Pakistan China Cotton Trade Settled In RMB With Optimistic Future Market Prospects

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Recently, China's cotton trade with Brazil may be settled in RMB in the future, as well as the reduction of domestic cotton planting area in the new season, and the inventory data may have a major adjustment have become hot issues of market concern.

Market insiders said that, on the whole, Brazil is expected to become a source country of cotton, corn, soybeans and other agricultural products that are increasingly valued in China in the future, which is conducive to the diversification of China's agricultural product imports. At the same time, affected by bad weather and adjustment of crop planting structure, the cotton planting area in Xinjiang tends to decrease. However, as the inventory is still sufficient, and the downstream demand continues to be depressed, the market supply and demand pattern remains stable. In the short term, the transaction logic such as production reduction expectation, inventory data adjustment, and downstream product export expectation will gradually disappear.

Pakistan China cotton trade may be settled in RMB in the future, and the import prospect is optimistic

According to the Global Times, Marcelo Duate Montero, CEO of the Asia Brazil Agricultural Union and director of international relations of the Brazilian Cotton Growers Association, recently predicted that the export volume of Brazilian cotton to China is expected to exceed that of the United States in the next few years, and may be directly settled in RMB.

As an important cotton producing, consuming and importing country in the world, China's cotton market has been paid more and more attention in recent years. In 2022, the United States and Brazil will be among the top two cotton importing countries in China.

Marcelo said that he took note of the agreement between the two countries on settlement in RMB, "which may be a way to the future". Marcelo said that as far as he knew, the cotton trade between Pakistan and China has not yet been settled in RMB, but it is only a matter of time and is likely to happen in the future.

At present, Brazil is an important cotton exporter and producer in the world. In recent years, the average annual output of cotton is about 2.6 million tons, and the export volume is about 1.75 million tons. Its export accounts for a high proportion of output. At the same time, its export volume in the world is second only to the United States, and it plays an important role in the international cotton trade market. What is more interesting is that Brazil is located in the southern hemisphere. Climate conditions support that the country can harvest two seasons of cotton every year, which can effectively fill the gap between cotton producing countries in the northern hemisphere. In addition. There is a clear distinction between rainy season and dry season in Brazilian cotton regions. Cotton production is generally harvested in dry season along with sowing in rainy season. At present, 92% of Brazil's cotton producing regions do not use irrigation, and the average productivity of cotton in dry land ranks first in the world.

Statistics released by the General Administration of Customs of China show that from January to April this year, China's cotton imports totaled 382000 tons. Among them, the import volume of American cotton was 199500 tons, accounting for 52.22%; The cumulative import volume of Brazilian cotton is 120500 tons, accounting for 31.53%. Over the past five years, China's import demand for Brazilian cotton has continued to rise, and the proportion of Brazilian cotton in China's cotton imports has expanded from less than 10% to about 30%.

Wang Jinfeng, an importer of grain and oil in Guangzhou, Guangdong Province, told the reporter that, in addition to Brazilian cotton, which is constantly entering the Chinese market in recent years, Brazil's imports of soybeans and corn are larger. Brazil is becoming a more and more important supplier of agricultural products in China. It is expected that Brazilian cotton will play a more important role in the domestic market in the future. In addition, Brazil has great potential to increase cotton production. For example, Brazil is trying to improve cotton quality and yield per unit area, and has a large amount of land to increase production.

There are variables in the domestic cotton market in the new season

This year, there have been many changes in the domestic cotton market. First, the cotton planting area has declined in the new season, secondly, bad weather has occurred in the main production areas, thirdly, there have been major differences in the market's estimates of inventory data, and finally, there are major differences in the market's expectations of downstream demand. At the same time, as an important cotton producing area in China, Xinjiang's current annual cotton output has accounted for more than 80% of the country's total output, occupying a leading position in the domestic cotton market. In addition, in recent years, cotton futures instruments have been more widely and deeply applied in industrial enterprises, making the market and investors pay special attention to Xinjiang's cotton market. Therefore, Xinjiang cotton market in the new season is more concerned.

