In October 2021, due to the overcapacity of ginners, there was a rush to harvest new cotton. Driven by the market enthusiasm, cotton prices rose crazily from 17,000 yuan/ton to 22,000 yuan/ton in just two weeks. The high prices of raw materials have caused textile companies to fall into deep losses. Inventories in the middle and lower reaches have continued to hit new highs, and negative news has continued to accumulate. In mid-June 2022, international central banks generally raised interest rates and tightened monetary policy, and the downward pressure on the economy continued to increase. After the inflation wave, Zheng cotton, which was swimming naked, plummeted, and it once again took two weeks to return to the price before the new cotton harvest. On June 23, the main force of Zheng Cotton fell sharply by more than 3% to close at 18,435 yuan/ton.
What is the fundamental situation of cotton at home and abroad? What are the driving factors behind the coordinated decline in domestic and foreign cotton prices? USDA will release a planting area report at the end of this month. What are the expectations for cotton data? Is there room for cotton prices to fall further in the short term? What aspects will the market outlook focus on?
What is the fundamental situation of cotton at home and abroad? What are the driving factors behind the coordinated decline in domestic and foreign cotton prices?
[Shanghai East Asia Futures Soft Commodity Researcher Cui Shengnan]: Cotton is in a situation of weak supply and demand, with even weaker demand. The drive from the foreign cotton supply side gradually weakened: 1) Brazilian cotton gradually came on the market, and the pressure on the early supply side gradually eased; 2) Rainfall in Texas, the United States, eased the drought, and the number of unpriced sales orders continued to decrease; 3) Indian cotton production reduction was basically digested.
After the drive from the foreign cotton supply side gradually weakened, the market focus turned to demand. The market believes that global cotton consumption may peak, and negative feedback makes it difficult to maintain high cotton prices, and there is the possibility of further declines in demand. 1) Tightening of macroeconomic policies and the decline in global economic growth are negative for cotton consumption; 2) Negative feedback brought about by high cotton prices: a. The negative feedback was first reflected in China. High cotton prices caused some textile mills to switch to chemical fiber production. Repeated epidemics have caused the country to The vulnerable downstream is vulnerable; b India and Southeast Asian countries, which enjoy the dividends of outflow of orders, are gradually intensifying their resistance to Khmer prices and taking the initiative to cut production.
The mid- to long-term cotton supply and demand pattern will gradually loosen, so the mid- to long-term short-term thinking remains unchanged.
[Li Min, soft commodity researcher at Huishang Futures Research Institute]: The recent fundamentals of cotton at home and abroad must be inseparable from the disturbance of weak consumption. Since the Federal Reserve aggressively raised interest rates by 75bp on June 16, domestic and foreign cotton futures have fallen together. In fact, domestic cotton has been weakening in consumption logic since April.
The 618 that just passed has given a lot of confirming information. According to various data, except for a few categories such as household appliances, maternal and infant products, and pet products, the pre-sales performance of other categories during this year’s 618 has declined year-on-year. According to Social Consumer Goods Retail The total increase and decrease shows that in the first half of this year, food, beverages, and petroleum products ranked among the top three in the list of increases, while automobiles, clothing, and cosmetics ranked in the top three in the list of decreases. The macro changes in the consumption environment have directly affected the decision-making of merchants to participate in 618, and they dare not “bet” on the huge rebound in consumption in a short period of time. This year’s 618, the expectation of consumption recovery is obviously extremely weak. From an objective perspective, the main reason is that production and supply chains have almost stagnated. Many clothing brands’ production plans have been completely disrupted, and most businesses have even given up most of their sales this year. . This is obviously not conducive to the overall growth of consumption.
Overall, domestic cotton supply is loose, demand is weakening, textile companies are under greater inventory pressure, and cotton prices are under significant pressure.
[CITIC Futures Wu Xinyang]: Recently, domestic prices have fallen, market sentiment has become pessimistic, Xinjiang ginnery lint has expanded losses and is unsalable, and the loan repayment period is approaching, which has intensified market selling pressure.
The main line of global cotton or cotton textile consumption peaking and falling is still continuing in the market game. The trend on the demand side will not change, and the cake of cotton textiles is shrinking. Domestically, as futures prices have fallen sharply recently, the rights to Xinjiang cotton have obviously shifted, and traders and spinning mills have mostly passively taken over. Overseas supply and demand are tight, but under the suppressive effect of high cotton prices, Southeast Asia’s demand for cotton imports has weakened significantly, and the start-up of textile companies has declined. As Brazilian cotton and Australian cotton come on the market in the later period, supply and demand will still show a further easing trend.
