In the middle of last week, USDA released its monthly supply and demand forecast report for February. The report lowered U.S. cotton exports in 2021/2022 by 55,000 tons to 3.211 million tons; and increased U.S. ending stocks by 65,000 tons to 762,000 tons. Total global imports were reduced by 26,000 tons, of which China’s imports were reduced by 55,000 tons, partially offsetting the increase in India’s imports; exports were reduced by 25,000 tons. The overall report is neutral to bearish. Once the report was released, ICE cotton prices fluctuated and fell.
Due to logistics and shipping problems, there is a shortage of warehouses, and the progress of U.S. cotton export shipments is slow, which directly leads to the report’s downward revision of U.S. cotton exports. As can be seen from the Baltic Freight Index in Figure 1, global freight rates fell sharply at the end of 2021, but at the beginning of 2022, freight rates are on the rise again. In addition, the international COVID-19 epidemic still lingers, and port epidemic prevention and disinfection measures have also hindered the shipping process. According to Thursday’s USDA weekly export report data, from January 28 to February 3, 2022, the export shipment volume of U.S. upland cotton in 2021/2022 was 68,032 tons, a decrease of 1% from the previous week.
In addition to international logistics issues, the market’s expectations for the Federal Reserve to raise interest rates also affect the export process of U.S. cotton to a certain extent. Data from the U.S. Department of Labor showed that U.S. CPI rose by 7.5% year-on-year in January, higher than market expectations. Core CPI rose by 6% year-on-year, both the largest increases since 1982. After the data was released, the 10-year U.S. Treasury yield rose above the 2% mark for the first time in two and a half years. The market predicts that the possibility of the Federal Reserve raising interest rates by 50 BP in March is more than 50%, and it will raise interest rates by a total of 100 BP by the end of July. Since February, the U.S. dollar index has continued to oscillate higher, which also means that other countries will have to pay higher costs to import U.S. cotton, and they can only look forward to “cotton”.
The U.S. CPI is at a historically high level and is still showing an upward trend, but the year-on-year trend of the U.S. clothing CPI has turned downward and has not maintained its rapid growth. This may imply that consumer demand in the US market is not as strong as expected. It can be seen from the year-on-year inventory of clothing and fabrics of U.S. wholesalers that the inventory is currently at a high level, and signs of accumulation are obvious. Therefore, the growth rate of U.S. imports may gradually slow down or even reduce imports in the next period of time.
At the same time, according to the CFTC report, as of February 9, there were still 147,950 unpriced sales contracts, proving that the market is not willing to accept high-priced cotton, but in turn, it also formed a certain degree of support for the bottom of cotton prices. Therefore, we expect that within the first quarter of 2022, ICE cotton prices will still maintain a high level of oscillation; however, affected by the tightening monetary policies of major countries around the world, the motivation for U.S. cotton to continue rising is slightly insufficient.
In this supply and demand report, USDA predicts that Turkey’s cotton consumption will reach 1.85 million tons. Due to its geographical advantage, it is less troubled by global shipping problems, and due to duty-free access to the EU, it supports the strong export of local cotton products and textiles. . This month, India’s cotton production has been reduced by 500,000 bales due to the slow pace of new cotton coming to market, indicating that the yield per unit area is lower than expected. Stimulated by high prices, Indian cotton seed reservation orders surged by 50-60% year-on-year. This strong demand is expected to continue in the next few months; while the supply pattern of new cotton in Bangladesh and Pakistan is tight, and the overall supply exceeds demand, cotton farmers hope to sell at high prices. Seed cotton. The author believes that the current global supply and demand tension is not caused by a significant reduction in supply and a surge in consumption, but by a temporary misalignment of supply and demand due to tight global logistics and transportation. With new cotton planting coming soon, expectations for planting and increasing production will increase, attracted by high-priced cotton in 2021/2022. If there are no major changes in the weather, cotton prices will eventually return to normal levels.
In addition, we need to note that in this report, USDA emphasizes that the United States, as the world’s largest importer of cotton products, needs to actively restructure its supply chain to reduce its dependence on imports from Asian countries, especially China. U.S. retailers are struggling to comply with U.S. hold orders (WROs) on products containing Xinjiang cotton derivatives and have shown that there is little Xinjiang lint in Turkey’s supply chain from lint to finished cloth. This move is undoubtedly an important means to crack down on China’s Xinjiang cotton products.
As my country’s largest textile and apparel exporter, the United States’ apparel exports to the United States exceeded US$40 billion for the first time in 2021, hitting a record high of US$41.13 billion. On the one hand, driven by the U.S. quantitative easing stimulus plan, the market demand compressed by the epidemic has exploded with retaliation, and U.S. apparel retail sales have repeatedly hit record highs; on the other hand, under the influence of the first phase of the China-U.S. economic and trade agreement, the U.S. has also Increase the purchase of Chinese clothing products.
According to statistics from the General Administration of Customs, national textile and apparel exports in 2021 were US$315.47 billion, year-on-year.It grew by 8.4%, a historic high. Among them, clothing exports totaled US$170.26 billion, a year-on-year increase of 24%. The increase will be significant in 2021. Data from the National Bureau of Statistics show that from January to November 2021, the garment industry produced 21.3 billion pieces, a year-on-year increase of 8.5%. This indicates that foreign clothing orders increased by approximately 1.7 billion pieces in one year. The reason for such growth against the market is mainly due to the epidemic blockade policies of Southeast Asian countries. Orders returned to the country exceeded 200 billion yuan. In addition, European and American countries had earlier placed orders in order to avoid shipping congestion problems and ahead of consumption. Therefore, my country’s cotton market generally showed a “low peak season” ” and “the off-season is not off-season” situation.
With the advent of the post-epidemic era, it is only a matter of time to resolve key issues such as tight shipping and rising freight costs. Therefore, the view of supply and demand mismatch is not enough to support high cotton prices in the long term. my country is still the world’s largest textile producer and exporter. However, as domestic costs rise and international procurement trends shift to Southeast Asian countries such as Vietnam and Laos, after reaching a peak of US$186.28 billion in 2014, China’s clothing exports have is declining year by year. Although there will be a sharp rise in 2021, as the United States makes a fuss about the “Xinjiang cotton” issue, the “Xinjiang ban” policy becomes stricter, the new round of economic and trade agreements have not yet been implemented, and China-US trade frictions arise, China’s exports The outlook is not optimistic.
Overall, the shortcomings of the economic stimulus plans adopted by various countries due to the raging global epidemic have initially emerged. Domestic inflation levels in major countries in the world are at high levels, and tightening monetary policies have been put on the agenda. After most international commodities have exceeded historical highs in 2021 The market will gradually come under pressure; and the country is facing three major pressures: shrinking domestic demand, supply shocks, and weakening expectations, which also indicate that cotton prices will be difficult to operate at high levels for a long time.
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