First, the cotton planting area in the new season is variable.

The total cotton planting area in Xinjiang in the new season has been generally recognized by the market, with an expected reduction of about 8%. From the perspective of the reasons for the decrease of cotton planting area, first, the policy of returning cotton to grain has been implemented, and the fields that are less suitable or unsuitable for cotton planting have been planted with wheat, corn and other crops. Second, due to the adverse weather such as low temperature and strong wind, some cotton fields missed planting time and were replanted with other crops. Third, the management of water resources by relevant institutions has become increasingly strict, and some cotton fields in water scarce areas have abandoned cotton planting. On the whole, the cotton planting area in Xinjiang has been reduced by different degrees. In most regions, the cotton planting area has not changed much, and the overall reduction is not as big as that advocated by individual institutions. Moreover, since most of the reduced cotton fields are low yield fields, the impact of the area decline on the total cotton yield will not be very serious. It is also necessary to observe the cotton yield per unit area in the future. It is also understood that the current market institutions predict that the unit yield of cotton in the new season is not optimistic. In fact, cotton is still in the seedling stage at present. In the later stage, as long as the weather is normal and cotton farmers strengthen field management, there are still many variables in the unit yield and total yield of cotton.

"Up to now, the situation of cotton seedlings in the new season in Xinjiang is constantly improving, and with the further recovery of temperature, the growth rate of cotton will accelerate. If there is no abnormal strong wind and high temperature weather in the future, it is expected that cotton growth will gradually return to the normal level on the premise of increasing input and field management efforts of cotton farmers." Yan Xu, a cotton seed dealer in Aksu City, told reporters that the sowing and emergence of cotton in the new season in the previous period could be described as "disastrous". For example, since the beginning of the new cotton year, Xinjiang has suffered from low temperature, strong wind, rain, snow and hail, especially from mid April to mid May this year. The low temperature and strong wind weather not only delayed the cotton planting time, damaged the plastic film and drip irrigation belt in some cotton fields, but also slowed the emergence and growth of cotton seedlings, and some cotton fields had to be replanted many times. Since the late May of this year, the weather in Xinjiang has gradually turned sunny. The ability of cotton seedlings to resist adverse weather has continued to increase, and the overall growth of cotton seedlings has improved.

Shan Hui, a major cotton planter in Shuchu County, told reporters that the local cotton returning and grain returning were gradual. Whether many lands were suitable for planting corn, wheat, soybeans and peanuts needed to be tested, and other crops were not planted in cotton fields at a large proportion all at once. In 2022, he planted about 150 mu of soybeans on the local experimental land, but the grains were not harvested. The main reason is that from the emergence of soybeans to the final podding, rabbits alone ate all the soybeans, and lost more than 100000 yuan. This year, he reasonably arranged the area for planting cotton, corn and wheat. At present, except for some corn seedlings being pecked by pheasants, they all grow normally. Among them, the development of cotton seedlings is delayed about a week compared with last year, mainly due to the low temperature in the early stage. It is expected that cotton seedlings will return to normal growth soon after the temperature rises.

"In the middle and last ten days of May this year, I spent nearly 20 days in the north and south of Xinjiang. According to the analysis of the situation, there is a big difference between the north and south of Xinjiang, Xinjiang Production Corps and the local cotton planting area reduction. Therefore, we should have an objective analysis of the total cotton planting area and the expected total output in Xinjiang in the new season. We should not 'point to area'." A cotton researcher from a futures investment institution in Shanghai said that, from the degree of adverse weather, the extent of the damage in northern Xinjiang was less than that in southern Xinjiang. At the same time, the damaged cotton fields in southern Xinjiang were mainly concentrated in mountainous areas and windy areas. Therefore, the cotton seedling situation in northern Xinjiang was better than that in southern Xinjiang, while the seedling situation in southern Xinjiang varied greatly. According to the adjustment and reduction of cotton planting area in northern and southern Xinjiang, Xinjiang Production and Construction Corps and local areas, the area in northern Xinjiang has decreased by about 5% - 10%, and that in southern Xinjiang has decreased by about 5%.

