Agricultural Sector: Cotton Prices Are Expected To Continue To Rise Sharply.

The unbalanced pattern of cotton supply and demand has strong support for cotton prices. Even if the state has introduced relevant adjustment measures, it is difficult to change the high cotton price situation.

It is estimated that domestic cotton prices will continue to run at a high level in the second half of 2010. If the external market stabilizes and the output is not as good as expected, it will not rule out the possibility of continuing to go up sharply.

Author: Bohai Securities Research Institute

Investment value of agricultural products (16.72,0.65,4.04%) highlights

Tight supply and demand, price increases are expected to be strong.

Corn: last year, natural disasters led to the reduction of maize production in the northeast of the main producing areas, which made the farmers reluctant to sell more heavily. This year, spring sowing negatively increased the supply of uncertain factors, and the expansion of production demand gap highlighted the contradiction between supply and demand of corn. Even if the country entered the dumping and storage, it would still be difficult to change the high position of corn.

Wheat: the unreasonableness of the wheat price fixing policy of the national wheat holding market has led to a sharp decline in the quality wheat area, and this year's freeze disaster has led to the shortage of excellent Wheat Resources in China.

Sugar: last year, the output of cane sugar dropped sharply, and the gap between production and demand expanded rapidly. This year, Guangxi, Yunnan and Guizhou suffered from rare drought in the main sugarcane producing areas. The increase in sugar production may not be as expected. The demand for sugar in the downstream industry is in sharp contrast to the stagnation of output. Sugar demand has gradually entered the peak season in the second half of the year, and the domestic sugar price has entered the upstream channel.

Cotton: last year, the domestic cotton output decreased by about 15%, and the contradiction between the supply and demand of cotton was highlighted. The spring sowing of the main cotton areas and parts of the Yangtze River Basin was affected by low temperature and rain in the the Yellow River basin this year. Then the main production area Xinjiang suffered from frost and storm rain, and the affected area of cotton seedlings was larger.

The prospect of production is worrying.

The unbalanced pattern of cotton supply and demand has strong support for cotton prices. Even if the state has introduced relevant adjustment measures, it is difficult to change the high cotton price situation.

Rising grain prices or new driving force for food CPI

2010 in the second half of the year, the overall temperature and rising trend of agricultural product prices will remain unchanged.

The structural rise is obvious: the edible oil that had led the rise of CPI will run steadily under the pressure of larger inventory, and its contribution to CPI will be smaller. However, the supply and demand of corn, high quality wheat, sugar, cotton and other agricultural products are tight, and the price increases will be larger. And there is a strong upward trend in the market. We believe that the price increase of the related varieties of raw grain will become an important driving force for the rise of CPI in the second half of the year.

Policy support and abundant liquidity have promoted the popularity of agricultural products sector.

First of all, in 2010, the national grain production is expected to be cut down strongly, the liquidity in the economy is still relatively abundant, inflation expectations are supported by the industry, and the defensive properties of the agricultural products sector will again be favored by the market.

Secondly, in order to safeguard national grain and agricultural security, increase farmers' income and realize the prime minister's desire to "nurture agriculture by industry".

It is estimated that the state will introduce a large number of preferential agricultural tax policies and fiscal subsidies in the second half of the year.

Cotton: brilliant future

It is under the stimulation of strong policy expectation and anti inflation concept that the recent agricultural share market is unique.

Since November 2009, the Shanghai and Shenzhen 300 (2780.663,84.50,3.13%) index has fallen by 16%, while the absolute yield of agricultural stocks has reached 14%, with a relative yield of 30%.

Since last November, agricultural stocks have won the market in 6 months in 7 months (except for March). Therefore, it is considered that the current market is a persistent market for obvious investment opportunities, rather than a purely seasonal market, which deserves investors' long-term attention.

Among the many sub sectors of agricultural products, we are more optimistic about the investment opportunities of the cotton sector.

International market: inventory decline, cotton prices upward trend difficult to change

According to the US Department of agriculture's latest forecast of supply and demand of agricultural products, the world's cotton production is projected to be 113 million 880 thousand bales in 2010/11, and the global consumption is expected to be 119 million 80 thousand packages. Although production is expected to increase significantly in the 10/11 year, the increase in production is still difficult to meet the needs of the world's cotton flower, and the gap between production and demand is 5 million 200 thousand packs. The steady growth of demand has led to a two-year decline in the end inventory. It is estimated that the end of 10/11 inventory will be 50 million 130 thousand packs and 2 million 620 thousand bags lower than that in 09/10.

The inventory consumption ratio dropped to 42.1%, the lowest in nearly 16 years.

The basic pattern of tight supply and demand has great support for international cotton prices. As of June this year, cotton futures contracts for ICE2 were 77.2 cents / pound, up 40.8% from the same period last year, and the cotlookA class index is currently 89.6, which is 45.2% higher than the same period last year.

With the slow recovery of the global economy, the demand for cotton will continue to grow steadily. However, there are some variables in the supply of cotton. It is difficult to change the trend of international cotton prices oscillating in the second half of the year.

The future price trend will be affected by the following factors:

First, China's output and the number of China's imports have great impact on international cotton prices.

