Since July, market concerns about drought in major producing areas have driven U.S. cotton to surge. The ICE cotton 12 futures contract rose to as high as 64.90 on July 9. cents/pound, hitting a new high after bottoming out in March. Compared with several Changyang stocks that gained momentum after US cotton broke through 60 cents/pound, Zheng cotton’s rise was slightly weak. It is not yet known whether the 09 contract can stand firm at 12,000 points. The domestic and foreign cotton prices have slightly diverged, and this difference may continue in the medium to long term. What is the reason behind it?
There are hidden concerns about the quality and quality of U.S. cotton, and export targets have been achieved ahead of schedule
According to the actual cotton sowing area report released by USDA on June 30, the US cotton planting area in 2020/2021 was 12.185 million acres, a decrease of 11.3% from the 2019/2020 year. The previous market expectation was 13.153 million acres. In the USDA global cotton supply and demand balance sheet in early July, the 2020/21 annual production was 3.815 million tons, a decrease of 512,000 tons from the 4.336 million tons in 2019/2020, and a decrease of 436,000 tons from the June supply and demand balance sheet. Ton.
In addition to lower than expected production, the quality of US cotton is also causing concern. According to the USDA weekly crop growth report, as of July 12, the excellent and excellent rate of cotton was 44%, compared with 56% in the same period last year. There was a large gap over the same period. An important reason for the sluggish rate of high-quality cotton in the United States is the continued drought in Texas, the main cotton-producing area, which has kept the high-quality rate of cotton there at 20+%, dragging down the overall quality of US cotton. In addition, based on past historical experience, the rate of U.S. cotton abandonment will increase during droughts. However, the drought problem in Texas has received sufficient market attention. After the USDA reported a reduction in production, it was interpreted as a bullish move, and US cotton made a brief correction.
Supply expectations have decreased, but export demand has achieved its target ahead of schedule with favorable support such as the Sino-US agreement. According to statistics, as of July 2, 2020, the United States has cumulatively signed contracts to export 3.995 million tons of cotton for the 2019/2020 season, reaching 111.28% of the annual expected export volume, and has shipped a total of 3.025 million tons of cotton, with a shipping rate of 75.71%. The overall export performance can be said to be outstanding within 10 years. Among them, China has signed contracts to import 840,000 tons of U.S. cotton in 2019/2020, accounting for 21.03% of the contracted volume of U.S. cotton; China has cumulatively shipped 480,000 tons of U.S. cotton, accounting for 57.16% of China’s contracted volume. China’s shipment progress is slower than past historical progress and the overall average. There may be certain variables if Sino-US trade disputes arise later. The sluggish cotton sales at home and abroad and the continued expansion of warehouses at ports may also be the reasons for the slow progress of China’s shipments.
Table 1: U.S. cotton export progress
Top 5 major producers Among cotton countries, cotton consumption in the United States and Brazil is dominated by exports. In 2019/2020, exports accounted for 75.32% of US cotton production and 65.1% of Brazil’s production. On the basis that export orders are guaranteed and quantitative easing monetary policy is maintained, the threat of the epidemic to US cotton and Brazilian cotton is smaller than that of cotton from other countries. Taking into account factors such as currency, exchange rate and port, the fundamentals of US cotton are better than those of Brazilian cotton.
With high inventory and weak consumption, Zheng Cotton is unable to chase the rise
Domestic cotton supply is abundant. As of June, industrial and commercial inventories totaled 3.8972 million tons, a year-on-year decrease of 130,000 tons. However, comparing the cotton demand in the two years, the pressure of oversupply this year is much higher than last year. The supply pressure can also be seen from the warehouse receipts. As of July 10, there were a total of 22,100 cotton warehouse receipts plus valid forecasts, equivalent to 880,000 tons of cotton. This is almost the same as the peak of 23,100 on April 23, 2019, but it lags 2.5 months and is also the historical peak for the same period. This year’s warehouse receipt digestion time is short, the task is heavy, and the 91 spread also has difficulties in moving positions. The huge warehouse receipt pressure will undoubtedly put pressure on the front-month contract.
Figure 1: Total domestic industrial and commercial inventories
Figure 2: Zheng Cotton Warehouse Receipt Quantity + total effective forecast
On the evening of June 30, the official announcement was made to sell out reserves. It is planned to roll out about 500,000 tons of cotton reserves from 7.1 to 9.30, and sell about 8,000 tons daily. . The sales floor price is linked to the domestic and foreign cotton spot prices. When the domestic market spot price index is lower than 11,500 yuan/ton, trading will be suspended from the next working day. If the price rises above 11,500 yuan/ton for three consecutive days, storage selling will be restarted. The circuit breaker bottom price of 11,500 yuan/ton has provided support to cotton prices, and the strength of the external market has also played a better role in stimulating domestic prices through the selling and storage link. But in the final analysis, dumping reserves is equivalent to increasing the supply of cotton by 300,000 to 500,000 tons. At the same time, it makes up for the possible structural gap of low-quality cotton and reduces the spot demand for cotton in disguise.