Second, cotton production costs were basically flat.

"This year, our 6200 mu of cotton was sown on April 30, and drip irrigation began on May 3, using the 'dry sowing and wet out' sowing technology." Xiao Jiale, a major cotton planter in Hutubi County, told reporters that in order to save water and reduce cotton production costs, the "dry sowing and wet out" sowing technology has been widely used in Xinjiang cotton producing areas, That is, before cotton sowing, neither winter irrigation nor spring irrigation is carried out, but mulch film, drip irrigation belt and cotton sowing are laid directly after land preparation. When the temperature reaches the emergence temperature, a small amount of water is dripped under the film through drip irrigation, so that the soil moisture under the film meets the requirements of cotton seed emergence. It not only saves water for irrigation in spring and winter in cotton fields, but also achieves the goal of growing cotton seedlings with neat, strong and even seedlings, laying a solid foundation for high and stable cotton production.

Xiao Jiale said that the "dry sowing and wet out" sowing technology can save water for cotton field irrigation in spring and winter. However, due to the rising water price, the cost of water for cotton planting has not decreased. At the same time, Hutubitu County is short of water all year round, and the cost of water has always been high. In addition, although the prices of some chemical fertilizer varieties have declined this year, the decline is limited in terms of the total cost of agricultural inputs for cotton planting. It is also understood that the local land rent remains stable.

Some cotton farmers told reporters that in recent years, Xinjiang's cotton policy has been relatively stable. In addition, this year's cotton target price policy has been issued, which is certain to remain unchanged for three years. In 2021 and 2022, the cotton farmers' income is good. This year, cotton farmers are highly motivated to plant, and are willing to increase investment. Field management has also been constantly strengthened. For example, in order to help seedling growth, Many cotton agricultural UAVs sprayed relevant drugs. Therefore, the cotton production costs in Xinjiang this year are basically the same as last year.

Third, the inventory is sufficient.

During the survey, the reporter saw in several cotton warehouses that the cotton stocks were piled up like mountains, and the data released by relevant institutions showed that the total output of Xinjiang would increase significantly in 2022. In addition, the industry insiders also gave a more reasonable explanation for the significant increase of cotton output in Xinjiang in 2022, that is, the cotton harvest in 2022 will be more mature, and the top peach that has not been fully mature in previous years will be fully mature, which will eventually lead to a large increase in cotton yield per unit area and drive a substantial increase in total output. However, in late May, another market agency released statistics that showed that the inventory had declined significantly. Hundreds of thousands of tons of cotton stocks were suddenly de stocked. In addition, the market expected a higher cotton production reduction in the new season. The price of domestic spot cotton, even the price of imported cotton stored in the bonded area and ports, continued to rise. At the same time, some people said, The lint percentage of Xinjiang seed cotton in 2022 is not high. In a short period of time, there have been many contradictory views in the market, and many investors are puzzled.

An "old cotton" from Zhengzhou City, Henan Province told reporters that the cotton inventory data is currently the focus of the market. There are many versions of inventory data in the market. Objectively speaking, it is normal for the national total cotton output, total inventory or total consumption to fluctuate 200000 tons up and down, and suddenly the inventory disappeared hundreds of thousands of tons, which is really surprising.

According to the person in charge of the Xinjiang office of an important cotton related organization, the inventory data released by some market organizations are not very reliable. Unless there is a special abnormal situation, or there is a deliberate intention to fake, the market will see the disappearance of hundreds of thousands of tons of cotton, or it will require investors to think deeply. Some insiders also believe that due to the different statistical caliber and the different time of calculating in transit, waiting for transportation, station and port inventory, downstream inventory, etc., it is inevitable that there will be a large data gap.

Fourth, it is difficult to find hot demand spots, and who will rush to harvest in the new season cotton market.

Relevant market institutions believe that there are more than 1000 ginning plants in Xinjiang at present, and more than 970 enterprises will participate in processing in 2022, especially the cotton enterprises in Kuitun area, whose processing capacity is three times of the local seed cotton output, and has become the highland of seed cotton purchase price in northern Xinjiang. Therefore, some market people predict that the local weighing price will not be low this year, and even think that the whole Xinjiang will repeat the situation of grabbing revenue as in 2021.

