Since April 2020, the global outbreak of the new coronavirus has caused panic in the commodity and financial markets. ICE cotton has fallen below 50 cents, and domestic cotton has fallen below 10,000 yuan. Since then, ICE cotton has been on a roll. Although there were some adjustments in the middle, the overall trend was a slow bullish rise. It continued to rise to a high of 155 cents in May this year, and then began to adjust. Will 155 cents be the end of this round of ICE cotton’s rise? How far can ICE’s strong momentum go? The author’s analysis is as follows:
USDA report likely to increase U.S. and global cotton production
The USDA report in May unexpectedly lowered the U.S. cotton production in 2022/23. The reason is that although the U.S. cotton planting area increased by 1 million acres year-on-year, the U.S. cotton abandonment rate in 2022/23 more than doubled year-on-year, so cotton production decreased year-on-year. 1 million packages. From the current point of view, the dry weather in the southern United States has been greatly alleviated, and the cotton planting speed has accelerated. As of June 5, the US cotton planting progress is 84%, exceeding the five-year average of 76%. New cotton has not been affected by the weather. . Therefore, in the June report, USDA is likely to increase US cotton production.
Amid high cotton prices, cotton planting areas are expected to increase in both China and India. According to the nationwide cotton planting intention survey conducted by the National Cotton Market Monitoring System in mid-to-late March, China’s intended cotton planting area in 2022 is 43.98 million acres, an increase of 789,000 acres or 1.8% year-on-year. Among them, the intended cotton planting area in Xinjiang is 36.390 million acres. , a year-on-year increase of 2.3%. The Cotton Association of India said in early June that the planting area in India, the world’s largest cotton producer, may jump to an all-time high in 2022, growing by as much as 15% year-on-year, as strong cotton prices prompt farmers to switch to cotton. Since Indian cotton depends mainly on the weather, the distribution of monsoon rainfall will determine the size of the crop. India’s monsoon rainfall in 2022 may reach the historical average, and the average cotton yield is expected to recover this year.
The impact of U.S. interest rate hikes on cotton
The Federal Reserve began to raise interest rates in March this year, and the U.S. dollar index rose sharply, which still has a certain negative impact on the entire commodity. Historically, in the past 40 years, the Federal Reserve has raised interest rates a total of 7 times. The last time it raised interest rates was from December 2015 to December 2018, from 0% to 2.25%. Then during this stage of the interest rate hike cycle, the performance of cotton and other agricultural products is as follows:
Judging from the statistical performance of futures prices, most agricultural products have risen during the interest rate hike cycle. This is consistent with the logic of interest rate hikes. Overheating of the economy must curb inflation. Well, during the two interest rate hikes this year, commodities performed generally or even declined slightly. The author believes that high prices are the main reason. Before the interest rate hike, agricultural products had already risen sharply during the epidemic, and the conflict between Russia and Ukraine also brought grain futures to a higher level. Then when the interest rate was raised, either the profits would be exhausted, or the current would retreat, and prices would begin to fluctuate and fall. Therefore, this round of U.S. interest rate hikes seems to be different from the previous round. Commodities are at a historical high price zone instead of the previous low zone, which will have a negative impact.
Funds gradually reduce long positions
The fund’s net long position in ICE cotton reached its peak since the epidemic on October 5, 2021, and then gradually reduced its position. Even though cotton has risen rapidly since March this year, the fund has not significantly increased its position, but has continued to slowly reduce its long positions. . The driving force for price increases comes from trade point price push, rather than funds continuing to allocate long positions. Since May 10, the fund has reduced its long orders for four consecutive weeks, and there are obvious signs of exiting cotton. With cotton growing normally in the southern United States, funds are expected to have no interest in increasing their long positions in cotton again.
The rise in ICE cotton is the starter, driving up global cotton prices. The price of cotton is now at a historically high level, and the price of crude oil is not low. It is under the U.S. interest rate hike cycle. Because the next contract will be a new cotton contract, there is a large amount of cotton in the market for delivery or time to move positions, and it is priced at trade points. The logic of liquidating positions to drive up front-month futures prices is difficult to continue. There is basically only one factor that causes cotton to rise, and that is the weather, while there can be many factors that affect cotton prices to fall.
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