Global Cotton Market Or Usher In Peak Supply Easing

First, the global market is loose.

Cotton stocks remain high in 2018/19

The global cotton planting area decreased in 2018/19 compared with the previous year, and the main cotton producing countries were affected by adverse weather during harvest. According to the latest global cotton supply and demand forecast report released by USDA in June, global cotton production in 2018/19 decreased by 1 million 70 thousand tons to 25 million 881 thousand tons, a decrease of 4.32%. In the context of stable global cotton consumption, the end inventory of cotton in China has decreased by 0.56% compared with that of China, but the total inventory is still at a high level of nearly 10 years. 2019/20 global cotton inventory pressure is bigger.

The picture shows the end of year inventory of cotton in the international market (unit: 10000 tons).

Global cotton production is expected to increase in the new year.

US cotton is expected to increase production and exacerbate inventory pressure.

The USDA report predicts that US cotton production will grow by 20% to 4 million 790 thousand tons in the year of 2019/20, and the export volume will increase by 15% to 3 million 701 thousand tons compared with the same period last year. The final stock will rise to 1 million 393 thousand tons, up 37.65% from the same period last year, the highest in nearly 5 years. Recently released US cotton production report shows that as of 9 June, the US cotton sowing schedule was 75%, a decrease of 13% over the same period last year, a decrease of 12% over the past 5 years. The rate of bud emergence is 11%, which is 3% lower than that in the same period last year, which is the same as the average in the past 5 years. The growth of cotton in the United States reached 85% above normal, 79% higher than that in the same period last year. Although the current American cotton sowing is slowing down, the growth is generally normal.

The picture shows the output, export volume and final inventory of US cotton (unit: 10000 tons).

India's cotton supply is relatively loose.

The India Meteorological Department expects that the southwest monsoon rainfall in the 6-9 month is 96% of the long cycle level, approaching the normal level. Overall, there will be good rainfall distribution in the 2019 monsoon season, which will benefit the next cotton harvest season. According to the USDA forecast report, the cotton planting area in India was 12 million 450 thousand hectares, and the unit yield was restored to 512 kg / ha, an increase of 7% over the same period last year. The output is expected to grow by 11.76% to 6 million 200 thousand tons in. India's domestic cotton consumption was 5 million 508 thousand tons, an increase of 2% over the same period last year. Combined with 2018/19 cotton inventory, cotton supply is relatively loose this year, and cotton export volume is expected to grow by 14% to 1 million 45 thousand tons.

Brazil's cotton output continues to grow to stimulate exports

Brazil cotton producers association said that cotton farmers have been increasing cotton planting area in Brazil in the past 10 years, and this trend is expected to continue in the future. Mato Grosso is the largest cotton producing state in Brazil. Because of the early harvest of the first crop of soybean crops, the cotton crop in the state is sowing earlier than normal. Up to now, the weather has been good, farmers expect to harvest very good yield.

The Brazil cotton Producers Association expects that cotton yields will be further improved. Cotton farmers in Brazil have pre sold about 70% cotton production, and surplus production will be sold after harvest. In view of the slower growth of cotton consumption in Brazil, it is estimated that Brazil will further increase its share of cotton exports. According to USDA's latest report, Brazil's cotton export volume in 2019/20 increased by 41.33% to 1 million 785 thousand tons over last year.

Two, the domestic market is abundant, but demand is weak.

Cotton production increased slightly, and cotton processing in main producing areas was basically completed.

According to statistics from the Ministry of agriculture and rural areas, the total output of cotton in China is estimated to be 6 million 40 thousand tons in 2018/19, representing an increase of 150 thousand tons over the previous year. Except for a small number of cotton sales in the the Yellow River River Basin, the sale of other cotton areas is over. In the year of 2018/19, the national lint processing is coming to an end. As of May 2019, 4 of Japan's total cotton processing in the year amounted to 5 million 311 thousand and 900 tons, and the total output of 151 thousand and 800 tons in the mainland. The total processing volume of cotton in Xinjiang was 5 million 160 thousand and 200 tons, of which the Corps processed 1 million 602 thousand and 400. Tons of local enterprises processed 3 million 557 thousand and 800 tons.

Cotton sowing area is expected to decrease slightly in 2019.

