Zheng Cotton Fell Into A Long Decline. Sino US Trade Friction Decided Market Trend.

Since mid April, Zheng cotton market has experienced a four round of rapid decline. This fall far below the cost of procurement, exceeding expectations, is also a result of supply and demand. It can be attributed to three factors: first, the downward pressure on the macro economy; the two is that Sino US trade friction leads to a depressed demand; the three is sufficient supply and high inventory. Among them, second factors: Sino US trade friction is the leading factor.

Sino US relations are affecting the market nerves, and the result determines the export orders for downstream textiles to the US. Without demand driving, there will be no increase in cotton prices. Before long, the new cotton market will start in the northern hemisphere. How will the cotton market evolve under the pressure of harvesting?

Demand attenuation exceeded expectations

The main reason for the fall of the Zheng cotton market is the tortuous and long-lasting trade conflicts between China and the United States.

China is the largest importer of cotton in the United States, and the United States is China's largest exporter of textiles and clothing. Since the trade friction, the complementary relationship between the two sides has been seriously hampered, and the cotton consumption in China is expected to decline.

Now, the United States will impose a 10% tariff on the remaining 300 billion US dollars after September 1st, which will affect about 45 billion US dollars in exports of textiles and clothing to the United States. So, insiders estimate: cotton consumption in the whole year will drop 800 thousand - 1 million tons. In fact, there is another reason for the decline in cotton consumption: domestic textile enterprises use more chemical fiber instead of cotton, which is a long-term change.

What needs to be considered is whether this decline in the number of cotton that is expected to be reflected in the domestic cotton supply and demand balance this year? In fact, it has not been fully reflected. That is to say, the bad demand will be further fermented in the future.

Because of the decline in demand, business and industrial inventories will continue to rise (despite the decline in the National Treasury), resulting in a serious backlog of cotton production last year (quite a few of them are still in the hands of ginning plants and traders). The absorption of this "barrier lake" takes time to digest.

How does Sino US trade relations evolve? The author believes that the confrontation between the two sides will be long in terms of high technology and so on, and cooperation in agricultural products is possible. But cotton companies need to prepare for the worst.

Sufficient supply of contradictions remains

The high inventory of domestic industry and commerce is the main factor of dragging down the price of cotton market. It is reported that in the early August, the national industrial and commercial inventory was about 4 million tons, the highest in the same period. As of August 9th, there were 1 million 200 thousand tons of cotton for sale in 2018/2019.

In June, China approved the import quota of 800 thousand tons of sliding tax, so there will be low price cotton to port in the following months.

There are also sources of supply: rotation of central cotton reserves. In August 20th, the reserve cotton was listed on 11 thousand tons, the average price was 11967 yuan / ton, the price of 3128B was 13144 yuan / ton, and the turnover rate was 94%. Since the auction in May 5th, the total turnover has reached 700 thousand tons, with a turnover rate of 85%. Since there is no full deal, it shows that the participants are relatively calm.

From a long-term perspective, the central reserve cotton rotation plan is: auction time to September 30th, the planned output volume is 1 million tons. So far, the plan is expected to be realized. Therefore, according to the plan, "1 million tons of new cotton" will be imported into the later stage. Whether by importing replenishment stocks or purchasing new cotton domestically at low prices, this consumption will foreshadow the market's next year's rise.

In addition, there was huge pressure of delivery in September. As of August 19th, Zheng cotton registered 299 warehouse receipts, equivalent to 492 thousand tons of cotton. Assuming that 450 thousand tons in mid September, the price is calculated at 12000 yuan / ton, then the delivery needs 5 billion 400 million yuan of funds.

The overall USDA report was empty in August.

After September, the cotton market will enter a new year. At the same time, the harvest season will usher in a new round of supply increase.

According to the latest release of the US Department of agriculture in August, global cotton production in 2019/2020 is estimated at 27 million 380 thousand tons, an increase of 1 million 400 thousand tons over the previous year, and consumption of 26 million 820 thousand tons, increasing by only 530 thousand tons. Production is more than 553 thousand tons, ending inventory increased by 470 thousand tons to 17 million 970 thousand tons, reversing the situation of insufficient production in 2018/2019.

The increase in global production came mainly from the United States and India. Cotton production in the United States increased by 22% to 4 million 910 thousand tons and India cotton increased by 8.6% to 6 million 320 thousand tons.

In terms of China's supply and demand, it is estimated that cotton production in China will basically remain unchanged at 2019/2020 in the year of 6 million 49 thousand, the consumption volume will increase by 109 thousand tons to 8 million 720 thousand tons, imports will grow from 218 thousand tons to 2 million 289 thousand tons, and the stocks at the end of the year will be reduced by 409 thousand tons to 7 million 348 thousand tons. In this way, inventory consumption fell to 84%.

Overall, the global balance of supply and demand again tilted to the empty side, and domestic supply and demand seemed to be tighter. However, we believe that in the USDA report, there is still a serious overestimation of the consumption data in China, and the reduction is not enough because the actual consumption is reduced by 800 thousand to 1 million tons over the previous year. What does this mean? The annual consumption data may be below 8 million tons.

Has the worst time passed?

To sum up, the inventory of the industry and commerce is high, the demand outlook is low, and this year there are still a lot of unsold new cotton. In the face of the "falling" market, it is questioned: where is the minimum cost of cotton planting? Statistics show that in the historical market of Zheng cotton, when there were two hits of 10000 yuan / ton, there was a huge reversal in the market.

Now, speculate about the problems ahead. After entering the September, all kinds of contradictions were concentrated: first, the United States imposed 10% tariffs on Chinese goods; two, the issue of new cotton production and listing; three, the 1909 contract huge delivery problem. In this way, the empty pattern can hardly be changed for a long time.

Among all the contradictions, the most important thing is the trend of Sino US trade. Trade friction will determine whether Zheng cotton market and downstream consumption continue to sink or recover. The picture shows the most optimistic anticipation.

The future trend of Zheng cotton index (Zhou Xian)

To sum up, the main negative factors have been clear and digested in the winter. If Sino US trade is reached in related fields, driven by low price and high consumption season, the market is expected to form a wave of phase rises and continue to spring.