Central Storage Cotton Feng Meng Xiao: 2019/2020 Cotton Market Outlook Report

In 2019, the supply and demand relationship of the global cotton market was significantly relaxed, and China's demand for production gap narrowed slightly. The changing external economic environment has reshaped the trend of supply and demand of cotton in recent years. In 2019, the international trade situation is still volatile. The global central bank's monetary policy is easing. The cotton market will face more challenges such as looser supply, intensified competition and surging capital markets.

The supply and demand relationship of cotton market has changed from tightened to loose in 2018.

In 2018, global cotton consumption declined, reversing the trend of global cotton supply and demand which has been tightened for nearly 4 years. The price has dropped to the initial level since the beginning of 2015.

1, global cotton consumption is declining. In April 2017, the United States initiated the investigation of imported steel and imported aluminum by using the 232nd clause of the 1962 Trade Expansion Act. In August 18, 2017, the United States launched a "301 investigation" against China. The global trade environment instability increased sharply in 2018. Global cotton consumption has been declining for many years. In 2018, global cotton consumption was 26 million 260 thousand tons (US Department of agriculture's August 2019 report), a decrease of 1.68% over the previous year, the first decline in nearly 7 years. China's cotton consumption is 7 million 990 thousand tons (the national cotton market monitoring system August 2019 report), a decrease of 6.8% over the previous year.

Figure 12007 global cotton consumption trend

Source: US Department of agriculture data August 2019

2, the development direction of supply and demand is reversed. In August 2018, the United States Department of agriculture estimated that the global cotton consumption in 2018 was 27 million 786 thousand tons. In August 2019, the agency lowered the figure to 26 million 260 thousand tons, down 1 million 526 thousand tons, or more than 5%, and increased the final inventory consumption from 60.4% to 66.6%, an increase of more than 10%. The development direction of global cotton supply and demand is reversed. Data released in August 2018 showed that the end of 2018 inventory consumption contracted by 8.4 percentage points in 2017. A year later, in August 2019, the agency adjusted the end of year inventory consumption ratio for 2018 to 0.5 percentage points over the 2017 year.

Table August 12019 and August 2018 the different forecast of end to end inventory consumption ratio of global cotton in recent years

Source: US Department of Agriculture

Comparison of global cotton consumption and inventory consumption since 22015

Data sources: data from US Department of agriculture in August 2018 and August 2019

3, domestic and foreign cotton market prices fell. In November 2015, the central authorities put forward structural reform of supply side. In May 3, 2016, the national cotton storage policy was launched. With the continuous expansion of the storage capacity of China's cotton reserves, the cotton industry has been out of the doldrums of nearly 5 years. The activity of cotton, cotton yarn and cotton fabric market has been significantly improved, and the main market prices are showing an upward trend, and the cotton industry is booming. Unfortunately, the marked deterioration of the market environment has led to a sharp decline in the domestic and foreign cotton market. At the end of 5 and early June 2018, cotton prices at home and abroad hit a sharp decline after the peak in the past 5 years. Cotton prices began to plummet in mid April 2019. On the last trading day of 2018 (August 30, 2019), the domestic cotton spot price (B index) was 12994 yuan / ton, the main contract of zhengmian was 12500 yuan / ton, the international cotton spot price (M index) was 70.24 cents / pound, and ICE cotton received 58.83 cents / pound, compared with the beginning of the year, it decreased by 3301 yuan / ton, 4220 yuan / ton, 21 cents / pound, 24 cents / pound respectively, with a decrease of 20%, 25%, 25% and 25% respectively. The market dropped to the level of the national cotton store.

Comparison of domestic and foreign cotton futures price trend since 32015

Source: national cotton market monitoring system

Analysis of cotton supply and demand in two and 2019

At present, global cotton output will increase significantly in 2019, consumption will be relatively pessimistic, and the supply and demand level of the market will be significantly relaxed. China's cotton production demand gap will be narrowed slightly.

1, the global cotton market is extremely loose. According to the report issued by the US Department of agriculture in October, global cotton production expanded to 27 million 166 thousand tons in 2019, an increase of 4.8% over the previous year, and consumption reached 26 million 478 thousand tons, an increase of 1.1% over the previous year, a new high in the past 13 years, a yield exceeding 688 thousand tons, and a year-end inventory consumption ratio of 68.8%, an increase of 1.7 percentage points over the previous year. Judging from the main cotton producing countries, the expansion of US cotton production is obvious. India's cotton production expanded to 6 million 640 thousand tons, an increase of 15% over the previous year, and China's output of 6 million 42 thousand tons, unchanged from last year. The US output expanded to 4 million 730 thousand tons, an increase of 18% over the previous year, and cotton production in Brazil was 2 million 530 thousand tons, down 9% from last year. In addition, the new US subsidy policy will help us cotton production recover to a higher level. In December 2018, US President Trump signed the "agricultural upgrading act 2018", which used seed cotton prices as the basis for calculating price loss subsidies and agricultural risk subsidies, and increased production subsidies for upland cotton.

