In recent times, European and American banks have been hit by thunderstorms one after another, and bulk commodities have been generally affected, and cotton has been unable to survive alone. But as banking turbulence was contained, macro risk appetite improved and market sentiment recovered. At this point, cotton, which was wrongly killed by macroeconomics, rebounded. As the sowing season in the northern hemisphere approaches, the focus of market transactions gradually shifts to the situation in the new year. The reduction in cotton planting area provides a theme. Can cotton prices take the opportunity to start a new round of rising prices?
Risks in the European and American banking industries are under control, but we still need to pay attention to the subsequent moves of the Federal Reserve
On March 10, Silicon Valley Bank declared bankruptcy. Following Silicon Valley Bank, Credit Suisse and Deutsche Bank came out with negative news one after another. The market is increasingly concerned about the liquidity crisis in the banking industry. In order to prevent the spread of liquidity risks in the banking industry, relevant governments have actively launched response measures. First Citizens Bank of the United States agreed to acquire all deposits and loans from bankrupt Silicon Valley Bank; German Chancellor Scholz said there was “no reason to worry”; European Central Bank President Lagarde said “the ECB will provide liquidity if necessary” support”. As there are no signs of further cracks in the European and American financial industries, and regulators have taken measures, investors’ nervousness has been temporarily calmed.
Market focus has returned to possible actions by the Federal Reserve at its next meeting in May. It was the Federal Reserve’s previous violent interest rate hikes that triggered the banking crisis. Banks collapsed because the sharp rise in interest rates caused losses in their bond portfolios. If the Fed further tightens monetary policy, more banks may face the risk of bankruptcy. The Fed will have to choose between high inflation, a hard landing, and financial instability. According to the CMEFedWatch tool, the market believes that the probability of the Federal Reserve keeping interest rates unchanged is more than 60%, and the probability of raising interest rates by 25 basis points is less than 40%. Investors even expect the Federal Reserve to cut interest rates before the end of this year. For cotton, on the one hand, the tightening of liquidity caused by interest rate hikes affects the overall market risk appetite. On the other hand, the interest rate hikes cause the US dollar to appreciate, which makes goods settled in US dollars more expensive. The rise in the US dollar affects US cotton exports, resulting in U.S. cotton consumption is expected to decline, which means that the Fed’s interest rate hike is negative for cotton prices. On the contrary, if the Federal Reserve slows down interest rate hikes or even cuts interest rates, it will be beneficial to cotton prices.
The sowing season in the Northern Hemisphere is approaching, and attention is being paid to the expected reduction in planting area
The supply of cotton in 2022/23 is a foregone conclusion, and there is no room for speculation. The sowing season in the northern hemisphere is approaching, and the focus of market transactions is gradually turning to the cotton planting situation in the new year. As global cotton planting costs increase and cotton prices fall, cotton farmers’ income is compressed. The cotton-to-grain ratio is at a historical low for the same period in more than ten years. The global cotton sown area is expected to shrink in 2023/24. According to the U.S. data report, the USDA Agricultural Outlook Forum in February estimated that the U.S. sown area in 2023/24 will be 10.9 million acres, a year-on-year decrease of 20.8%. In the southeast, delta, and southwest of the United States, the cotton planting area has shifted to food crops such as soybeans, corn, peanuts, and wheat due to the impact of the grain-to-cotton ratio. In the west, due to restrictions on irrigation water, the cotton area in the highlands may decline. It is expected that corn and wheat will increase. The market is currently awaiting the USDA planting intentions report due out on Friday. A survey of industry analysts showed that analysts on average expected cotton planting area in 2023 to be 11.212 million acres. Analysts’ estimates range from 10.3 million to 12.7 million hectares, with the USDA reporting 12.76 million acres for the 2022 cotton crop.
Domestically, main cotton-producing areas such as Aksu, Kashgar, and Korla in southern Xinjiang have begun orderly preparations for spring plowing, and it is expected that sowing will begin after the Qingming Festival. The National Cotton Market Monitoring System launched a nationwide cotton planting intention survey in mid-to-late March. China’s cotton planting intention data for 2023 released by China Cotton Reserve shows that China’s intended cotton planting area in 2023 is 43.891 million acres, a year-on-year decrease of 2.279 million acres. Among them, the intended cotton planting area in Xinjiang is 38.425 million acres, a year-on-year decrease of 893,000 acres, or 2.3%. It is reported that the main reasons for the decline in cotton planting intentions in Xinjiang are: First, the purchase price of seed cotton in 2022 is low, which affects the enthusiasm for cotton planting; second, in the spring of 2022, water fees, cotton seeds, and agricultural inputs have generally increased in price, and the cost of cotton planting has increased significantly. Mainly relying on target price subsidies to support cost recovery; third, to ensure food security, some areas plan to increase the area of grain planting this year. In the mainland production areas, the output and quality declined due to the weather last year. The purchase price of seed cotton fell and the cost of cotton planting increased, resulting in lower planting income. The intention to plant cotton in the mainland also declined.
