Demand Is Hard To Pick Up. Cotton Futures Will Hardly Rise Effectively.

Affected by domestic production reduction and government purchasing and storage, cotton futures prices have rebounded substantially since October. However, considering the difficulty of the overall demand for cotton and the low cost of warehouse receipts, it is difficult for cotton to grow continuously.

Reduction, overlay, storage and support price

Affected by less than expected output, the US Department of agriculture's 11 monthly report lowered the US cotton production in 2019/2020 to 4 million 532 thousand tons, cutting India's cotton output to 6 million 532 thousand tons. Not only that, because the accumulated temperature is not enough this year, the output of the main cotton producing areas in Northern Xinjiang is lower than that in previous years. According to the preliminary research, the cotton output in the northern Xinjiang area is 15% lower than that of last year, and cotton output in Xinjiang is less than 5 million tons this year.

After several years of dumping and storage, cotton national reserve stock is below 3 million tons warning line, and cotton prices are at a low level. Therefore, the government recently issued a cotton purchase and storage policy to stabilize cotton prices. The government plans to purchase 7000 tons of cotton in Xinjiang and 500 thousand tons of cotton every day in the national statutory day from December 2, 2019 to March 31, 2020. The landing of the purchase and storage policy not only indirectly reduced the direct supply of cotton in the domestic market, but also played a role in restoring market confidence and supporting the rise in cotton prices.

Stocking downstream is still cautious.

The United States is the most important clothing exporter in China. Due to the Sino US trade friction, the United States has imposed an additional 10% tariff on the export of cotton products to the United States, which has affected the export of textiles in China. From 1 to October, China's textile and apparel exports were US $224 billion 815 million, down 2.55% from the same period last year. Affected by this, the downstream textile mill procurement stock will not be strong, most of them do not receive orders, do not stock up, or consume their own inventory strategy for production. In this case, domestic yarn and germ cloth inventory fell sharply. As of October, domestic yarn inventory was 23.87 days, 6.73 days lower than the May high point, a drop of 21.99%, and embryo cloth inventory for 28.36 days, a decrease of 5.74 days compared with May, and a decrease of 16.83 days. However, the recent Sino US trade friction has obviously eased, superimposed on the current low yarn and germ cloth inventory, and cotton demand is expected to improve. However, there are still many uncertainties in Sino US relations. Coupled with the demand for overtaking overdraft at the early stage, the terminal textile enterprises are still cautious about stocking up, and the demand for short time is still hard to improve.

When the new cotton market came into being this year, the market was in panic, so the price of seed cotton purchase was low this year. According to the understanding, the purchase price of seed cotton in North Xinjiang is 5 to 5.5 yuan / kg this year, which is lowest to 4.2 yuan / kg. In southern part of Xinjiang, because of the higher cost of hand picking in some areas, the price is 6.2 yuan / kg, and the price of lint converted to lint is between 12600 yuan and 13300 yuan per ton. The purchase cost of ginning plant is low this year. Once cotton price rises to 13500 yuan / ton, the market will enter a lot to suppress cotton prices. Judging from the current cotton futures warehouse receipts at the Zhengzhou Mercantile Exchange, as of December 2nd, the volume of cotton warehouse receipts has reached 15787, up from 11354 in the same period last year, indicating that cotton futures are facing a larger market sell-off and it is difficult to form an effective rise.

Overall, the supply of the market showed a downward trend under the background of the US Department of agriculture's reduction of global cotton production and China's acquisition and storage of 500 thousand tons of Xinjiang cotton. Demand side, although Sino US trade has recently eased, but the actual demand has not improved significantly. In addition, the cost of cotton warehouse receipts is low this year, and there is a big arbitrage space in the current cotton futures price. Therefore, we believe that under the premise of no significant breakthroughs in Sino US trade, cotton futures will be difficult to form an effective rise.