At present, the cotton seeding work in Xinjiang is coming to an end. It is generally in the stage of seeding and emergence. Some parts of the the Yellow River River Basin and the Yangtze River Basin have been sowing. Because of the rising cost of cotton planting and labor shortage, the direction of cotton subsidy policy adjustment is uncertain, and cotton growers' enthusiasm for planting cotton has declined. According to the Ministry of agriculture and rural data, China's cotton planting area was 3 million 300 thousand hectares in 2019/20, 2% lower than the same period last year, and the output of cotton in the whole country will be reduced to 6 million tons.

The state-owned cotton stocks are out of stock and the social stocks are high.

Since 2014, the Xinjiang direct subsidy pilot project has been implemented. Under the annual phasing out policy, China has accumulated about 8 million 400 thousand tons of net cotton reserves in the past 2016-2018 years, with an average annual output of about 2 million 800 thousand tons. The stock of reserve cotton has been reduced from 1100 tons to less than 2 million tons, and the storage of cotton reserves has basically been completed.

In 2019, the State Grain and material reserve bureau and the Ministry of Finance issued a notice in April 23rd. The announcement indicated that during the 30 months of May 5, 2019 -9, 1 million tons of cotton reserves were planned. As of June 6, 2019, 224 thousand tons of cotton and 1 million 621 thousand and 500 tons of surplus cotton were successfully sold. If the 1 million tons of state cotton were successfully put into operation this year, the stock would be reduced to 845 thousand and 500 tons.

From the cotton business inventory and industrial inventory, as of May 2019, due to the downturn in downstream consumption, China's cotton business inventories of about 3 million 528 thousand and 100 tons, an increase of 974 thousand and 600 tons compared to the same period, at nearly 5 annual high level in the same period. From the perspective of industrial inventories, 796 thousand and 800 tons in April increased by nearly 90 thousand tons compared with the same period last year, accounting for about 1 million 10 thousand tons of cotton stocks, which is also at the same level in the past 5 years. Domestic cotton social inventory amounts to about 4 million 890 thousand tons, and inventory pressure is large.

From another hidden social inventory futures Warehouse receipts, this year, futures warehouse receipts continue to increase, first, the cotton mill hedging business gradually improved, the two is that the market base trade has increased rapidly in the past two years, has basically become the mainstream mode of spanaction, three is the Zhengshang office this year in Xinjiang increased 3 delivery repository, making the Xinjiang cotton into a simple step. The above points, coupled with the poor spot sale of new cotton, most of the cotton ginning factories have registered the warehouse receipt guarantee operation under the condition of guaranteeing small profits, which has led to a record high of cotton warehouse receipts this year. By the end of June 14th, 17122 cotton warehouse receipts were converted to about 721 thousand tons on spot, while 1022 effective forecasts were equivalent to about 43 thousand tons and about 764 thousand tons of cotton in stock.

Cotton imports increased significantly

Since 2014, China has strictly controlled the import of cotton, providing market demand for reserve cotton. With the stock of China's cotton reserves falling to a safe level, the important task of ensuring market supply is gradually shifting from reserve cotton to imported cotton.

At present, cotton imports keep increasing year by year. In June 12, 2018 and April 12, 2019, the national development and Reform Commission announced that the total amount of cotton import slide tax quota was 1 million 600 thousand tons. In April 2019, the number of cotton imports in China increased by 179 thousand and 800 tons, an increase of 69 thousand and 800 tons compared with the same period last year, an increase of 63.45%. As of the end of April 2019, cotton imports in the 2018/19 months have maintained a positive year-on-year growth, with a total import volume of about 1 million 433 thousand and 400 tons, an increase of 79.61% over the same period last year. The increase in cotton imports has also ensured domestic cotton supply.

cotton Spin Enterprise operating rate decline, product inventory backlog

The inventory of cotton and grey fabrics is at a record high this year because of the drop in overall clothing sales in 2018. Clothing sales in 2018 were 818 billion 700 million yuan, down 66 billion 400 million yuan compared with 2017, a decrease of 7.5% over the same period last year. Due to 18 years of reduced sales volume and slow production, pressure was spanmitted to the upstream, resulting in a decline in yarn and grey fabric consumption, resulting in inventory accumulation. Recently, this phenomenon is more obvious. As of April 2019, the yarn stock days were 23.8 days. The growth rate is 7%, and the number of grey cloth storage days is 30.2 days, up 26% compared with the same period last year.

