too high, especially those in China, and the market outlook is facing great downward pressure. USDA estimates that global consumption this year will be 26.495 million tons, and China’s consumption this year will be 8.274 million tons; global consumption in the new year will be 26.462 million tons, and China’s consumption in the new year will be 8.274 million tons. The author revised China’s consumption for this year and next year down to 7.51 million tons, and the adjusted global cotton inventory-to-consumption ratio in 2022/23 became 76%. The corresponding times and prices for the 76% storage-to-consumption ratio in the past ten years are: January 2013, corresponding to 80 cents/pound; July 2017, corresponding to 67 cents/pound; April 2020, corresponding to 53 cents / pound; in May 2021, it corresponds to 83 cents / pound; the average value is approximately 71 cents / pound. The author predicts that the low of US cotton in this round of bear market will probably be around 71 cents/lb. Currently, US cotton at 2307 has fallen below 90 cents/lb, and there may still be some room to explore.
Since Zheng Mian was listed in 2004, there have been 7 large-scale bear markets; the average running time is 10.7 months, the longest time is 16 months, and the shortest time is 3 months; the average decline is 34.79%, the maximum decline is 45.15%, and the minimum decline is 26.76% . We first calculate this bear market based on the average duration and decline. Since Zheng cotton peaked at 22,960 yuan/ton in October 2021, this bear market may run until September 2022, with the low point pointing to 15,000 yuan/ton. The import price calculated from the New York futures price of 71 cents/pound plus freight basis is slightly less than 15,000 yuan/ton. It is expected that the inversion in the price difference between domestic and foreign cotton will gradually narrow in the bear market. At present, there is no big contradiction between these two guessed prices, and they can provide us with some guidance.
2. Expectation deviation
The first thing that can bring about bias is policy. At present, most of the negative policies have been priced in. What we need to be wary of later is the positive policies. The Xinjiang cotton ban has officially come into effect on June 21, and rumors of Sino-US trade tariff reductions and stockpiling have also come to nothing for the time being. This, together with deepening external concerns about austerity and recession, has contributed to this rapid decline. At present, the sales of cotton ginning mills are still under great pressure, and the requirement to settle loans at the end of August has not been extended. According to the National Cotton Market Monitoring System, as of June 16, Xinjiang’s cotton sales progress was only 58.5%, a year-on-year decrease of 40.3 percentage points. The risks caused by the sharp decline in cotton prices have exceeded the tolerance of the ginners, and it has also contributed to the expansion of downstream spot spinning profits. At this time, the probability that certain policies will be forced to stabilize the market is increasing. If there is news about purchasing and stockpiling in the market outlook, it may trigger a price rebound. In terms of weather, the threat of drought in Texas has not been eliminated, but rain is forecast for the next week and the weather rise and water drop will make it difficult to deviate from expectations for the time being. If the weather premium rises again in the market outlook, it will also constitute another condition for a rebound. In addition to the weather, pay attention to the supply and demand report at the end of the month. At present, the author expects that the area may not change much.
Figure cotton sales
Data source: National Cotton Market Monitoring System, compiled by COFCO Futures Research Institute
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