2, the "temperature difference" is obvious in China's cotton market. The key period of the new year's acquisition comes from the good news of Sino US trade negotiations, followed by the call for cotton production cuts. Futures market and spot market "temperature" gradually declined, textile procurement cautious. At the moment, cotton purchase in Xinjiang is coming to an end. The purchase price of seed cotton rose from about 4.3 yuan per kilogram in the early period to 5.1 yuan / kg in late October, or 18.6%. The price of seed cotton, especially hand picked cotton, is higher in South Xinjiang. Considering that the price of cottonseed is decreasing, the cost of purchasing is heating up obviously. Next is the futures market. The main contract of Zheng cotton futures was from 12015 yuan / ton at the end of 9 to 13025 yuan / ton in October 29th, up 8.4%. The second is the lint sales market. In October 8th, the B index of the national cotton was 12660 yuan / ton, and it was 12764 yuan / ton in October 29th, or 0.8%. This is a rise in the futures market and a slight increase in the pressure of a larger portion of new flower supply. Relatively speaking, procurement of textile enterprises is more cautious. Short term orders and small orders of textile enterprises have improved slightly, but medium term orders still need to be observed. Cotton purchases are still buying and buying. According to the data released by the national cotton market monitoring system in October, in 2019, China's cotton output was 6 million 160 thousand tons, consumption was 7 million 750 thousand tons, and the gap between production and demand was 1 million 590 thousand tons, narrowing 300 thousand tons compared with last year.

Cotton market risk forecast in three and 2019

Since mid April 2019, the game of big powers has escalated, the global trading environment is more complex and changeable, the international financial market is in turmoil, the risk of economic recession has increased, and the macro policy has stepped into the defensive stage. Market environment requires enterprises to make strategic positioning in the medium and long term.

(1) global economic growth is still cooling.

1, the growth rate of international trade has weakened significantly, and the growth rate of major economies has continued to slow down. At present, the global industrial chain reconstruction triggered by trade frictions and trade wars is still continuing, and the pessimistic outlook for economic prospects has not yet converged. Sino US trade frictions are escalating. Trade frictions between the US and Europe, Britain and Europe are pending. Trade frictions between South Korea and Japan continue to ferment. The global technology supply chain has been hit hard. Investment and demand markets are uneasy and economic activity is cooling down. In October, the World Trade Organization (WTO) predicted that the growth rate of global merchandise trade in 2019 was only 1.2%, which was significantly lower than the growth rate of 3% in 2018. The forecast is forecast for further reduction on the basis of 2.6% in April. In June, the world bank lowered its global economic growth in 2019 to 2.6%, down 0.4 percentage points from the previous year. The International Monetary Fund (IMF) released the world economic outlook report in October 15th, reducing the world economic growth rate to 3% in 2019, the lowest level since the outbreak of the international financial crisis in 2008. This is the fifth time in 2019 that IMF has lowered its forecast for world economic growth. Despite the recent figures, the US unemployment rate in September was 3.5%, the lowest since December 1969, but this is not enough to change the trend of its economic slowdown. Economic growth in the major economies of the world has slowed down significantly.

Table 22019 GDP growth of major economies

Source: Wind national cotton market monitoring system

2, manufacturing is weak, and PMI in major economies continues to decline. JP Morgan's Global Manufacturing Purchasing Managers Index (PMI) in September was 49.3, still below the 50 withered line. The ISM index dropped to 49.1 in August, the first time it has fallen below the 50 level since August 2016, the lowest since January 2016. The manufacturing sector contracted further in the euro area, and the PMI index for manufacturing in September dropped to 45.6 from 47 last month. The output index dropped from 47.9 last month to 46, and the new order index fell from 45.9 last month to 43.1. In September, Japan's manufacturing PMI fell to 48.9 from 49.3 last month.

