Zheng Cotton Has A Positive Or Profitable Position After May.

In recent years, when speculators can not find the right direction from unilateral operations, intertemporal arbitrage has evolved into another way of gaining profits. Take the current main contract CF1905 and the second main contract CF1909 as an example. After the end of 12 2018, the price difference of zhengmian 5-9 month contract was more than 150 rise. The monthly price difference of this combination began on the date of the September contract signing, that is, the mid September of last year, ending in May May. During this period, cotton production was mainly concerned in the first half, and after the end of lint processing, the market focus was on demand side and cotton cultivation in the next year.

According to the relevant theories, there will be two directions for the spread of price differentials, one is the mean regression, and the other is always fluctuating around a certain interval. The other is the trend enhancement, and the price difference is obvious and continuous strength or weakness. From the past 4 years, the trend of the 5-9 month contract spread of Zheng cotton has seen a more obvious trend in 2017 and 2018. The difference in the price of the 5-9 month contract is weakening. In 2016, the 5-9 month contract price difference appeared a startling trend reversal in the latter half, and dropped from 820 to -555.

Zheng cotton futures contract spread trend in 5-9 months (2015-2019 years)

The author believes that the trend of price differentials in these three years has been enhanced, mainly due to the market's expectation of better demand. Benefiting from the policy of reserve cotton rotation from 2016, cotton supply has been guaranteed, cotton prices have been running smoothly, spinning enterprises' cost of yarn production has been controlled, and profits from spinning enterprises have been better. Among them, the price of 32 domestic cotton yarns is more advantageous than that of Vietnam's and India's 32 cotton yarns. The considerable production profit makes the cotton mill's load start to maintain a higher position, which also helps the domestic cotton textile industry to pick up.

32 cotton yarn inside and outside price contrast chart (yuan / ton)

From the production point of view, the cotton warehouse receipts in May and September were all lint cotton in the current market year. The cost of lint production is almost the same. There is only a certain storage cost and capital cost difference. According to the production cost of 15300 yuan / ton, the warehousing cost of Xinjiang cotton delivery warehouse 0.6 yuan / ton / day and the cost of 6% capital, the cotton price in September is higher than the May contract price by 380 yuan / ton. That is to say, if the supply and demand ends smoothly, the trend of the spread of price will show the form of mean reversion. Therefore, the 5-9 month contract price difference in 2019 will be expected to fluctuate around -380.

For the time being, cotton output has been determined this year, and Sino US trade relations that affect demand remain uncertain. It can be said that the factors that will affect prices and spreads in the future are whether the production and marketing gap of domestic cotton is weakened or how to make up for it.

In view of the current domestic cotton supply and demand situation, the demand for cotton is not optimistic. Under the influence of trade disputes, the starting load of the pure cotton yarn mill in 2018 has obviously decreased, and the production and marketing gap is facing further weakening. At the same time, the reduction of the quota import import slip tax and the high commercial inventory will also make up for the gap effectively. We note that the price gap of the 5-9 month contract has continued to maintain at a normal price spread of around -380 during this period. That is to say, the demand for good and scarce supply of the market is expected to bring about a long month of premium water has been squeezed out.

Cotton cotton mill load chart

What will be the trend of the next 5-9 spreads? First of all, there are great variables in Sino US trade relations. The situation is virtual, real and hard to distinguish. But from a fundamental point of view, the weakening of cotton demand is a short-term fact and a long-term trend. In the short term, the downstream yarn finished product storage, the internal and external yarn price upside down is not conducive to the digestion of goods. In the long term, the chemical artificial fiber is constantly optimized, the trend of substitution is gradually strengthened, and the demand factors such as the transfer of cotton textile industry to Southeast Asian countries such as Vietnam, or difficult to make the September contract rise again.

Secondly, another factor affecting the price difference of 5-9 months is cotton production in 2019/20. According to the sales information of a cotton seed company in southern Xinjiang, sales of cotton seeds have been over half, sales have increased over the same period last year, cotton farmers' willingness to grow cotton has not been reduced in South Xinjiang, and sales of machine picked cotton seeds have expanded. From this we can speculate that cotton output in 2019/20 is still stable, and the situation of supply shortage in the coming months will not appear.

In terms of the 5-9 month contract price difference this year, I prefer the trend of mean return in the future, that is, the fluctuation in the vicinity of -380, but speculate on the current fundamentals. If the price gap of the 5-9 month contract continues to weaken, it will be more secure.