"We will learn the lesson of 2021. In that year, how many ginning plants lost all the wealth accumulated over 10 years in the process of seed cotton rush collection." A person in charge of a ginning plant from Wenzhou in Tiemenguan said that "high is not much, low is not empty" is an empirical statement, and it is also one of the best ways to reduce business risk.

In the future, it will be more important for the overseas cotton market to meet the resonance of production reduction. When we all focus on the changes in supply and demand in the cotton market, we must first accept that major institutions are still pricing in the future in the reality of weak demand. First, the forecast of global cotton production, sales and stock in 2023/2024; Second, although American cotton will give 2.5 million acres of planting area to soybeans and corn in 2023/2024, it is still expected to increase production in 2023/2024 on a year-on-year basis (the abandonment in 2022/2023 is too serious, and the harvest area is 7.31 million acres in 2022/2023 compared with 8.71 million acres in 2023/2024). It is important that American cotton still remains weak under the expected benefits of the report to go to the warehouse in May; Third, there is no significant yield threat in the world's major cotton producing countries. The second is the longer than expected duration of textile and clothing exports (weak domestic demand at the near end has basically no difference).

In this regard, the expectation of differentiation is that the export exceeding the expectation is compared with the boycott and order transfer in Europe and the United States. What is beyond the market expectation is that since March this year, the intensity of China's textile and clothing exports has reached the highest level in at least five years. At one time, when the export data was released in April, it triggered a lot of power in the cotton futures market, which made the futures price of Zheng Mian's main contract break through the 15000 yuan/ton threshold. However, there are two key concerns about China's textile and clothing exports. First, the irreversible order transfer trend; The second is the weakening demand in Europe and the United States. Specifically, the irreversible order transfer trend.

According to the relevant statistics of the US Department of Commerce, the peak proportion of China's textile and clothing imports in the US was 41.2% in 2010, and then fell year by year. In the first quarter of this year, it has dropped to 20.6%. As a comparison, from 2010 to 2022, Vietnam, India and Bangladesh increased their combined share in the textile and clothing imports of the United States from 16.9% to 30.8%. Weaker demand in Europe and the United States. In the case of low demand and high inventory, recent survey data from international market institutions shows that nearly half of fashion stores still have excess inventory after the first quarter of this year. There is a significant correlation between the inventory sales ratio of American clothing and clothing fabric wholesalers and the export quantity index of China's textile clothing and clothing industry,

The inventory sales ratio of the United States is 4-5 months ahead of China's exports, which can be used as a relatively reliable leading indicator of China's exports. In the future, it is still difficult to falsify the expectation of weakening demand in the United States and Europe. Therefore, the current demand for China's clothing exports cannot be expressed in a linear extrapolation way. Finally, how to view the cotton production reduction pricing in the period of weak risk appetite. Even though commodities cross the industrial chain, there is still a clear linkage between them. The consistency of Brent crude oil and cotton price trends in the downward cycle also indicates that cotton is difficult to walk out of the "stand out" market independently. Cotton is different from domestic priced pigs, apples, dates and eggs. There are still large demand elasticity and macro attributes in its prices. The key logic behind this is that commodities are priced by demand rather than supply, because the bottom layer of social demand is debt, while debt is naturally leveraged and collapses more rapidly.

Facing the future, how should we think? The first is insight. Exploring the discourse power of each subject in the industrial chain on profit distribution is usually our starting point for industrial research. Second, cotton is the agricultural product with the most industrial attributes, which contributes to the price elasticity of cotton. From the perspective of domestic supply and demand, the inventory level of the industrial chain is in a neutral position. The reason for prudent replenishment in the downstream is that the demand prospect is not good. If the export demand no longer exceeds the expectation in the future, then the domestic demand needs to be tested again. The domino of global meteorology will be launched again in 2023. In the future, how to price the supply and reduce the output of agricultural products may become a key issue, especially in the downward cycle of demand.