The international cotton consumption situation is worrying, and domestic demand needs to be released
Global inflation remains at a high level, the external environment is increasingly uncertain, and the growth momentum of the world economy and trade is weakening. The U.S. Department of Agriculture has lowered its global cotton consumption forecast for several months in a row. According to the USDA report in March, global cotton consumption in 2022/2023 was revised down by 555,000 bales to 110.11 million bales, a low of nearly ten years, and new…Global cotton textile consumption is still under pressure. However, recent US cotton export contract volume and shipment volume data are relatively good, both of which are near stage highs, which has improved the market’s concerns about the demand side to a certain extent. Some analysts in the market hold a relatively optimistic attitude and say that global demand may still appear slightly too low. USDA tends to be slightly more cautious at the beginning of the year, leaving room for upward revisions in the future.
USDA global cotton monthly supply and demand balance sheet (thousand bales)
In the domestic market, the operating rate of downstream textile companies continues to rebound at this stage. It is reported that most of the existing orders of textile companies can maintain operations until mid-to-early April, and some home textile orders can support operations until late April. Most of the orders are domestic sales, and export sales are relatively sluggish. . In terms of raw material replenishment, the cotton raw material inventory of textile enterprises has returned to normal levels. The willingness to replenish the inventory in large quantities in the short term is low, and they are more likely to purchase small quantities at bargain prices. The characteristics of the domestic “Golden Three” peak season are average, but the downstream industry remains stable as a whole, and the downstream industry is waiting for the increase in orders before and after the Qingming Festival. After the traditional peak season demand of “Gold, Three and Silver” has passed, May will enter the off-season, and seasonal effects also need to be paid attention to. On the whole, domestic consumer demand, market circulation, industrial production, corporate expectations and other factors are all improving. With the successive introduction of policies and measures to expand domestic demand, it will help release the vitality of the cotton textile industry. Overseas orders need to track changes in the external market environment.
There is no shortage of speculation topics during the planting period, and the focus of cotton prices is expected to shift upward.
As the cotton planting season in the northern hemisphere begins, the market logic is shifting towards a balance between supply and demand in the new season. The current market hot spots will focus on the area of new cotton planting. The U.S. Department of Agriculture is scheduled to release a planting intention report on March 31 (00:00, April 1, Beijing time). The price ratio of cotton to grain is at a low level, and cotton planting is not cost-effective. It is inevitable that the global cotton sown area will decrease. However, if the published data deviates significantly from the expected value, it may cause market disturbances. Domestically, in addition to the issue of cotton planting income, the target price subsidy for cotton in the new year has not been released, and in addition to the requirements of replacing cotton with grain in some areas of Xinjiang, the cotton planting area has decreased significantly compared with previous years. The market expects that the cotton target subsidy policy may be introduced in April. If it is lower than the level of previous years, it may lead to a further decline in cotton planting area.
In addition to planting area, subsequent weather factors are also the focus of the market. Weather agencies are predicting a possible El Niño later this year, a weather pattern that could bring rain after years of drought in U.S. cotton regions. But analysts warn that too much rain could go too far and could lead to yield losses and reduced quality. The USDA Agricultural Outlook Forum had predicted that US cotton area would decrease without reducing production in the new year, but the market still has doubts about this expectation. The same is true for the domestic market. Weather conditions are unpredictable, the window for speculation will open, and market sentiment is easily driven.
During the cotton planting period in the northern hemisphere, there is no shortage of speculation on the supply side, but it is difficult for the demand side to perform well, which will also limit the space above cotton prices. Although the current banking crisis in Europe and the United States has been contained, the Federal Reserve has hinted at at least one point in time when it may suspend interest rate hikes, and market sentiment has calmed down. However, the global economic situation is still far from optimistic, and it will still take time for cotton consumption to recover. According to the latest report of the World Bank, the average global economic growth rate is expected to be 2.2% in the next ten years, which is far lower than the peak of 4.5% in 2010 and the lowest growth rate in thirty years. Domestically, the current downstream domestic sales demand is performing well, but orders have been queued up until mid-to-late April, and the sustainability remains to be seen.
Overall, the supply-side hype theme may boost domestic and foreign cotton markets, while hidden concerns on the demand side still exist, and the space above cotton prices is limited. With the overall external environment under control, the center of gravity of cotton prices is expected to shift upward.