Sluggish consumption is the most important reason restricting the rebound of domestic cotton. Since the epidemic, the frequency and scale of centralized events such as wedding banquets, high-end forums and events have been significantly reduced. For example, events such as the Olympic Games and the Seven-Nation Forum have been canceled in large numbers, and the demand for dresses, suits, team uniforms, etc. has decreased. The demand for regular clothing has also declined when travel activities have been hindered. It is foreseeable that clothing demand will be difficult to return to normal before the epidemic is over. The downturn in consumption can be verified from many data such as my country’s clothing export data, downstream orders, textile profits and clothing retailer bankruptcy rates.
According to customs data, in May 2020, my country’sThe export of textiles and apparel was approximately US$29.554 billion, a year-on-year increase of 24.02% and a month-on-month increase of 38.36%. Among them, exports of textile yarns, fabrics and products were US$20.649 billion, a year-on-year increase of 77.34%, and exports of clothing and clothing accessories were US$8.906 billion, a year-on-year decrease of 26.93%. From January to May 2020, my country’s total apparel exports were US$38.213 billion, a year-on-year decrease of 22.8%. The increase in textile exports is mainly attributed to the export of masks. The drop of more than 20% in clothing exports is a real response to demand. In June 2020, the Purchasing Managers Index (PMI) of China’s cotton textile industry was 47.26%, a month-on-month decrease of 0.34%, still below the 50 boom-bust line, which is very different from other industries.
Cotton has risen from the low point by more than 1,500 yuan/ton since bottoming out at the end of March, but the price of cotton yarn has not followed but has continued to fall. As of July 13, the cotton yarn price index CY Index OEC 10S, C32S and JC40S were quoted at 11780, 18600 and 21900 respectively, which was 820, 1300 and 1330 yuan/ton lower than the yarn price when the cotton spot price bottomed out at the end of March. Textile profits have entered a negative range since the beginning of June. The negative profits that have lasted for more than a month are the first time in more than ten years. The volume and price of yarn have dropped, and the industry has entered a reshuffle stage of clearing production capacity and survival of the fittest.
Figure 3: Textile profit
According to the semi-annual reports and announcements of various parties, a large number of well-known international brands such as H&M and Nike have successively laid off employees and closed offline stores. Brands with poor cash flow management have begun to go bankrupt. According to CCTV reports, on July 8, local time, two well-known American clothing retailers, Ascene and Brooks Brothers, reported bankruptcy. According to statistics from industry organization Epiq, the number of commercial bankruptcies in the United States this year reached 3,604, a year-on-year increase of 26%. There were 609 new cases in June, a year-on-year increase of 43%. The number of bankruptcy filings may further worsen in the third quarter. The pressure from clothing brands’ store closures and bankruptcies is expected to gradually be transmitted to upstream companies at the end of the third quarter and the fourth quarter.
According to WHO data, the number of people affected by the international epidemic currently exceeds 13 million, making prevention and control work increasingly difficult. According to the progress of the vaccine, it will be difficult for the vaccine to be widely used in China before September, and it may have to wait until next year for global economic activities to return to normal. In the USDA report from February to June, global consumption was reduced by more than 4 million tons to 22.287 million tons, and the inventory-to-consumption ratio reached a historical peak of 98.59%. However, the June and July reports estimated that consumption in 2020/2021 will recover significantly. The inventory-to-consumption ratio will fall back to 89.92%. Considering that USDA’s consumption in 2020/2021 may still be affected by the epidemic for nearly half of the year (2020.9-2021.2), the duration is not much shorter than that of 2019/2020 (2020.3-2020.8). The USDA supply and demand forecast for 2020/2021 Consumption is still overestimated. In subsequent supply and demand reports, consumption is expected to decrease by more than one million tons, and the international inventory-to-consumption ratio in 2020/2021 is likely to remain high above 95%.
Summary
Since March Laizheng cotton shows a wave-like oscillatory upward trend. The main reasons for the slow upward shift of the price center of gravity are the breakthroughs in the financial market brought about by active fiscal and monetary policies, the overall upward shift of the commodity price center of gravity, and the expectation of reduced supply.
The former has supported cotton prices for a long time, but there is a risk of recurrence of the epidemic in autumn and winter, and may trigger a wave of corrections in the financial market, reducing the preemptive recovery rise in the financial market and the continued sluggish actual consumption. the difference between. In addition, due to the poor fundamentals of Zheng Cotton, the speed and magnitude of the increase will lag behind the overall performance of the commodity. The latter has already been reflected in US cotton, and the domestic market still needs to wait. The key for Zheng Cotton’s 09 contract to break through the 12,000 point mark is that there are major problems with the domestic planting weather, production cuts are real, or the financial and commodity markets maintain the crazy rise in early July, and Zheng Cotton passively follows. Delivery pressure emerged after mid-August, with recent months flat or falling, and distant months expected to continue to rise. </p
