Recently, due to market rumors about the tightening of old crop inventory resources and the impact of high temperature weather caused by El Niño, the main contract price of Zheng cotton has strongly exceeded the 10,000-seven mark. It is now a critical period for the growth of new cotton, but high temperature weather has once again put Xinjiang’s main cotton-producing areas facing severe challenges. Xinjiang has been experiencing high temperatures and little rain for the past 30 days. Although this is helpful to make up for the lack of accumulated temperature caused by low temperature and freezing damage, cotton will stop growing if temperatures above 35°C are maintained for a long time.
According to the current weather forecast, most of the Xinjiang plains will have high temperatures above 35°C. The highest temperatures in the northern slopes of the Tianshan Mountains, Turpan City, and Hami City will rise above 40°C, and in Turpan City, the local maximum temperature will rise above 45°C. In July, cotton growth gradually enters the flowering and peach setting period. If the temperature remains above 35°C or reaches 40°C for two consecutive weeks, it will easily cause the young peaches to fall off, exacerbating the yield reduction. Previously, April and May were affected by low temperature and freezing damage during the sowing period. In order to make up for the growth gap of about 10-15 days, some cotton farmers chose early-maturing varieties with a growth period of about 120 days, and used more water and fertilizer to shorten the cotton growth cycle. However, This will cause the growing seedlings to be weak and less able to resist pests and diseases.
In late May, the National Cotton Market Monitoring System conducted a nationwide special survey on the actual cotton sowing area. The actual sowing area nationwide decreased by 10.3% year-on-year, and the total output was expected to decrease by 13.5% year-on-year. If the current high temperature weather continues, there is still some room for downward adjustments in total output.
The tightening trend on the supply side this year is basically a foregone conclusion, and the uncertainty of the extent of production cuts is one of the main hot spots of market speculation. The hot topic accompanying the production reduction is the overcapacity of my country’s ginning plants. In 2022, the number of cotton gins in Xinjiang has exceeded 1,000, with a production capacity of nearly 12 million tons, far exceeding my country’s cotton production. Due to the existence of fixed costs, ginners can only make up for the cost of idle capacity by generating incremental economic benefits by purchasing a large amount of cotton for processing. Because the problem of overcapacity in ginneries has not yet been effectively resolved, and output is expected to decrease this year, the problem of harvesting may be unavoidable.
The reduction in new crop production has become a clear sign, but because it is too early to speculate on the harvest, this cannot fully explain the premature start of cotton prices. In the traditional off-season period, cotton prices have experienced outstanding performance. In addition to strong support from the weather, the shortage of old crop resources is also its main driving force, which has also led to the firm basis price in the market. At present, the market price has basically reflected the tension of the old work. Even if the old work is speculated again in the future, the stimulation to the market will not be obvious. Judging from the current number of warehouse receipts, as of July 12, Zheng Cotton has 12,000 warehouse receipts, equivalent to 480,000 tons of cotton spot resources. The number of warehouse receipts is at its lowest point since 2019, and its delivery speed has accelerated significantly. Correspondingly, there are 480,000 positions in the 09 contract on the market, reaching the highest point since 2019. Since new cotton has not yet been picked, processed and put on the market in September, the cotton delivered is still old crop, so the possibility of a long squeeze in the later period cannot be ruled out.
The policy of dumping reserves has not yet been implemented. Although the dumping of reserves will increase supply on the one hand, which will create resistance to rising prices in the short term; on the other hand, it will also deepen the market’s speculation about tight supply. If the dumping of reserves is truly implemented, prices will still remain low in the long term. There is upward momentum.
At present, the most important factor restricting the wide rise in cotton prices is the demand side. The contradiction between tightening upstream supply and weak downstream demand is the current core contradiction. As the traditional off-season of cotton spinning deepens, inventory accumulation in the middle and lower reaches, especially at the gray cloth end, is obvious. The inventory at the yarn end has also changed from the previous destocking status. The inventory is slightly overstocked. The current inventory is about 20 days, but in the off-season, this accumulation phenomenon also occurs. This is normal, and the current overall inventory level is still in a relatively healthy structure. Different from the trend of lower construction rates in 2020 and 2022, the construction rate in Jiangsu and Zhejiang has begun to rebound, and the construction level is second only to 2021. The Golden Nine and Silver Ten are coming soon. Theoretically speaking, the number of new orders from textile companies will start to pick up after August, and the inventory is expected to be significantly digested by then.
As far as the author is concerned, the impact of the overall negative feedback on terminal clothing consumption may not be as strong as the market predicts. Entering 2023, domestic retail sales of clothing, shoes and hats are significantly growing year-on-year that month, and clothing exports are also at a relatively high level in recent years. At this stage, as the bottom of the economy is gradually confirmed, domestic consumption still has some room for growth. We cannot be too bearish on the prospects of domestic consumption. At the same time, USDA estimated China’s cotton consumption in its latest July report to be 8.056 million tons, a year-on-year increase of 1.37%.��
Overall, as the launch of new cotton approaches, and on the premise that production cuts have been announced, and high temperatures add fuel to the flames, there is still room for cotton prices to rise. Since the consumer side has entered the cyclical adjustment stage, there is limited room for further exploration, and the negative feedback from the downstream may not have an obvious constraining effect on cotton prices. The tightening effect of upstream supply on cotton prices is greater than the constraining effect of downstream weakness. The short-term 09 and 01 contracts may operate in the 16000-18600 range.