Against the background of the Federal Reserve raising interest rates and the slump in commodities, cotton futures were also sold wildly. On the 24th, cotton once fell 8%, with the price as low as 16,885 yuan/ton, a new low in the past 10 months. Since June, cotton has been falling, with a cumulative decline of 17%! ICE cotton has fallen by more than 20% this month.
Last Friday, the main contract of Zheng Cotton opened lower and moved lower, hitting 16,885 yuan/ton during the session. This level was the lowest record in the past nine months for the 09 contract, and the main continuous price reached a new low in the past eleven months. The contract finally closed at 17,230 yuan/ton, with a daily decline of 6.94%. The speed and depth of Zheng Mian’s downward adjustment exceeded market expectations. Overnight ICE cotton futures fell more than 5%, falling for a fourth consecutive day and hitting a nearly nine-month low. Keith Brown, president of Keith Brown and Co, a cotton brokerage in Georgia, said that speculators, investors and traders are liquidating their long positions, and the testimony of Federal Reserve Chairman Powell makes them worried about the risk of economic recession.
Recent cotton futures market performance
Why does cotton continue to plummet? What are the main factors?
1. The Federal Reserve is raising interest rates frantically, and concerns about economic recession are rising.
Recently, against the background of a sharp interest rate hike in the United States (by 75 basis points in June), the world has entered an interest rate hike cycle, and market concerns about a global economic recession have increased. Commodity prices have plummeted, with copper, iron ore, coal and other prices all suffering heavy losses; agricultural products are not immune to high levels, with cotton futures falling all the way from the 22,000 mark to around 17,000. In addition, the Federal Reserve will raise interest rates by at least 50 basis points in July, and market concerns will put pressure on bulk prices.
2. The United States completely bans Xinjiang cotton
European and American boycotts of Xinjiang cotton have intensified. According to market news, the Biden administration has implemented a comprehensive ban on Xinjiang products. Starting from June 2022, U.S. Customs will strengthen inspections of products imported from China. Once the cotton used in the product is found to come from China Xinjiang, Uzbekistan and Turkmenistan will be seized or even destroyed on the spot.
3. The supply side maintains a loose situation
According to data from the Cotton Information Network, the national cotton commercial inventory in May was 4.1628 million tons, a year-on-year increase of 584,900 tons (an increase of 16.3%), the highest level in the same period in history, and the year-on-year increase continued to expand, showing that upstream cotton supply is loose. At present, Xinjiang still has a large amount of cotton to be sold, and the sales progress is significantly slower than the same period in previous years. As the loan repayment date continues to approach, cotton ginning mills are facing serious losses and are waiting for the expected implementation of the national rotation policy.
Internationally, the U.S. Department of Agriculture’s June supply and demand report continues to lower global cotton production and ending stocks for 2021/2022, mainly due to larger production reductions in India and Brazil. The tight international cotton supply situation this year has not changed, supporting the external cotton market to continue to operate at a high level. However, the inhibitory effect of high cotton prices on consumption is emerging. The United States Department of Agriculture has lowered global cotton consumption for this year and next year, and the growth rate of global terminal demand is also slowing down at the margin.
4. Low consumption season and low demand
At present, it is the off-season for textile industry consumption, and insufficient downstream orders have led to weak demand. Southeast Asian countries are facing an outflow of orders in the face of the epidemic. Textile companies continue to have insufficient orders and finished product inventories continue to accumulate. As textiles enter the off-season, new orders are insufficient and demand itself is weak. The continued rapid decline in cotton futures spot prices from late May to June further slows down the purchasing pace of traders and downstream companies, and the average operating rate remains at 5 into the following low levels.
Bear market slowly! Cotton may continue to fall in the medium to long term
This time Zheng Mian’s decline showed a collapse of the army. It was obviously seriously disturbed and affected by market sentiment. Otherwise, the large decline would not have run so smoothly. I am afraid only the market can give the answer when the decline can be stopped. . Faced with such a plunge, how has the entire cotton spinning industry chain been affected?
Guotai Junan Futures analysis said that due to the sharp decline in ICE cotton, market pessimism continued to spread, and domestic cotton futures fell further. The sharp decline in international cotton prices, especially the decline in forward cotton prices, has made the market more pessimistic about the outlook for cotton demand in the new year. This extremely pessimistic sentiment about demand currently dominates the domestic and foreign cotton markets, and the periodic market has stopped falling. To stabilize, we still need to see support from the demand side, whether it is centralized procurement from the downstream or policy support.
Regarding the focus of the market outlook, Li Min, a soft commodity researcher at the Huishang Futures Research Institute, said that in the later period, we must first focus on the macroeconomic aspects of the Fed’s interest rate hikes and inflation. Clothing is highly resilient to the impact of macro-consumption. Clothing consumer goods, which can be bought or not bought if consumption is poor, 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.
Regarding the follow-up trend of cotton, Shenyin Wanguo Futures analyzed that domestic cotton production in the new year is expected to be stable, but downstream demand continues to be poor, the foreign trade export situation is severe, and the pressure on upstream ginners to repay loans continues to increase, and short-term cotton prices will continue to bear the burden. pressure. NoZheng cotton has experienced a large decline recently, and the negative factors have been partially reflected. The market is currently waiting for the emergence of a rebound driver. The call for Xinjiang cotton rotation policy continues to heat up. If the country purchases and reserves in the future, cotton prices will still rebound sharply. possibility. However, under the loose supply and demand tone of the global cotton market in 2022/23, the mid- to long-term trend of cotton prices is still weakening.
Orient Securities Futures pointed out in its semi-annual report that cotton has entered a bear market as a whole. Under the pessimistic demand outlook, the outlook for the international cotton market is bearish; domestic supply and demand are both weak, the inventory and financial pressures of upstream ginners still need to be resolved, and downstream textiles are still facing the dilemma of “product inventory backlog and insufficient orders”. Domestic demand in the future The extent of marginal improvement is uncertain, and external demand is not optimistic due to the increased resistance to Xinjiang cotton in Europe and the United States. The demand outlook is difficult to give the market firm confidence. In addition, June and July are the off-season for textiles, and the Federal Reserve may also aggressively increase production in July. news, the external macro environment is bearish.
It is expected that the weak market situation of Zheng cotton will continue in the third quarter, and the momentum may slow down. In the fourth quarter, there are expectations for purchasing and stockpiling during the new cotton acquisition and listing period. The negative sentiment will continue to be released in the third quarter, and the price may rebound weakly in the fourth quarter. Overall, cotton may continue to fall in the medium to long term.
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