Recently, the purchase of machine-picked cotton in Xinjiang has led the cotton trend, and the oscillation center of Zheng cotton has dropped to 14,000 yuan/ton. Looking forward to the market outlook, negative factors continue to be digested, and cotton prices still have room for decline.
Cost support is weak
In mid-to-early September, hand-picked cotton was the main focus. The purchase price of hand-picked seed cotton in southern Xinjiang rose from 6.90-7.0 yuan/kg to 7.7 yuan/kg, and the purchase price of seed cotton in the mainland reached a maximum of 8.5 yuan/kg. Calculated at a cottonseed price of 1.6-1.7 yuan/jin, the cost of lint exceeds 17,000 yuan/ton. However, when machine-picked cotton was about to be launched, cotton prices plummeted, and the market was not optimistic about the purchase price of seed cotton. Judging from the current water test prices of some ginners, the opening price of seed cotton with 40 lint cents and moisture content within 12% is only 5-5.5 yuan/kg. The previous market expectation was 6-7 yuan/kg. However, the purchase of seed cotton has not been carried out on a large scale. At present, cotton farmers are not convinced about the purchase price of seed cotton and are in a stalemate with ginners.
From the perspective of ginning plants, the situation faced by the industry in 2022/2023 has changed to some extent compared with previous years. First, the production capacity of ginning plants has been significantly reduced. In 2022, the first three batches of cotton target price reform and processing enterprises in the Xinjiang Uygur Autonomous Region announced a total of 154 fewer companies. If there are no major changes in the later period, 2022 will be the year with the lowest number of ginning mills in the past four years. The significant reduction in production capacity will ease the competition among ginners and avoid rush to harvest. Second, the Agricultural Development Bank of China has increased the loan deposits for ginners and issued them in batches. Even if the ginners want to raise the purchase price of seed cotton, they are “powerless”.
For cotton farmers, although the state has a subsidy price of 18,600 yuan/ton, it will take several months before the subsidy is available. Cotton farmers have the motivation to raise prices, but the cotton purchase time is limited, and seed cotton cannot be stored for a long time. If it is not sold in time, there may be certain risks. The author believes that the stalemate may end with concessions from both parties, and the final average seed cotton purchase price may return to 6 yuan/kg.
High internal and external price differences
Since August, the textile and weaving industry has shown signs of improvement. Finished product inventories have declined for seven consecutive weeks, while operating rates have continued to rise. The industry atmosphere is still mostly wait-and-see. Although the market situation in the peak season is better than before and sales have improved compared to small batches, overall there are no obvious signs of improvement, and the quality in the peak season is slightly insufficient. From the perspective of European and American demand, it is difficult to perform well. With high inflation and continuous interest rate hikes, the demand side will continue to be under pressure. Overall, after the “Golden September and Silver Ten” peak seasons, domestic demand may fall into a downturn again.
International cotton prices are greatly affected by macroeconomic factors. Although the Fed’s interest rate hikes have improved the financial market atmosphere in the short term, in the medium term, continued pressure to raise interest rates will eventually have a negative impact on the economy, thereby affecting demand. From the supply and demand side, the quality rate of US cotton remains low, and floods in Pakistan have led to a reduction in cotton production. India has completed sowing and the planting area has increased. However, the main producing areas have experienced continuous rainfall in August and September, which is unfavorable for cotton growth and there is some support on the supply side. Overall, the rise in international cotton prices has been suppressed by demand, but supply-side support will limit its downward space.
At present, the price difference between domestic and foreign prices is high, and the price of imported cotton is severely inverted. Therefore, the overall linkage has weakened, but it is difficult to achieve the expectation that the price difference will shrink when the domestic market is strong and the foreign market is weak. For domestic enterprises, part of the use of imported cotton is a rigid need, and it is reasonable to maintain a high price difference in the short term.
To sum up, on the one hand, when new domestic cotton comes on the market, supply pressure increases, and the cost of new cotton provides weak support for futures; on the other hand, demand is supported in the short term, but it is unsustainable in the long term. In addition, high prices in the international market are difficult to bring back the price difference between domestic and foreign prices. In the medium term, there is still some room for downside for Zheng cotton.