Bailong Oriental Loss 70 Million Yuan To Think About How To Treat Cotton Hedging Surplus And Deficit?

In January 2nd, the domestic leading enterprise of color spinning, the Baron Oriental Limited by Share Ltd (hereinafter referred to as "Bailong Orient"), announced that the company's cotton futures contract was calculated at the last trading day settlement price in 2018, forming a floating deficit of 71 million 87 thousand and 400 yuan.

Affected by this news, Baron East next day, the stock price opened once down.

So how does floating loss affect 70 million of the blong east?

What is the significance of developing cotton futures hedging business?

How should the market view the profit and loss of cotton futures hedging?

Generally speaking, for cotton spinning enterprises, hedging in futures market is aimed at effectively preventing the fluctuation risk of raw material prices.

The main raw material cost of cotton is only about 70% of the cost of production.

Nearly 70% of the total, which means that cotton prices directly affect the company's cost and product pricing, and the fluctuation of cotton prices leads to corresponding changes in production costs.

According to the insiders, the price of the color spinning products of Baron East is priced by the cost plus method, and the price of the colored spun yarn is determined by reference to the spot price of cotton.

Therefore, in the process of rising cotton prices, the spot price is higher than the historical price. The current price benchmark is higher than the inventory cost. Besides the profit from the increase in price, the company will also get extra income.

Conversely, when the cotton price is in a state of decline and the current price is lower than the historical price, the company will suffer some losses.

It is precisely because of this consideration, in May 30, 2018, Bailong Eastern issued a notice on the development of futures hedging business.

In the announcement, Baron East expects that the price fluctuation of domestic and foreign cotton market will increase in the future, and as the company's production scale continues to expand, the demand for raw materials and cotton is also increasing. In order to prevent the fluctuation of the cotton price from affecting the company's performance, the company decided to carry out the cotton futures hedging operation in 2018.

It can be seen from the announcement that the starting point of Baron East is to circumvent the risk of cotton price fluctuation, but the real trading risks remain.

In 2018, cotton futures prices experienced roller coaster changes.

Beginning in mid May, a bad weather in Xinjiang, the main cotton producing area, made cotton futures price rise sharply. However, with the issuance of the 800 thousand ton sliding quota tax quota and the postponed landing of cotton reserves, the cotton market was obviously cooling down. In addition, the increase in global cotton output in 2018, the sharp fall in inter country cotton prices, the drag on domestic cotton prices continued to go down, and the multiple factors such as Sino US trade disputes, the market saw a strong atmosphere.

Cotton futures price dropped from high position and once explored 14335 yuan / ton.

In this regard, industry experts said that from the perspective of the development of the domestic cotton market in the future, the supply and demand fundamentals of cotton market in China and the whole world are tight. The reasons for the current decline in cotton prices are manifold. They have both the impact of poor market demand caused by the complex and changeable international situation, as well as the market's psychological enhancement to the consumer side in the future. Next, the market will pay close attention to this.

In addition, the excessive quantity of cotton futures warehouse is one of the main reasons to suppress cotton prices.

Data show that as of the end of the two quarter of 2018, Baron East holds 4600 hands (460000 shares) of cotton futures contracts, which only lost 1 million 979 thousand and 500 yuan at that time.

In the three quarter, although it did not disclose the position and profit and loss of cotton futures in the quarter, the financial liability of Baron Eastern has risen to 54 million 893 thousand and 500 yuan.

That is to say, cotton futures in Bailong are still losing money.

As cotton futures continued to fall, as of December 31, 2018, Bailong Eastern cotton futures contract deficit has reached 71 million 87 thousand and 400 yuan.

But does floating loss mean a real loss?

The answer is negative. According to reporters, there are still variables.

In January 3rd, the share price of Baron shares fell by nearly 5%, due to the loss of cotton futures contracts.

In view of the decline in share prices, Hua Jingdong, Secretary of the chairman of Baron Oriental, said that due to the recent multiple factors, domestic cotton futures prices have dropped continuously, but according to the experience of many years in the industry, the company's attitude towards the overall market is still optimistic about cotton market.

