Currently, the global economy continues to recover and has not yet returned to pre-epidemic levels. Global monetary policies are accelerating in diversification under a loose tone, and various uncertainties have not yet settled. It is determined that cotton prices have risen to the highest level since the epidemic. In the critical period of alternation between old and new cotton, what will be the next market trend? Will it continue to rise or fall? !
Market Review
| International cotton prices fluctuate upward
Since the beginning of June, U.S. inflation has hit a new high, asset prices have continued to rise, and international cotton prices have followed the trend; during this period, the Federal Reserve’s interest rate meeting hinted at the end of 2023 Before raising interest rates, international cotton prices once fell; however, the Federal Reserve continued to moderate its interest rate hike remarks and reiterated that inflation is only a temporary phenomenon, and international cotton prices continued to climb to around 90 cents/pound. As of July 27, 2021, the settlement price of the main ICE cotton futures contract was 90.23 cents/pound, an increase of 5.98 cents/pound or 7.10% from the beginning of June. The International Cotton Index represents the average CIF price of imported cotton in China’s main port. (M) The average price is 100.85 cents/pound, an increase of 8.88 cents/pound, or 9.66%, from the beginning of June. The import cost in RMB is 16,084 yuan/ton with a 1% tariff, an increase of 1,341 yuan/ton, or 9.10%, from the beginning of June.
| Domestic cotton prices fluctuate upward
After a period of decline, domestic cotton prices experienced a technical rebound in early June. On June 11, Zheng cotton broke through the 16,000 yuan/ton mark; with the intensive introduction of national policies to ensure supply and stable prices , the cotton price oscillated and stabilized to 15,400 yuan/ton; since late June, as the external market rose, bull funds once again drove the domestic cotton price to rise sharply, breaking through the 17,000 yuan/ton mark, setting a new high since the epidemic. As of July 27, 2021, the settlement price of the main cotton futures contract on the Zhengzhou Commodity Exchange was around 17,480 yuan/ton, an increase of 2,010 yuan/ton from the beginning of June, an increase of 12.99%; the National Cotton Price B Index (representing the 328-grade lint price in the Mainland ) is about 17,440 yuan/ton, an increase of 1,688 yuan/ton from the beginning of June, an increase of 10.72%.
Market Analysis
| Domestic and foreign macro environment
It is difficult to withdraw the economic rescue policy, and the Federal Reserve faces a dilemma. Entering the second quarter of 2021, although the economies of major economies continue to recover, they have not yet returned to pre-epidemic levels. The current Fed policy faces a dilemma. On the one hand, the U.S. labor shortage, coupled with the uncertainty of the new coronavirus, affects businesses and economic recovery; the other is the risk of inflation. U.S. stocks have risen sharply to record highs, and the U.S. consumer price index hit a record high in June. The biggest increase since 2008 increases the need for monetary tightening by the Federal Reserve. We need to be alert to the risk of asset adjustment caused by the Federal Reserve’s early exit from its easing policy or the marginal slowdown in liquidity expansion.
The marginal slowdown in domestic economic growth has begun to appear, and economic policies are focused on stability. Data from the National Bureau of Statistics show that my country’s GDP growth rate was 7.9% in the second quarter (18.3% in the first quarter, and the two-year average was 5.5%). The economy is growing steadily and is slowing down at the margin. In May 2021, the country successively launched policies to ensure supply and stabilize prices. On July 15, the central bank lowered the deposit reserve ratio of financial institutions by 0.5 percentage points. It insisted on the stability and effectiveness of monetary policy and did not engage in flooding, but targeted measures. Strengthen efforts to support small and micro enterprises.
| Supply and demand situation analysis
(1) Supply
Entering the later part of the year, global cotton stocks have declined, but are at a relatively abundant level in history; the weather in the northern hemisphere is normal, which is conducive to the growth of new cotton; the new cotton harvest in the southern hemisphere is progressing smoothly, and global cotton production in the new year is expected to increase.
1. International cotton market supply
Global cotton supply is relatively abundant in the second half of the year. According to predictions by international institutions, by the end of August 2021, global cotton inventory levels will be between 19.94 million tons and 20.99 million tons, a year-on-year decrease of about 6% and 4.2% to 4.3% higher than the average of the past five years. After September 2021, cotton in the northern hemisphere will enter the harvest period. Global cotton production in the new year is estimated to be between 25.59 million tons and 25.99 million tons, a year-on-year increase of 5% to 6%, and 0.8% to 1% higher than the average output of the past five years. .