Global trade friction affects textile and garment industry

The United States is the second largest exporter in China's textile and clothing export trade after the European Union. The amount of exports to the United States accounts for 17.23% of China's textile and clothing exports. Therefore, Sino US trade friction has a negative impact on the textile and garment industry. In the 1-4 month of this year, the amount of textile exports to the United States decreased by 20.72% compared with the same period last year. In contrast, due to the depreciation of the RMB, the total amount of textile raw materials exported to China has risen. The total export volume of textile raw materials in 1-4 is about 162 billion 900 million, up 7.23% from the same period last year. In addition, because clothing is not on the list of taxes, China's clothing export is not obviously affected by trade friction.

Since May 10, 2019, the US government has announced that the tariff rate on goods imported from China for the $200 billion list will be increased from 10% to 25%. If the Sino US economic and trade relations continue to deteriorate, or the scope of Taxation will be extended to US $325 billion, the scope of Taxation will almost cover all textile and apparel products exported to the United States. With the expansion of tax scale, trade war has a real impact on China's textile and clothing exports.

The picture shows the total value of textile exports and the proportion of the United States (unit: 10000 yuan,%).

The picture shows the total amount of clothing exported to the United States and the proportion of the United States (unit: 10000 yuan,%).

Three, option strategy analysis

Judging from the overall situation of the global cotton market, under the influence of the 2018/19 inventory pressure and the expected growth in the new year's output, the current cotton market is in a relaxed supply situation.

According to the situation of China's cotton market, cotton production in 2018/19 is relatively stable. At present, the cotton processing in main producing areas has basically been completed. Cotton reserves 1 million tons in 2019 and cotton import quotas Additional issue The current supply of cotton is abundant. However, there are about 3 million tons of cotton production demand gap per year in China. In recent years, the gap is generally made up by import and storage. However, after the end of this year, the stock of national cotton reserves is less than 1 million tons, and cotton imports are subject to policy restrictions. Therefore, it seems that domestic cotton supply and demand will maintain a tight balance pattern in recent years.

In terms of downstream demand, due to the overall decline in domestic garment retail sales in 2018, clothing orders were reduced, stock of cotton yarn fabrics was continuously accumulated, inventory pressure was spanmitted to the upper reaches, overall cotton demand declined, and domestic retail sales declined in 2018, but the export amount of China's textile industry continued to rise, or could make up for the impact of insufficient domestic demand.

On the other hand, the trade frictions have not made much impact on the total export of textiles in China. If the tax scale is further increased, the actual impact will need further observation, which may impact the cotton prices in the short term in the market sentiment, but there may also be a bad rebound.

To sum up, the recent cotton prices have reflected the USDA cotton production increase, trade frictions and the expected tax increase of 325 billion US dollars, but the market may overestimate the impact of trade friction on China's textile exports. There is a possibility of overreaction. It is estimated that the probability of price rebound or consolidation in the next 3 months is higher than the probability of continued decline.

Because of the sharp fluctuation of cotton prices in recent years, the implied volatility of cotton options has been at a high level recently (as shown below), and we tend to build short selling volatility strategies.

The picture shows the trend of cotton historical volatility and implied volatility.

On the basis of the above analysis, the probability of rebounding or consolidation of cotton prices in the next 3 months is higher than the probability of continuing to fall, and we are going to sell the volatility strategy again. Plus the multi - head strategy, we choose to sell the best liquidity September put option contract. In the choice of the right price, we choose to sell the deep virtual value put option of 12400 yuan / ton.

But considering that the subsequent 325 billion US dollar tax increase may impact cotton prices in the short term, in order to reduce risks, we choose to buy a put option with a strike price of 12000 yuan / ton to build a bull market price difference.

We calculate the strategic revenue based on the closing price in June 14th. At the close of June 14th, the price of CF909 was 13425 yuan / ton, the price of CF909P12400 was 159 yuan / ton, and the price of CF909P12000 was 102 yuan / ton. We have reduced the price of cotton to 12000 yuan / ton and estimated that the first hand combination needs 7000 yuan. The chart below shows the bull market spread curve, which has a maximum yield of 285 yuan, corresponding to 32.57% of the annual yield. Unlike the usual bull market spread, if the cotton price oscillates at the current position, the maximum yield of the combination can be obtained, and the price of cotton will not rise further. The price of the exercise price will also leave a big drop for cotton prices. When cotton price is no less than 12400 yuan / ton, the strategy can still get the maximum benefit. As the bull market spreads are limited, the loss can be controlled within a certain range when prices fall sharply.