In recent days, cotton has been the leading performer. While other commodities have been pulling back, it has gone against the norm and made a strong rebound. Under the current contradictory situation of weak fundamentals and strong market conditions, what will be the trend of cotton prices?
Looking at Zheng Cotton’s K-line history, the overall market in August basically went up and down, but this time the performance was obviously very strong, with a rebound of about 1,800 points in just one week, which is closely related to U.S. cotton. According to actual production measurements this year, U.S. cotton production in 2022/23 is expected to be 12.6 million bales, the lowest level since 2009/10. A sharp increase in the abandonment rate in the Southwest has caused production reductions. The ending inventory of U.S. cotton decreased by 600,000 bales month-on-month, and the inventory-to-consumption ratio was 12.6%, a year-on-year decrease of 8 percentage points, the lowest level since 1924/25. At the same time, affected by the reduction in U.S. cotton production, U.S. cotton exports also decreased by 2 million bales month-on-month. The above data gave bulls confidence. After the data was released last Friday, the US cotton ICE was directly closed to the daily limit.
The market has been skeptical about the August report released by the USDA, believing that it exaggerated the serious impact of drought in the United States on cotton growth. Similar situations have often occurred in previous years. However, in the author’s opinion, no matter what the actual US cotton production is, the current market atmosphere is strong and has been separated from the demand side factors. The December position data released by the CFTC for unpriced sales reached 59,322. Obviously, this value is still growing, which means that the possibility of long positions in the market is increasing. On the other hand, the U.S. ban on Xinjiang cotton products has strongly stimulated the consumption of U.S. cotton. Especially when demand increases, the limited production of U.S. cotton has aggravated the supply shortage. Therefore, the rally in U.S. cotton in August may continue, and those holding short positions need to be cautious.
With the support of US cotton, Zheng Cotton may not be bearish in August. Although the fundamentals of the cotton spinning industry are now very poor, the risk factors of US cotton must be taken into consideration. On August 15, the central bank lowered the winning bid rates for medium-term lending facility (MLF) operations and open market reverse repurchase operations by 10 basis points respectively. The reduction in policy interest rates also had a certain stimulating effect on the financial market. At this stage, under the condition that Zheng Cotton continues to rebound, short selling still needs to be careful. Of course, it is not recommended to go long. After all, it has rebounded by nearly 2,000 points. It is not cost-effective to continue to gain the profit risk and benefit ratio above. In the medium term, domestic cotton spinning Industrial consumption is weak, especially when output increases and consumption decreases, a short-term rebound may be for a better decline.