The main price of Zheng Cotton rose by nearly 5% on Monday. The short-term bullish sentiment in the market is still strong, but the current situation of the industry does not support the continuous surge in cotton. On the one hand, it is the upcoming supply pressure, and new cotton will be launched on a large scale in September; on the other hand, On the other hand, consumption has not improved significantly, and it is difficult for the industry to support the trend of cotton rising.
The picture shows the spot price of cotton in Xinjiang
Since August this year, Zheng Cotton’s main contract has seen a bottom rebound, rising from 14,000 yuan/ton to around 15,000 yuan/ton, an increase of more than 6%. Zheng cotton opened higher and continued to rise on Monday, closing with a gain of nearly 5%. Overall, the market’s short-term bullish sentiment is still strong and is greatly affected by the daily limit of US cotton.
However, from a fundamental point of view, the current situation of the industry does not support the continuous surge in cotton. On the one hand, it is the upcoming supply pressure, and new cotton will be launched on a large scale in September; on the other hand, consumption has not improved significantly, and the industry end It is difficult to support the rising trend of cotton. The range of 15,500-16,000 yuan/ton is under great pressure. Be wary of rising prices and falling prices in the future.
There are bullish factors emerging from the macro perspective
After the Federal Reserve raised interest rates by 75 basis points in July, August was a gap period, and the Federal Reserve refused to make any forward guidance for the September interest rate meeting. The market believes that the Fed’s interest rate hikes may be unsustainable, especially since the Fed not only failed to shrink its balance sheet as planned, but instead restarted its balance sheet expansion from the end of July to August. This is also the reason why commodity and asset prices remain strong in the short term.
We have seen that domestic and international commodity and asset prices have begun to stabilize, and even rebounded quite a bit. Looking to the market outlook, expectations of the Federal Reserve raising interest rates may come to an end. Without the Federal Reserve substantially shrinking its balance sheet, asset prices and commodity prices will continue to maintain a oscillating upward trend.
The market price is already somewhat attractive
The downstream is still in the off-season, and orders are seriously lower than expected, which also makes the downstream extremely cautious in purchasing cotton. Cotton textile companies in some areas have been shut down on a large scale. This has led to a serious lack of buying orders from downstream textile companies. However, it should also be noted that the cotton price level of 13,000-14,000 yuan/ton is already at a historically low valuation level, which is already somewhat attractive to downstream companies.
At present, the inventory of textile mills is low. If the order level recovers in the later period, it is expected to trigger further inventory replenishment behavior by textile enterprises. At present, some textile companies have enlarged the scale of restocking at low levels. It is still uncertain whether the peak season from September to October will still be slow. From a price point of view, the buying power of textile companies will support the price of far-month contracts.
USDA sharply cuts production, raising questions
In the early hours of last Friday, USDA released its monthly report, which significantly reduced U.S. cotton production by as much as 640,000 tons from last month’s estimate, triggering the daily limit of U.S. cotton. The reason behind this, USDA explained, is that due to drought and other factors, the U.S. cotton farm abandonment rate is 43%, which has greatly affected U.S. cotton production. At the same time, China’s consumption forecast remains unchanged at 8.05 million tons, unchanged from last month’s forecast.
The USDA’s adjustments to U.S. cotton production and China’s data have raised questions in the market. From the author’s observation, USDA has indeed made certain misjudgments regarding China. It is a relatively clear fact that China’s consumption is not good, and consumption may not reach USDA’s estimates. However, U.S. cotton production has been reduced due to drought. It is difficult to verify whether the data has been lowered too much. Even so, it may not be a bullish factor for Zheng Cotton. At present, the logic of Zheng cotton and US cotton is different. Zheng cotton has a higher probability of high yield, but consumption is difficult to improve. The rise of US cotton may not drive the strength of Zheng cotton.
Huge supply will still be bad for the market
Relevant statistics show that there are still about 2 million tons of cotton harvested last year that have not been digested, and will become carryover stocks into the new year. Starting from September, the new year’s cotton will be on the market. It is currently estimated that Xinjiang has a high probability of a bumper harvest, and the output is relatively high. Growth last year means that 5.8 million to 6 million tons of cotton may soon enter the market. Ginning companies will focus on completing hedging of new cotton from September to December. The huge amount of hedging and the current consumption that is difficult to improve will make Due to the short-term imbalance between supply and demand, cotton will continue to be affected by high inventory and high production in the third and fourth quarters, and its rise will be under tremendous pressure.
Taken together, the short-term upside of Zheng cotton is limited. On the one hand, the carryover inventory is large and the probability of a bumper crop of new cotton is high. The huge supply will have an impact on the market. On the other hand, due to the high acquisition price of ginning mills last year, acquisitions will be more cautious this year. A lower opening price is expected, and the industry should seize the opportunity of this sharp rebound to hedge on highs.
</p
