The higher-than-expected performance of the U.S. CPI in August re-stimulated market expectations for the Federal Reserve to raise interest rates. Commodities fell again, with U.S. cotton falling below 100 cents/pound. During the same period, Zheng cotton, which symbolizes supply and demand in the domestic market, performed strongly, and both spot cotton prices and downstream yarn prices showed a stabilizing and rebounding trend. The recent strong performance of Zheng cotton is mainly due to the replenishment of domestic cotton downstream.
However, the downstream stocking drive does not mean that consumption has truly improved. Based on our macro understanding, we still maintain a pessimistic view on the end market. First, with the recovery progressing slowly, investment and consumption drivers are weak, and conservative sentiment prevails. Second, overseas is in a tightening environment of high inflation and high interest rates, which has led to a decline in clothing consumption in the United States. High clothing imports and high inventories are the main symptoms, which means that the end consumption power is weak, but clothing manufacturers still maintain high supply, and supply and demand Mismatching has caused high clothing inventories, and orders may continue to shrink in the future. The expansion of textile production capacity in 2021 means that it will take time to clear production capacity, blind operations will continue, and operators still have a sense of luck. This domestic stocking drive comes from the rebound in processing profits brought about by the sharp drop in textile raw material prices, and the restoration of low raw material inventories in the early textile losses. However, under the decline of the macro environment, it may cause inventory to accumulate again in various channels of the textile industry chain. .
As textile consumption continues to weaken, textile raw materials represented by cotton may continue to decline, but the bear market will inevitably encounter rebound obstacles. As the new year’s seed cotton weighing scale approaches, short-term market conflicts focus on the seed cotton purchase market. Seed cotton is the primary agricultural product grown and harvested by cotton farmers, and it is also the raw material for processing the lint cotton that is the subject of market transactions. The acquisition period is concentrated from October to November every year, but the price game in these two months can basically determine the entire annual lint cost position. According to the pattern of the past two years, the grabbing behavior of ginners during the acquisition period will not only push up the price of seed cotton, but also bring support to the lint market. Although Xinjiang ginners generally suffered a huge floating loss of 8,000 yuan/ton last year, the author predicts that there is still the possibility of a rush to harvest the seed cotton market this year. There are two reasons:
First, cotton farmers expect to pass on high planting costs to ginners. This year, against the background of rising costs of chemical fertilizers, land rent, etc., the fact that Xinjiang cotton cultivation costs are basically confirmed is that the cost of renting land for mechanical harvesting is about 3,000 yuan per mu, which is about 25% higher than the same period last year. Calculated based on a yield of 400 kilograms of seed cotton per mu, the cost of seed cotton per kilogram is about 7.5 yuan. High costs have aggravated cotton farmers’ reluctance to sell. It is expected that at the beginning of the scale opening, cotton farmers’ expected prices will first be benchmarked against last year’s seed cotton price rather than the current lint price. During last year’s acquisition period, Xinjiang seed cotton was weighed at 10 yuan/kg. In mid-to-late October, it once rose to 11.4 yuan/kg, with the lowest price falling. to 8.4 yuan/kg.
Second, Xinjiang’s ginning production capacity has not been significantly reduced. According to statistics from the first two batches of cotton target price reform processing enterprises announced by the Xinjiang Development and Reform Commission, there are 489 ginning factories this year, 53 fewer than the first two batches last year. The ginners that lost money last year have been replaced by some participants with financial strength and speculative nature. Therefore, the situation of oversupply and insufficient supply in the seed cotton market has not changed.
Can the possibility of a rush harvest bring about seed cotton speculation, thereby boosting lint prices? The author believes that in an overly competitive environment, ginners are still facing unsolvable difficulties this year, and they are unable to smoothly pass on the cost of seed cotton through the sales end. First, in an environment where there is a possibility of harvest harvest, the ginners that have entered the market cannot escape the predicament even if they have a cautious attitude towards acquisitions. Open acquisitions can only accept the pressure of high-priced seed cotton, while cautious acquisitions will face the pressure of capacity utilization. Risks of deficiencies and high unit output costs. Second, the dilemma in the seed cotton market cannot be broken by forces other than cotton farmers and ginners, and the actual downstream conditions cannot be effectively fed back into the seed cotton supply and demand game, resulting in a disconnect with the downstream. The disconnection between the upstream and downstream markets and the competition of overcapacity resulted in the ginners being unable to transfer risks smoothly through the futures market during the acquisition period, and the market was unable to provide reasonable hedging profits. The ginners chose to sell at higher prices through the spot market, returning to the top. situation for one year.
To sum up, if the downstream decline does not change, cotton’s cost support theory is still untenable, and the market outlook remains bearish. If the seed cotton market encounters a rush to close again and forms support for the futures market, traders can try to short the market after the price of seed cotton becomes clearer. However, the price-raising strategy of ginners will bring about firmness in recent-month contracts. If the downstream cannot accept the cost of the new season and the sales of new crop lint are unsalable, you can try 1-5 regular sets.
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