Market Analysis: Domestic Cotton Consumption May Recover Strongly In The Future

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Since May 2022, cotton prices have peaked and fallen, opening a wave of bear markets. The core factors are monetary tightening, consumption decline, and seed expansion and production increase. Monetary tightening is the first core factor in this round of cotton bear market. The Federal Reserve raised interest rates by 25 basis points in March 2022, but it still maintained the expansion of the balance sheet, which is not a real tightening. In May, the interest rate was increased by 50 basis points. At the same time, the scale began to shrink in June. After the real tightening began, the cotton prices at home and abroad fell in response.

In June, July, September and November 2022, the Federal Reserve will raise the interest rate by 75 points, which will bring continuous pressure on cotton prices. At this time, we saw that the cotton bear market continued, resonating with the monetary tightening. In the monetary tightening cycle, the net excess orders of the Fund in the American cotton futures and options markets continued to decrease from 85000 in May 2022 to 7000 in early November 2022, further aggravating the decline in cotton prices.

The consumption decline is the second core factor in this round of cotton bear market. From May 2022, the differentiation of "good foreign consumption and poor domestic consumption" will end, and the domestic and foreign cotton consumption will decline at the same time, and the consumer side will continue to suffer from bad luck until November. The IMF expects the global economic growth rate to be 6.1% in 2021, 3.2% in 2022 and 2.7% in 2023. According to the historical model analogy, the global cotton consumption rate has peaked and dropped, and the global cotton market pattern may change from de stocking to cumulative stocking.

In May 2022, USDA estimated the global cotton consumption in 2022/23 to be 26.56 million tons. Since then, the consumption estimate has been lowered all the way, down to 24.32 million tons in December, with a cumulative decrease of 2.24 million tons, resulting in continued pressure on cotton prices. According to the high-frequency data of TTEB, the startup of China's cotton spinning industry fell from 45.9% in May to 38.6% in November, that of India fell from 73% in May to 52% in November, and that of Vietnam fell from 79% in May to 35% in November, basically reflecting the downward trend of global consumption. Among them, the Xinjiang cotton ban came into effect in June, and the market was disappointed in July because of the low volume of China's purchase and storage. The strengthening of resonance of various negative factors led to a huge decline in cotton prices in June and July.

The third core factor in this round of cotton bear market is the expansion of seed production. As the cotton price reached a historical high, the global expansion of seed production was triggered. Before the extreme weather of drought and floods in the United States in July, the expansion of seed production was negative, forcing cotton prices to fall. Globally, the mainstream cotton planting cost in 2021/22 is about 61-69 cents/pound, and the cotton planting profit theoretically exceeds 80%, which is bound to encourage farmers to increase cotton planting in the next year.

After February, especially the outbreak of the Russia Ukraine war, grain prices rose sharply, reducing the comparative advantage of cotton, but it did not turn into a planting disadvantage. On February 24, the USDA Forum also gave an estimate of the global cotton area and output in 2022/23: it is estimated that the global cotton harvest area in 2022/23 will be 33.6 million hectares, an increase of 4.2% year on year; The output was 27 million tons, up 3.2% year on year. On March 31, USDA revised the area of American cotton. It is estimated that the planting area of American cotton in 2022/23 will be 12.234 million acres (12.7 million acres in the February Forum), an increase of 9.04% year on year, which is basically a negative result of the expansion of American cotton. In the case of declining consumption, the increase in output may lead to the reversal of supply and demand, and the cycle of destocking will turn into the cycle of accumulated inventory, driving the cotton price to fall at the top.

However, the weather is unpredictable. In August 2022, there will be extreme weather of drought, floods and floods in the United States, which will offset the negative effects of seed expansion and yield increase and trigger a big rebound in the bear market of American cotton in August. Due to La Nina weather, Texas, the main production area of American cotton, experienced a historic drought. In August, USDA adjusted the abandonment rate of American cotton to a historical high of 42.9%, with an estimated output of 3.007 million tons, a year-on-year decrease of 0.808 million tons. At the end of August, Pakistan suffered a historic flood, which resulted in a large reduction in cotton production. USDA has successively lowered Pakistan's production estimate for 2022/23 to 810000 tons, a year-on-year decrease of 500000 tons. The US Pakistan production cut led to the rebound of US cotton from about 90 cents/pound to about 120 cents/pound in August, and then fell again under the pressure of monetary tightening and downward consumption.

This round of cotton bear market is probably over. First of all, from the perspective of space-time energy, Zheng Mian's biggest decline in this bear market was 47%, 12% more than the average decline in the bear market, which fully released the bad news. Secondly, the three core factors supporting the bear market have changed. In November, monetary tightening turned into a slowdown in interest rate hikes; Seed expansion and yield increase are hedged by extreme weather, and the global output will be flat or even slightly reduced in 2022/23; Domestic and foreign consumption declined together, and there was differentiation. Foreign consumption maintained recession and decline, but domestic trade was liberalized and recovered. So let's see the end of the bear market.

In the future, the core factors will gradually switch to "undervalued repair, improved consumption margin and area reduction next year", and cotton prices will rebound from shocks. In the global market, cotton consumption continued to decline, and most of the risks of deflation and recession have been priced. Drought in the United States, floods in Pakistan, extreme weather hedge against the negative effects of seed expansion and yield increase. If India's output is less than expected, the global cotton production may be slightly reduced in 2022/23. The ratio of cotton to grain is at a historical low, and there will be deviation in area reduction in the future.

These three core factors support the shock rebound of American cotton. In terms of the domestic market, the high inventory superimposes on the high yield, and the supply pressure is large, but the acquisition cost is solidified around 13000 yuan/ton, providing bottom support. Since November, domestic epidemic prevention has been liberalized. Referring to foreign experience, domestic cotton consumption may recover strongly in 2023. The undervalued value attracts capital inflows. At present, the price of Zheng Mian and the overall commodity is still at a historical low, imports are still in deficit, and the valuation repair market will continue. These three core factors support Zheng Mian's shock rebound. Risk factors, mainly from policies, area and weather, need to be tracked continuously.