In January 2022, cotton still maintained high and strong oscillations. In the short term, ginners have difficulty selling cotton, and sales progress has dropped sharply year-on-year. Downstream demand has been weak, and the contradiction between supply and demand has intensified.
Be wary of short-term macro risks
Looking forward to the first quarter of 2022, the haze of stagflation is actually affecting the global economy. U.S. GDP dropped to 2% in the third quarter of 2021, while the inflation rate rose to 7% in December 2021. Taking into account the sharp rise in housing prices and U.S. stocks, real inflation The expansion rate will be higher, basically reaching double digits, and a stagflation pattern will be formed. Stagflation has a greater impact on commodities. Due to economic stagnation and rising inflation, consumption will be suppressed to a large extent and demand will be even more sluggish. We predict that industrial product prices are expected to drop significantly in 2022. In addition, stagflation will also have a negative impact on European and American stock markets, which is generally negative for the stock market and will also be negative for global consumption. In late January 2022, European and American stock markets began to decline significantly, with a clear head pattern. It is expected that the downward trend of European and American stock markets will continue during the Spring Festival, which is negative for global risk assets.
The contradiction between supply and demand intensifies
From the perspective of the industrial structure, ginning mills are currently experiencing difficulties in sales and prices remain high, which provides certain support for cotton prices. However, downstream resistance to high-priced cotton is relatively strong, and textile mills just needed a small amount of restocking a year ago. Judging from commercial inventory data, cotton commercial inventory hit the highest level in the past five years in December last year, reaching 5.5598 million tons; the inventory of finished products in downstream textile companies also rebounded rapidly, and the inventory of gray fabrics rose to near the highest level in recent years, indicating that the destocking of finished products is slow. From the perspective of textile enterprise profits, high-priced cotton has significantly compressed the profits of textile enterprises, and downstream support for rising cotton prices is limited.
Policy support
Policies also have certain support for ginners. Not only may local purchasing and storage policies be introduced, but also related measures may be introduced to extend loan periods and relax repayments for ginners. In the future, further measures to promote Xinjiang cotton sales may be introduced. Relevant policies are good for cotton in the short term, and the downside space for cotton is limited.
23,000 yuan/ton is a strong resistance level
Overall, the short-term upside space for cotton is limited, and the focus of cotton trading will gradually shift to downstream consumption. Technically, there is a strong resistance level near 23,000 yuan/ton. It is expected that cotton will maintain a wide oscillation trend in the first quarter, with the oscillation range being 19,000-23,000 yuan/ton.
Looking at the volatility of cotton options, the volatility level has dropped from 45% to around 23%. On January 21, the implied volatility of cotton options remained at around 22%. As market volatility weakens, option volatility is expected to decline. Short-term oscillations are suitable for selling options, and investors can sell them for 24,000 yuan/ton. Execution price call options and put options below 19,000 yuan/ton.
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