Figure 42009 Morgan chase global manufacturing PMI comparison

Source: Wind national cotton market monitoring system

3, the macro policy is stepping into the defensive stage, and Europe and the United States restart the quantitative easing monetary policy. In August 14th, the 10 year US bond yield was 2.1 basis points lower than the two-year US bond yield for the first time since 2007. Before the seven recession, the yield of us 10 - year treasury bonds was lower than that of 2 - year treasury bonds. In August 14th, the interest rate of the 2 and 10 year treasury bonds in Britain also appeared for the first time since the financial crisis in 2008. Between the security and the reward, the funds choose the former. In the past six months, more than 20 countries such as the United States and India have lowered their policy interest rates because of the growing concern about the global economic recession. The United States and Europe launched quantitative easing monetary policy. The European Central Bank announced in September 12th that it lowered the overnight interest rate in the eurozone to -0.5%, maintaining the euro zone leading interest rate to zero and overnight lending rate unchanged at 0.25%. At the same time, the European Central Bank has changed its interest rate policy guidelines and announced the resumption of quantitative easing (QE). It will buy 20 billion euro bonds every month from November 1st, and the investment on maturity bonds will last for 2-3 years. In September 18th, the US Federal Reserve announced another 25 interest rate cut, while injecting 7 billion 500 million US dollars into the overnight repo market, will continue the overnight buyback operation until at least January next year. Since October 15th, the Federal Reserve has purchased $60 billion of short-term treasury bills every month until the second quarter of 2020.

(two) the operation of China's cotton textile industry chain is not smooth.

In the two quarter of 2018, the global economy touched the top. The change of the economic environment was like an invisible hand, which strongly shaped the cotton industry. Since 2019, the demand for textiles and clothing has dropped significantly. After May, the stock of gauze has been overloaded and prices have dropped. The abrupt change of foreign trade environment since the reform and opening up has caused great damage to the efficient operation pattern of China's downstream cotton industry chain over the years.

1, the export of textile and clothing has declined and domestic consumption has cooled down. According to the monitoring data of the China National Business Information Center, the retail sales of major retail enterprises decreased by 4% in the 1-9 months of 2019. According to the data released by the National Bureau of statistics, the retail sales of clothing, shoes and hats and needle textiles increased by 3.6% in September 2019, down 5.4 percentage points from the same period last year. In September 2019, China's textile and apparel exports amounted to US $24 billion 520 million, down 7.9% from the same period last year.

Figure 5 Comparison of retail sales of clothing, footwear, hat and textile products above the quota

Source: Wind national cotton market monitoring system

2, cotton yarn inventory backlog, cotton inventory increased. According to the data released by the national cotton market monitoring system, the stock of cotton yarn has increased since 2019. In 2019 1-5 months, the cotton yarn inventory was 20-22 days, averaging 20.8 days, an increase of 3.6 days over the same period last year. After June, the sales of the cotton yarn again dropped significantly. The average cotton yarn inventory in 6-9 months was 29.4 days, an increase of 14.5 days over the same period last year, an increase of more than 97%. The average cotton cloth inventory was 49.9 days, an increase of 15.5 days over the same period last year, an increase of 45.1%.

3, the gauze Market is fragile and the price is falling. Since May 2018, the market price of cotton yarn and cotton cloth has gone down three steps. Take cotton yarn as an example, the first two steps are relatively slow. From May 2018 to 2019, the price of cotton yarn dropped 1400 yuan / ton, or 5.8%, for 1 years in late 4 months. Third steps, from the late April 2019 to the first 4 months of September, the price of cotton yarn dropped more than 2600 yuan / ton, or 11.7%.

The price trend of cotton yarn and cotton cloth since 62015

Source: national cotton market monitoring system

(three) strengthening strategic determination, active defense is the real defense.

Cotton prices fell sharply last year, and price risk was significantly released. However, this year, the weak turbulence may become a major feature of the international financial market, and there is still downward pressure on global cotton consumption. The competition between domestic and foreign cotton industry chain entities is intensified. In 2019, the United States began to raise tariffs to a large extent on the export of US goods and deal with the important stage of us containment. The state's concern for and support for entities and small and micro enterprises has improved significantly. The entity enterprises should enhance their strategic determination and reduce operational risks.

1, the potential factors that cause cotton price turbulence are increasing. Multiple factors indicate that cotton is becoming the focus of hot money. First, with the start of the interest rate cuts and the reduction of monetary policy in the major economies of the world and the start of the quantitative easing monetary policy, the cost of capital will be further reduced, and the funds in the international financial market will become more and more abundant. We need to be vigilant against the sharp fluctuations in the financial market caused by this. Second, the cooling of major economies and countries has lasted more than a year, and investment opportunities in the financial market have been greatly reduced. Third, the more lengthy industrial chain has increased the risk of information asymmetry, the sharp contrast between the curing of agricultural products and the free flow of downstream industries. The superposition effect of related factors has given cotton strong price elasticity potential. Fourthly, the severe and complex economic and trade prospects and the market environment of increasing volatility have raised the probability of great turbulence in cotton prices. For example, in recent years, many cotton purchasing enterprises reflect that most of the new flowers they processed have been given to financial capital rather than textile enterprises or cotton traders. The main driving force for the rise of the futures market in October is that the good news of Sino US trade negotiations and the fear that Xinjiang's output may be lower than expected has all contributed to the easing of market sentiment. Two, funds have played a real role.

