Driving Force Analysis Of International Cotton Price Rising In The First Quarter Of 2019

Key words: ICE futures, inventory consumption ratio, Sino US trade, structural deleveraging, correlation

In December 2018, the Federal Reserve raised its interest rate fourth times during the year. Powell reiterated that the Federal Reserve plans to end its action later in 2019.

As China and the United States reached a consensus on economic and trade issues, the two sides began to exchange delegations for rounds of high-level economic and trade consultations.

After the international crude oil prices hit a new low of two years before and after Christmas, the pessimism of the market began to reverse. Under the impetus of multiple factors, commodities resumed a recovery.

Since February of this year, the international cotton price represented by ICE cotton futures is expected to rise. During the same period, domestic cotton prices are relatively weak in the case of the policy of stock rotation, and whether the strength of the outside world will continue can be the focus of the close attention of the market in the coming period.

First of all, from a macro perspective, it is well known that the operation of the cotton market price is the result of the combination of supply and demand, industry prosperity and financial policy.

To explore the main reasons why the international cotton price exceeds the expected strength in the first quarter, especially since February, we summarize the monthly average price of the ICE cotton futures contract settlement price and ICE cotton basis difference (ICE futures main settlement price international cotton index) in the 2015 month since the beginning of the year, as well as the three monthly data of the global inventory consumption ratio released by the USDA supply and demand forecast report, and draw the graph (Fig. 1) in the three month.

From the past 3 years of historical trend, we can see that before June 2018, the price trend of ICE futures at the end of the month basically reflected the change of the latest supply and demand data of USDA, that is, the price and inventory consumption ratio showed a negative correlation.

It is worth noting that in the 7-10 month of 2018, the average price of ICE futures fluctuated in the same direction as the sink to consumption ratio. This abnormal behavior may be due to the pfer of basic supply and demand to other factors during this period.

Considering that the most tense situation of Sino US trade friction overlapped with the structural leveraging deepening stage of domestic economic structure in the three quarter of 2018, cotton, as part of the bulk agricultural products, was dominated by systemic risk and the market was full of mud and sand.

Since November, the ICE futures average price has a negative correlation with the USDA inventory consumption ratio, which is basically consistent with the above macro trend.

After a comprehensive analysis, we believe that the rise of international cotton prices in the first quarter of 2019 is a restorative rebound against pessimistic expectations of last year's trade frictions and macro deleveraging, which both contributed to the overall favorable returns brought by the global risk appetite and the "delayed response" to the decline in the 2018 half of the year. Whether the trend will continue in the future depends on the next step in the Sino US trade negotiations and the global market risk appetite.

Secondly, from the microscopic structure analysis, as at April 11, 2019, the historical fluctuation rate of the main contract settlement price of ICE Cotton Futures (the 242 year annualized coefficient) was calculated as short as 19.1% (10 days), medium term 18.2% (30 days) and long term 19.7% (100 days) respectively. The historical fluctuation level is still relatively low in the long term. The short and medium term volatility is lower than the long term level. This phenomenon indicates that the overall volatility of ICE cotton futures is still in the downward process in the medium to long term.

Taking into account the volatility mean reversion characteristics, we believe that the trend of increasing international cotton price volatility is not yet over in the medium term, but the trend of long-term volatility is still doubtful (Fig. 2).

In April 10th, the Federal Reserve announced a March conference summary that it would not raise interest rates this year and plan to close the table by the end of 9. The Fed's pigeon statement finally made the first quarter a booming global market for commodity markets.

In order to further investigate the correlation between the major asset class fluctuations in the past 3 months, we summarize the main contract of Zheng cotton futures, the main contract of ICE futures, the CRB index textile sub item, the CRB composite index, the US crude oil futures, the US dollar index and the 10 year US Treasury bonds, which contain 7 asset targets, which are divided into four categories: cotton futures, commodity spot index, crude oil futures and dollar class. The rolling calculation window length is 3 months (1811-1902, 1812-1903, 1901-1904), and the chart is drawn after calculating the correlation coefficient matrix (Fig. 3).

From the correlation analysis chart, we can see that the major global assets fluctuated in the same quarter, and the 10 year treasury bonds and risk assets rose together, indicating that the main type of global market rebound may be attributable to liquidity easing.

The negative correlation between the commodity spot futures and the US dollar index and the 10 year US debt gradually narrowed in the first quarter. By the beginning of April, most of the commodity spot spot prices were positively correlated with the US dollar index and the 10 year US debt, further confirming that the recovery of the global risk assets since the first quarter is in progress.

In addition, we can also see that the main cotton futures contract on behalf of the domestic cotton prices has generally declined since the first quarter, and the correlation with other assets has generally declined. This indicates that the relative price of domestic cotton is relatively independent in recent years. This trend may be related to the policy of dumping and storage and the recovery of downstream industries. With the gradual development of relevant policies in the cotton industry and the gradual economic clarity of the whole year, the domestic cotton price is expected to be in line with the international market operation direction.