USDA will release a planting area report at the end of this month. What are the expectations for cotton data?
[Shanghai East Asia Futures Soft Commodities Researcher Cui Shengnan]: The tone for cotton planting expansion in the new year has been set, and cotton output is determined by two factors: yield per unit area and harvested area. We need to continue to pay attention to the weather in the main producing areas, especially Texas, which will determine the final increase in global cotton production.
The U.S. Department of Agriculture’s March planting area intention report showed that the U.S. cotton planting area in 2022 is expected to be 12.2 million acres, a year-on-year increase of 9%. Analysts before the report expected plantings of 12.3 million acres. Subsequent reports in May and June predicted 12.23 million acres. However, due to drought in Texas, the Department of Agriculture gave a 25% abandonment rate, and the output decreased by 5.82% year-on-year.
[Li Min, Soft Commodities Researcher at Huishang Futures Research Institute]: Judging from the growth cycle of cotton crops in major cotton-producing countries in the world, the cotton planting period is from March to May in China, the United States, and Turkey, from April to June in Pakistan, and from April to India. In August, the current planting data of Brazil in China and the United States are relatively certain. According to various data, China’s cotton sown area will increase by 2.5% year-on-year in 2022. India’s CAI estimates that its cotton sown area will increase by 8-12%, and the US cotton sown area is expected to increase by 9%.
【middleXinjiantou Futures Wu Xinyang]: The grain-cotton ratio in the U.S. market has not been significantly biased towards cotton in recent months. The planting area report at the end of the month is likely to be similar to the planting intention at the end of March, which is in line with expectations and remains at 12.23 million acres. Nearby, the actual planting increased by 9% compared with last year. In terms of yield, it is expected that there is still room for downward adjustment due to the failure of drought conditions in the main producing area of Texas to be effectively alleviated. The report is overall bullish and may be more supportive of the US cotton market than the Zheng cotton market.
Is there room for cotton prices to fall further in the short term? What aspects will the market outlook focus on?
[Shanghai East Asia Futures Soft Commodity Researcher Cui Shengnan]: Against the background of weak domestic cotton fundamentals, downstream textile mills have historically high finished product inventories, and there is a lack of motivation to replenish inventories during the traditional off-season. Follow-up attention will be paid to the actual new orders of downstream textile companies. The supply side is paying attention to the extent of cotton planting expansion in the new year and continues to pay attention to the weather conditions in the main producing areas.
[Li Min, soft commodity researcher at Huishang Futures Research Institute]: Cotton still has room to fall. In the later period, we must first pay attention to the macroeconomic aspects of the Fed’s interest rate hikes and inflation. Today, Powell gave the clearest hint that the U.S. economy may be in recession for the first time. However, expectations for the Fed to raise interest rates by 75 bp in July are still strong, which shows its determination to raise interest rates. Clothing is more resilient to the impact of macro consumption. Clothing can be bought or not bought if consumption is not good. Consumer goods will bear the brunt of the squeeze and will still not be optimistic in the future; secondly, we must pay attention to purchase and storage expectations. At present, purchasing and stockpiling may be the only way to hedge against weak consumption.
[CITIC Futures Wu Xinyang]: I think the short-term 01 contract and 05 contract are undervalued. In the market outlook, domestic fundamentals are still facing a situation of weak supply and demand, and prices are likely to continue their downward trend, but the driving role of policies may gradually emerge. Although the current purchase and storage policy has not appeared in response to the appeal of Xinjiang cotton ginning mills, which has also caused market concerns and accelerated the decline, this does not mean that the possibility of future purchase and storage is low. In the period from 2014 to 2021, China Reserve’s net cotton sales and storage reached 11.72 million tons. The inventory level has clearly bottomed out, and the net purchase and storage cycle has now begun. The State Reserve’s regulatory measures may be effective in the short to medium term to support the cotton spinning industry chain. On the one hand, in order to protect cotton farmers’ planting profits and stabilize seed cotton prices, the market support method can be adopted to purchase and store lint cotton during the October purchase period, so as to stabilize cotton prices and the mentality of ginners. On the other hand, in order to protect downstream orders, the foreign cotton purchased and stored in the early period when the internal and external price differences were high can be sold to meet the textile industry’s demand for non-Xinjiang cotton. In addition, the State Reserve is at a low point in inventory, and the price difference between domestic and foreign prices is inverted. Xinjiang cotton is in turn, which can economically meet the demand for replenishment.
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