The weather in the northern hemisphere cooperates, and the growth of new cotton is good. The rate of high-quality cotton in the United States has continued to increase rapidly in recent weeks. As of July 18, 60% of U.S. cotton was in good or above growth conditions, an increase of 15 percentage points year-on-year. Indian monsoon rains have covered the entire territory, prompting an overall acceleration of cotton planting. As of July 19, the cotton sowing progress in Gujarat, India, reached 92%, with a cumulative area of more than 2 million hectares, an increase of 3% year-on-year.
Cotton in the Southern Hemisphere is abundant and of high quality. According to the latest forecast of Brazil’s CONAB, Brazilian cotton production in 2020/21 will be 2.3424 million tons, an increase of 25,000 tons from the previous forecast. As the harvest progresses, the main color grade of new Brazilian cotton is also above M grade; the Australian Cotton Association predicts , the yield per unit area in most areas of Australia is 10% to 15% higher than expected, and the total Australian cotton output is expected to reach 609,000 tons this year.
2. Domestic cotton supply situation
In the later part of the year, the transfer of domestic cotton to downstream speeds up. According to data from the National Cotton Market Monitoring System, as of July 23, cotton processing enterprises across the country had sold a total of 5.916 million tons of lint (output of 5.95 million tons).� accounted for 24%, and decline and uncertainty combined accounted for 11%.
4. The probability of periodic market fluctuations is high
From the perspective of the domestic supply and demand pattern, in the new year The decline in cotton planting area has led to a decline in cotton production, which has provided certain support for market expectations before the new flowers are launched. Weather changes during the critical period of cotton growth have become the focus. October to December is the large-scale market launch period for cotton in the northern hemisphere. As long as there are no major surprises in later cotton production, the possibility of cotton prices falling cannot be ruled out. The cotton consumer side is subject to high uncertainty in the external macro environment. China’s policy is intended to stabilize the market and will, to a certain extent, avoid the possibility of a sharp rise or fall in cotton prices. If there are a series of major changes in the weather, epidemic situation, and capital policies, the global capital market and cotton market conditions will be adjusted.
Production, sales and inventory forecast
| Global cotton production and demand in 2021/22 are basically The stock-to-consumption ratio at the end of the period was flat and the stock-to-consumption ratio decreased slightly
Released by the International Cotton Advisory Committee (ICAC) Global cotton production, sales and inventory forecast data for 2021/22 show that global cotton opening stocks in 2021/22 are 20.99 million tons, a year-on-year decrease of 1.37 million tons, a decrease of 6.13%; global cotton production is 25.59 million tons, a year-on-year increase of 1.37 million tons, an increase of 5.66%; Consumption volume was 2,580 tons, an increase of 200,000 tons year-on-year, an increase of 0.78%; the ending inventory was 20.77 million tons, a year-on-year decrease of 220,000 tons, a decrease of 1.05%; global cotton production was insufficient to require 210,000 tons, a decrease of 1.17 million tons compared with 2020/21. ; The global cotton ending inventory-to-consumption ratio was 80.5%, a decrease of 1.49 percentage points from 2020/21.
| In 2021/22, domestic cotton production is reduced, and the inventory-to-consumption ratio drops
Based on relevant special surveys and domestic Based on the analysis of the foreign economic environment and market conditions, in July 2021, the National Cotton Market Monitoring System predicted the domestic cotton production, sales and inventory in 2021/22 as follows: China’s cotton output in 2021/22 is 5.578 million tons, a year-on-year decrease of 372,000 tons, a decrease of 6.25%; consumption volume was 8.24 million tons, a year-on-year decrease of 150,000 tons, a decrease of 1.79%; import volume was 2.31 million tons, a year-on-year decrease of 546,000 tons, a decrease of 19.13%; the ending inventory was 6.21 million tons, a year-on-year decrease of 390,000 tons, a decrease of 19.13%. The gap between production and demand was 2.662 million tons, an increase of 222,000 tons compared with 2020/21, and the inventory-to-consumption ratio was 75.44%, a decrease of 3.29 percentage points compared with 2020/21.
Main conclusions
To sum up, at present, global monetary policy is divergent under the loose tone, and the capital market is at a high level However, there are many uncertainties and vulnerabilities in the actual economic operation, which increases the complexity of this round of market operation and brings certain troubles to investor expectations. Although the current cotton price has reached a new high since the epidemic, what troubles the market is how sustainable it is? As the cotton market enters the transition from the old to the new year, the weather is a big uncertainty and requires close attention. Before the new cotton is launched on a large scale, the market has a strong bullish sentiment and financial enthusiasm is high. The pace of domestic consumption in the second half of the year needs further observation, and foreign trade development still faces many unstable factors. If no obvious disaster occurs, the evolution of the epidemic does not deviate from the expected track, and the capital market does not undergo major changes, cotton prices are expected to gradually return to a reasonable range in the medium term.
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