Financial reports show that in the first three quarters of 2018, the net profit of Baron East was 465 million yuan.

It is understood that as the company's future capacity in Vietnam continues to release, it is expected that in the second half of 2019, Vietnam's capacity will reach 900 thousand ingots, which will account for about 60% of the total capacity, and will lead to performance growth.

At the same time, when Hua Jingdong responded to the company's losses, he also said: "the impact of floating losses is in the controllable range for a time. The price range of futures prices is not too large, and the goods are not yet delivered. Everything is still book data, and the actual situation is still not easy to say."

According to industry analysts, as a textile enterprise, cotton is the main raw material of this enterprise. In 2018, when the cotton and cotton market was changing at home and abroad, buying and keeping value in futures market was normal, and it was also in line with the operational essence of futures hedging.

"The reason for the loss is to see whether the cotton long positions owned by the enterprise match with the production plan of the enterprise and the order quantity of the downstream products. It depends on whether the price level, the operation strategy and the distribution of batches are reasonable and scientific.

These are more likely to be closely related to the floating losses on the books published by the announcement. "

Analysts believe that the loss of the stock market will affect the operation and financial statements of the enterprise to a large extent, and it is necessary to conduct a comprehensive analysis.

Futures Company people also hold this view that futures experts say that hedging is equal to the opposite direction in the two markets, and the final hedging effect is the two market timing.

In terms of specific technology, it is mainly the calculation and dynamic adjustment of the best hedge position.

In the case of Baron East's futures hedging account, there is a deficit. If we do not know the spot and the main information, we can not simply draw the conclusion that "futures are losing".

In addition, there are professional analysis institutions, first of all, from the medium to long term, floating loss does not represent a real loss, the company can hold until delivery under the discount situation; secondly, the "floating deficit" of futures is expected to be partially compensated in the production department by reducing the spot cost of cotton.

In the process of accounting treatment or the separation of futures and production sectors, the futures sector appears to be losing money in the process of falling cotton futures contracts.

If the company is properly insured, the "floating deficit" is expected to partially compensate for the reduction in the spot cost of cotton in the production sector.

It is understood that the cotton spinning industry instead of inventory is normal, large enterprises can be stored in a month to run, small companies should keep at least a week or so.

To the negative impact of Bailong's floating losses, a cotton mill manager said: "Baron East is a listed company, and its volume is not small. It is a normal thing to lose money. After all, floating loss is not equal to real loss, and there is room for maneuver in the future."

As for the future trend of cotton futures, the industry generally believes that the market will have limited future space and cotton prices will show a slow rise pattern.

Although Bailong's "buoyancy" has attracted heated public debate, in the eyes of many professionals, it is normal for the commodity related enterprises to float or float in the process of hedging.

Wu Faxin, chief strategy officer of Shanghai yarn Bao Technology Co., Ltd., said that from the point of view of the announcement of the Baron East announcement, the company carried out hedging operations in the cotton futures market. If the company hedged the risk of spot spot trading, it would have a better grasp of the spot cash position, so the profit of the cash side should cover the losses of the futures side.

"The market should objectively look at the problem that the cotton enterprises are losing their positions in the futures market. We need to give a comprehensive and reasonable assessment. We should not place the local losses on the futures side and mislead the investors."

Wu FA Xin said.

In view of the floating loss of the Oriental, there are people in the industry that, although the Oriental "drop pit" cotton futures, but this does not mean that cotton futures do not apply to the cotton textile industry.

In fact, many enterprises have hedged the risk through hedging in the futures market, and made up for losses in the spot market by making profits in the futures market.

In addition, enterprises need to understand that the essence of commodity futures is to pfer their risk functions, and to hedge the rights and price risks in the spot chain according to their own business conditions, rather than profits from futures markets.

However, if the enterprise hedges the original intention of hedging risks in the process of futures hedging, futures will become a speculative tool to try to make profits, which will probably lead to a larger real loss.