Domestic cotton “cannot be sold” and imported cotton “cannot be bought”. Recently, with the sharp expansion of the price difference between domestic and foreign cotton, many companies can’t help but express this emotion.
Currently, it costs about 24,000 yuan to import US cotton per ton, while the price of domestic cotton is less than 16,000 yuan per ton. Even so, my country still imported about 1.14 million tons of cotton in the first half of this year.
On one side there is imported cotton that is “unaffordable” and on the other side there is domestic cotton that is “unsellable”. What is the logic behind this market pattern? Where will cotton prices go in the future?
Extreme weather causes international cotton prices to rise
In the past month, the price of the main cotton futures contract on the Intercontinental Exchange in the United States has surged by 30%. On August 21, it reached the highest level since 2011.
“For some time, due to extreme weather, all major cotton supplier countries in the world have issued production reduction signals.” Liu Youran, a cotton analyst at CCB Futures, said that extreme weather such as high temperatures, droughts, and heavy rains in different countries and regions has caused Major cotton-producing areas around the world have lowered their cotton production forecasts, leading to a surge in global cotton prices.
The United States, the world’s largest cotton exporter, has lowered its cotton production forecast for this year by 28% to the lowest level in more than 10 years due to dry weather. As of August 21, the high-quality rate of U.S. cotton was 31%, compared with 71% in the same period last year. The 2022 global cotton production and sales forecast report released by the International Cotton Advisory Committee in August showed that the cotton abandonment rate in the United States reached a historical high of 42.9%, and the actual harvest area of US cotton dropped to 43.27 million acres.
Brazil is the world’s second largest cotton exporter. Data show that Brazil’s dry weather has caused about 200,000 tons of cotton to die, which is expected to drag down the country’s output in the next harvest season. Brazilian cotton producer Bom Futuro Group, whose cotton planting area accounts for about 10% of Brazil’s total, estimates that this year’s output will fall by 27% compared with the previous year.
As the world’s largest cotton producer, India has experienced continuous heavy rains and pest and disease disasters this summer, which have also seriously affected the country’s cotton production, forcing India to import cotton from overseas this year. Atul Ganatra, chairman of the Cotton Association of India, said that although India’s cotton sown area has reached 12.2 million hectares, India’s domestic cotton supply is tight and prices are expected to remain high before new cotton is launched in October.
In the past two months, weather factors have driven pessimism about cotton production in countries around the world. At present, the cotton growth cycle in the northern hemisphere has entered the middle and late stages, and the “weather speculation” is gradually coming to an end. With the arrival of the cotton harvest period, cotton production will gradually “fall off”. Is cotton production as expected?
In this regard, Wang Sijia, a cotton researcher at Henan Tongzhou Cotton Industry Co., Ltd., believes that although global cotton prices have fluctuated significantly in the first half of the year, industry companies still have to rationally digest the pessimism caused by the weather. Currently, Brazilian cotton is in the harvesting period. The market generally expects the output to be around 2.6 million tons, while last year’s output was 2.36 million tons. The argument circulating in the market for a 30% production reduction is unconvincing. The cotton planting area of India and Pakistan, the two major producing countries, increased by more than 6% year-on-year. The market is worried that excessive monsoon rains in India and Pakistan this year may have a certain adverse impact on later production assessments. However, as long as the rainfall is not enough to cause major disasters, the cotton production in India and Pakistan is more likely to increase year-on-year.
“Judging from the growth situation of U.S. cotton this year, although the good and good rates have oscillated lower and remained at the lowest level in the past decade, the budding rate, boll setting rate and lint opening rate are all faster than the same period in previous years. Based on this, the weather conditions will not deteriorate further in the future. Under the circumstances, there is room for upward revision of U.S. cotton production.” Liu Youran believes that from a fundamental point of view, the global cotton supply and demand pattern shows a general trend of gradually narrowing the gap and shifting from a tight state to a loose one. If the output of other major cotton-producing countries increases, fluctuations in the US cotton supply will have a limited impact on the general trend.
Internal and external cotton prices may further diverge
Unlike the rising international cotton prices, domestic cotton prices generally show a downward trend amid oscillations. From January to July, the average monthly price of domestic standard grade 3128B cotton dropped from 22,530 yuan/ton to 17,366 yuan/ton, a decrease of 22.9%. At present, the spot price of 3128B grade cotton has dropped to 15,000 yuan/ton-16,000 yuan/ton.
“The price of domestic cotton will most likely continue to be lower than that of foreign cotton.” Analyzing the reasons for the current large price gap between domestic and foreign cotton, Liu Youran believes that in addition to drought weather exacerbating market concerns about the decline in foreign cotton supply, domestic cotton is expected to have a bumper harvest and downstream market demand is sluggish. Affected by other factors, domestic and foreign cotton prices will further diverge in a short period of time.