2, be alert to the risk of black swans and grey rhinoceros. Under the gloomy atmosphere of the market, we should be vigilant against the black swan event. On the one hand, domestic and foreign cotton and downstream textile market prices plummeted, from mid April 2019 to mid September nearly 5 months, flowers, yarn, cloth links in a slow inventory stage. The new large-scale flower market in the northern hemisphere is coming. On the other hand, some unexpected events are likely to disturb the market quickly and make waves. For example, Saudi Arabia's oil facilities were suddenly attacked in September 15th. The oil market opened sharply on the 16 day. If Saudi Arabia could not resume its supply quickly, oil prices would be pushed up. In turn, the ripple effect of chemical fiber and other related products may lead to a sudden market price of cotton. For example, influenced by African swine fever, pig raising has dropped sharply, and pork prices have skyrocketed. We need to pay attention to the price changes, such as soybean meal and cottonseed meal, which will affect cotton prices. Be alert to the risk of grey rhinoceros. At present, the uncertainty of US trade policy is causing global economic slowdown, manufacturing and capital spending weakness in the United States. Even if a loose monetary policy is launched, its effectiveness will be difficult. After ten years of super bull market, the stability of the US stock market has been continuously eroded. The characteristics of the grey rhinoceros are becoming more and more obvious. Once the potential energy of high volatility is converted into a downward trend, it will surely impact the broad financial products including cotton futures. In addition, Trump has declared the campaign slogan of 2020 as "maintaining the greatness of the United States" and through Twitter warnings, "if anyone takes over the us except for me in 2020, there will be an unprecedented stock market crash." If the outbreak is at the end of the 2019 cotton year, it is bound to hit the cotton market.

In 3 and 2019, the competition between the domestic and foreign cotton industry chains was intensified. Judging from output, global cotton output will expand significantly in 2019. In terms of consumption, the trade friction between the US and Europe is now on the upgrade, and the game of big powers is increasing. A milestone in the technological revolution is still on the road, and the global economic landing will be more difficult in the short term. In the context of the marginal economic slowdown, the market players have to face the brutal reality of the stock game. Global cotton consumption has to maintain the level of the previous year without sufficient support. In terms of supply and demand, according to the end of October 2019 inventory consumption ratio released by the US Department of agriculture in October 2019, 68.8% has reached a new high of nearly three years. Supply structure, in the context of the sharp decline in China's state cotton stocks, higher inventory consumption ratio means that the supply of cotton in the free trade market in 2019 is very abundant. Downstream competition level, in order to reduce production costs and maximize investment efficiency, the global textile industry chain is still in the process of restructuring. For the vast textile competitiveness with low competitive barriers, the competitive intensity of its stock capacity and new capacity, China's capacity and overseas capacity, and between the mainland's capacity and Xinjiang's production capacity are facing increasing pressure.

Only active defense is real defense. "On the way forward, the risks we face will only become more and more complex, and even we will encounter unimaginable waves. All kinds of struggles we face are not short-term but long-term. We should at least accompany us to achieve the goal of second hundred years of struggle. (Xi Jinping delivered an important speech at the opening ceremony of the training course for young cadres in the Central Party School in September 3, 2019) suggesting that the majority of cotton enterprises should set up the bottom line thinking and prepare the plan well. It is suggested that cotton enterprises should adhere to the strategic thinking of active defense, transform pressure into motive force, take the development of high quality as the goal, make long term plans, set up a winning strategy plan, intensify their internal efforts, speed up the research and development of frontier technology, enhance the brand influence, seize the initiative of the market, and win the trade war. With heroic, tenacious and flexible strategy and tactics, through hard fought heroic fighting, the three main forces of the Chinese workers' and peasants' Red Army joined forces in October 1936 to win the long march. In December of the same year, Mao Zedong made a speech at the University of Chinese Anti Japanese Red Army, which systematically expounded the strategy of China's revolutionary war. He pointed out that "in our ten years war, there are two kinds of bias towards strategic defense, one is to despise the enemy, and the other is to frighten the enemy." When analyzing active defense and passive defense, it proposes "active defense", also called offensive defense, also called decisive battle defense. Passive defense, also known as defensive defense, is also called pure defense. Passive defense is actually a fake defense. Only active defense is real defense, only for counterattack and offensive defense.