The cotton market has been relatively stagnant recently. Although the price seems weak and difficult to rise, it fell below 17,000 yuan/ton and seemed to be quickly raised by speculative funds. In September, the Federal Reserve announced that it would not raise interest rates, but hinted that maintaining high interest rates would inevitably suppress inflation below 2%. The market expects cotton demand to continue to be weak under high interest rates. The reality of reduced global cotton production does not support a larger drop in cotton prices. It is expected that this contradictory psychological expectation will continue, and the volatile market situation will be difficult to change in the short term.
Reduced supply in new year supports cotton prices
In the September report released by the USDA, U.S. cotton production was lowered by 109,000 tons. This has been lowered for two consecutive months. Because cotton was affected by drought and hurricanes in the early stage, the market expects that there is still some room for downward adjustments in U.S. cotton production. Due to weather reasons, India’s 2023 monsoon rainfall may fall to its lowest level in eight years. The United States Department of Agriculture predicts that India’s cotton output in 2023/24 will be about 25 million bales, which is nearly 2% lower than the forecast value last month and lower than the 2022/23 forecast. The annual decline was nearly 4%. The USDA report in September did not adjust China’s cotton output and maintained the expectation of 5.88 million tons. Although the weather in Xinjiang is conducive to cotton growth from May to August, compared with Xinjiang’s cotton output of 6 million tons last year, most domestic institutions predict that this year’s cotton output will be 5.6-5.7 million tons.
Downstream demand for cotton yarn is weak
Slowing economic growth and continuous interest rate hikes in Europe and the United States are the underlying reasons for the weakening demand for cotton. From the perspective of spinning, last year the price of domestic cotton was about 2,000 yuan/ton lower than imported cotton. Spinning profits were generally 1,000 yuan/ton. Domestic yarn was more than 800 yuan/ton cheaper than imported yarn. In addition, the downstream inventory of cotton yarn was low. , the recovery of domestic demand for yarn and clothing is enough to support the rise in cotton prices. As the price of cotton continues to rise, the price of cotton yarn has risen. However, the price of downstream gray fabrics has not increased significantly. The shortage of overseas orders has become more and more obvious. Clothing exports have been lower than the same period last year for four consecutive months. The peak season of cotton yarn is obviously not prosperous.
When will the sideways pattern be broken?
At present, long and short factors in cotton are intertwined, and the long and short forces are basically balanced. The reduction in cotton production does not support the excessive decline in cotton prices, and the weakening demand also suppresses sharp price increases. From an external perspective, there will be another 0.25% interest rate hike before the end of the U.S. interest rate hike cycle, that is, in December. The U.S. dollar index may also strengthen, which will suppress the rise in ICE cotton prices. As the interest rate hike cycle ends, international cotton prices It is expected to rise again. The cost of purchasing new cotton is also a focus of the market. It is expected that the price of seed cotton will be 8-9 yuan/kg. If the transaction price of seed cotton declines in the later period, the domestic cotton price is expected to fall below 17,000 yuan/ton. Considering that the external market decline is not large ( limit fell to 80 cents/pound), and it is difficult for domestic cotton prices to fall below 16,000 yuan/ton. According to the seasonal judgment of previous years, cotton’s sideways trend may change at the end of the year, and it is expected that the probability of falling first and then rising is relatively high.