Unlike U.S. cotton, which continues to release signals of production cuts, my country’s cotton production is likely to increase this year. This year, the high temperature weather in my country’s Xinjiang cotton region mainly occurred in late July. However, due to the good infrastructure of the cotton fields and drip irrigation operations, the high temperature weather did not have too great a negative impact on the growth and development of cotton. On the contrary, cotton production will increase due to high accumulated temperature and sufficient photosynthesis. It is expected that both unit yield and total output will be higher than last year.
The latest cotton output survey of the China Cotton Association shows that the total cotton output this year is expected to be approximately 5.92 million tons, a year-on-year increase of 2.5%. my country’s current total cotton commercial inventory is 2.4324 million tons, a year-on-year increase of 28.39%. Liu Youran said that considering the cotton…�Picking will begin in more than a month, and industry concerns about oversupply continue to suppress domestic cotton prices.
“Compared with the global cotton supply and demand pattern, China’s domestic cotton supply and demand situation is more relaxed. Therefore, there is insufficient momentum for domestic cotton prices to rise.” Liu Youran said that the fundamental reason for the current oversupply of domestic cotton is that domestic demand is relatively sluggish and external demand orders are restricted.
In terms of domestic demand, my country’s annual cotton demand has been stable at around 8.6 million tons in the past, but since this year, domestic and foreign cotton consumption has been reduced. According to a survey by China Cotton Network, my country’s cotton consumption this year is approximately 7.37 million tons, which is expected to be more than 1.2 million tons less than in normal years.
The recent rotation of cotton reserves also reflects the expectation of reduced cotton consumption to a certain extent. As of August 23, reserve cotton has not been traded for ten consecutive days. Since the cotton reserves were rotated in, the actual transaction volume has been low, and the rotating price has not reached the expected price of cotton enterprises. Small and medium-sized textile enterprises generally said that the downstream market has improved slightly in August, but the overall shortage of orders has not changed significantly. The traditional “Golden Nine and Silver Ten” peak season is coming, and they look forward to a slight recovery in consumption.
In terms of external demand, the global textile and apparel consumer market is not optimistic. August is the end of the off-season for the global textile industry. In the past, starting from mid-August, companies have to start stocking up for the peak season. However, this year, not only are domestic companies in my country not actively stocking up, but textile companies in Southeast Asia and South Asia are also generally experiencing order cancellations from European and American customers. , operations are facing difficulties.
Survey data released by the National Cotton Market Monitoring System also shows that in terms of textile foreign orders, nearly 80% of companies said that orders have decreased, about 18% of companies said that foreign orders are basically stable, and only about 3% of companies have increased orders.
Enterprises expect cotton prices to remain relatively stable
What impact will the rise in international cotton prices and the fall in domestic cotton prices have on industry companies?
“Currently, global yarn manufacturers are still struggling to digest high-priced yarn inventories. With downstream orders sluggish, factory operating rates continue to be low. Countries are trying their best to compress production capacity and reduce procurement, even though global cotton supply looks tight. , but factories have insufficient motivation to expand purchases.” Liu Youran said that the recent surge in international cotton prices is different from previous years and lacks the support of consumption. In the future, international cotton prices will continue to be affected by the intersection of long and short factors such as the Federal Reserve’s monetary policy and extreme weather.
“The decline in domestic cotton prices is not good for cotton spinning companies. Companies prefer that the market prices of raw materials remain relatively stable.” Ye Jianchun, chief engineer of the China Cotton Textile Industry Association, said that for cotton spinning companies, although the drop in cotton prices means a drop in raw material costs, it The price of downstream yarn will also drop, and cotton spinning companies will not benefit from it.
Ye Jianchun introduced that different varieties of pure cotton yarns in the current market perform differently, and low-count yarns are still the main sales varieties in the market. The cotton yarn market situation is not very good, only better than the previous period but weaker than the same period in previous years.
From an enterprise perspective, Su Jianjun, general manager of Xinjiang Dongchunxing Group, believes that the main problems faced by cotton spinning enterprises are product structure issues. As various costs rise, labor difficulties and other problems further emerge, some companies will be eliminated in the future. Faced with the slowdown in product exports in the second half of the year, companies need to plan for the domestic market.
Liu Youran said that in the short term, as new domestic cotton comes on the market and under the influence of expectations for an increase in cotton production, the domestic oversupply situation will continue, and the divergence in domestic and foreign cotton prices may continue until at least the Spring Festival. During the new cotton delivery stage, China’s domestic cotton futures price may be in the range of 13,000 yuan/ton to 15,000 yuan/ton. Under the conditions of the supply situation in the northern hemisphere, the overall domestic cotton market may fall again and hit a new low for the year.