With the explosive growth of China's textile exports after joining the WTO, the amount of cotton used has risen sharply, and the gap has been expanding with cotton.

China's imports of cotton continue to grow. In recent 5 years, China's imports account for about 33% of Global trade. Therefore, the "China factor" in international cotton prices is becoming more and more important.

Two. Weather anomalies lead to loss of production risk.

The growth period of cotton is longer, and if the weather is extreme, the yield will be greatly lost.

In recent two years, the weather changes in the world are abnormal. Natural disasters happen frequently. China's cotton growing period is low temperature and rainy. Recently, the main producing areas of Xinjiang are experiencing rainstorm and flood.

In the case of tight supply and demand, if the output is lost, the possibility of price inflation will be greater.

Three, the risk of trade policy change in the main producing countries.

India is the second producer and exporter of cotton in the world. In April this year, the India government announced the ban on the export of cotton in order to curb the rise in domestic cotton prices. But in May it allowed exports to be exported in the form of export licenses. The change of India's trade policy will affect the effective supply of the global cotton, thereby affecting the trend of international cotton prices.

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Domestic market: imbalance between supply and demand, cotton prices easy to rise or fall

According to the forecast data of the national cotton market monitoring system, the domestic cotton output in 10/11 is estimated to be 6 million 960 thousand tons, up by 3% over the same period last year, and the import volume is expected to be 2 million 738 thousand tons, an increase of 5.8% over the same period last year. The import volume is expected to account for 26.3% of domestic demand; domestic cotton demand is expected to be 10 million 400 thousand tons, up 2% over the previous year; the domestic demand gap is 3 million 440 thousand tons, and the end inventory will continue to decline, which is expected to be 2 million 207 thousand tons, down by 14.7% compared with the same period last year, and the inventory consumption ratio dropped to 21.2%, which is near the lowest level in recent years.

The domestic cotton market continues to maintain a tight supply and demand pattern.

Domestic cotton output is stagnant and the annual variation is intense. With the rapid development of China's economy and textile industry, the demand for cotton in China has been growing steadily, and the contradiction between supply and demand has been increasing.

Last year, domestic cotton output dropped by about 15%, and the contradiction between supply and demand intensified. The tight supply and demand pattern made domestic cotton prices enter a long-term upward channel since the beginning of 2009.

As of June this year, the domestic 328 cotton spot index was 17742 yuan / ton, up 39% over the same period last year, and Zheng Jiao's cotton futures contract price was 18285 yuan / ton, up 44.7% over the same period last year.

It is understood that under the influence of low temperature and rainy weather, the spring sowing time in the main cotton areas of the Yellow River River Basin and parts of the Yangtze River Valley is generally delayed by one to two weeks compared with the previous years, and the northern part of Xinjiang has also been postponed.

Recently, some areas of Southern Xinjiang suffered frostbite and heavy rain, and the temperature of cotton plants was greatly affected.

Although the domestic cotton futures price has been receded by the weakening of the peripheral market and domestic policy, the fundamentals of supply and demand imbalance still can hardly change the rising trend of cotton prices.

It is estimated that domestic cotton prices will continue to run at a high level in the second half of 2010. If the external market stabilizes and the output is not as good as expected, it will not rule out the possibility of continuing to go up sharply.

The future price trend will be affected by the following factors:

First, the state may release cotton reserves to control cotton prices.

At the end of May this year, the NDRC called for strengthening the supervision of the agricultural products market, maintaining the normal market order, resolutely preventing and curbing speculation and speculation, and organizing a special action against the speculation of agricultural products in conjunction with the Ministry of Commerce and the State Administration for Industry and commerce. In the near future, the reserve cotton said it would take timely and appropriate measures to maintain the cotton price basically stable, and the national policy will limit the amplitude and rhythm of domestic cotton rising.

Two, weather and disasters make the prospect of production very worrying.

The growth period of cotton is longer and the weather is more influential.

In recent two years, the weather is very unusual and the weather is frequent. In April, the cotton planting season in China began in April. Since the beginning of April, the low temperature and cold damage in the cotton producing area has affected the cotton planting and early growth. Subsequently, the continuous rain in the middle and lower reaches of the Yangtze River has led to rotten roots and seedlings. In May, the storm and flood in the main producing area destroyed the cotton fields, and many unfavorable factors made the new year's output potential worrisome.

The impact of future weather conditions on cotton growth is noteworthy.

Three, the impact of international cotton prices.

Since the entry of WTO, China's textile industry has exploded. The gap between imports and exports is mainly offset by imports. The import volume in 09/10 is estimated to be 2 million 588 thousand tons, accounting for 25% of total domestic consumption.

The linkage between domestic and foreign cotton prices has gradually increased.

investment opportunity

Thanks to the strong recovery and market expectations of China's textile industry, China's data in May continued to improve, and ICE cotton rose more than 6% last week, while Zheng cotton has continued to go strong and close to its all-time high.

The sharp strengthening of cotton prices will certainly enhance the profitability of the cotton industry, and the future of the cotton sector is worth looking forward to.

Xinjiang is an important commodity cotton base in the country. Two listed companies that are dominated by the cotton industry deserve our attention: 12.83,0.31,2.48% (600359) and new agriculture development (15.14,0.55,3.77%) (600540).