16 Months Down 36%?

From last June to September this year, the Zheng cotton market has fallen for 16 months, the highest point is 19040 yuan / ton, the recent lowest point is 12045 yuan / ton, or 6995 yuan / ton, or 36%. The main reason for this decline is the over expected decrease in downstream demand. It can be said that the long and tortuous trade negotiations between China and the US have led to the shrinking of US textile export orders. In addition, the global economic downturn and adequate supply of cotton are secondary factors.

Recently, Sino US economic and trade consultations have witnessed the first light and achieved definite results in agricultural products. Therefore, the worst period of demand is in the past. At present, the new cotton season is coming. At this time, the rise will encounter the suppression of the policy, but the fall will have cost support. As the bottom of New York's cotton market is basically established, the rise of US cotton will bring import costs up in the case of internal and external cotton upside down. Therefore, we speculate: at the next stage, Zheng cotton will build the bottom around the procurement cost repeatedly. If demand recovers, there will be a gradual rise at the end of the year.

Demand recovery is the premise of rising.

Without healthy consumption driven, there will be no basis for sustained growth. The drop in cotton prices is not related to Sino US trade frictions. Similarly, the substantive progress in the Sino US economic and trade consultations is a prerequisite for the rise in cotton prices.

In October 11th, the Sino US consultations reached two basic achievements, and it is expected to formally sign the "first stage" trade agreement at the Chilean APEC summit in November 16th. At this summit, China has a goal of cancelling the previously imposed tariffs.

It is reported that since this year, Chinese enterprises have imported a certain number of agricultural products from the United States, including 20 million tons of soybeans and 320 thousand tons of cotton.

As far as Zheng cotton is concerned, there are two advantages and disadvantages in reaching the first stage agreement: first, the export orders for textile and clothing in the lower reaches of China are expected to gradually recover, but the premise is that the United States cancelled the import tariffs before it increased. Two, the Chinese government will increase imports of cotton from the United States. It is estimated that the State Reserve will import about 1 million tons of American cotton to replenish its stock.

At present, the probability of reaching a basic agreement between China and the United States is quite large. For president Trump, it is the harvest season of the autumn harvest in the United States, and it is eager to reach an agreement with the Chinese side in terms of agricultural products and increase the chips for next year's general election. As far as China is concerned, the United States is China's largest export and consumer market. Therefore, the possibility of worsening trade frictions between China and the United States is less likely, and is expected to reach an ultra expected "first stage" agreement on the 16 day of next month. This has laid the foundation for Chinese textile enterprises to resume exports to the United States.

It has been estimated that if the Sino US consultations are completely "collapsed", then China's cotton consumption will decline by 80-100 tons annually. If agreement is to be reached next month, the shrinking export orders and cotton consumption will gradually recover in the future.

The cost price of inside and outside cotton is a strong defensive area.

First, let's talk about the import cost of New York cotton. Because of the cost of planting cotton in the United States, and the substantial progress in Sino US economic and trade consultations, the worst supply and demand relationship is in the past. Therefore, we conclude that the bottom of the US cotton index is basically proven that 57.08 cents should be the lowest point.

With the formal signing of the "first stage" trade agreement on the 16 day of next month, if China's export tariffs (US textiles) are partially abolished, China's export orders and cotton consumption to the US will gradually recover. In accordance with past rules, driven by the peak season of winter consumption, New York cotton will get out of a wave of seasonal rise until spring. The technology is expected to reach 76 cents (+33% compared with lows).

Recently, domestic and foreign cotton prices have been upside down, and the cost of US cotton imports (Procurement) is higher than domestic benchmark prices. It can be imagined that if the US cotton enters the rising stage, it will raise the cost of import and purchase, thus affecting the price of zhengmian.

Secondly, analyze the domestic cotton purchase cost and the mentality of hedging. It is reported that Xinjiang's cotton output has decreased slightly this year. According to the cotton information network, it has cut cotton production in Xinjiang to 5 million 7 thousand tons, down 3.2% from the same period last year. Among them, the North Xinjiang reduced production by more than 10%, and the southern Xinjiang also reduced production. And do not rule out the possibility of further downgrades.

At present, when the new cotton comes into the market, the superposition of Sino US trade has eased and the market mentality has been optimistic. As a result, the price of seed cotton starts to rise and the cost of new flower production goes up, and the price of the hedging price increases. It is understood that since October, the purchase price of cotton in Xinjiang has been first suppressed and then promoted. Insiders estimate that the total cost of the 3128/3129 class entry control library is about 11500 yuan / ton, according to the calculation of 40% linen purchase price 4.9 yuan / kg and cottonseed 1.7 yuan / kg. Once the 40% lint seed cotton purchase price reaches 5.2 yuan / kg, the comprehensive cost of the machine picking cotton warehouse receipt is about 12200 yuan / ton.

In view of this, the new cotton listing will have two effects on the Zheng cotton Market: first, the production cost of new cotton or the defensive area, that is, 12000 yuan / ton is the strong support area. Two, the rise in cotton prices will be subject to a series of hedging, due to the loss of value last year's mentality. That is to say, the CF2001 contract between 12500 - 13300 yuan / ton will be heavier and heavier.

The static supply and demand pattern is not ideal.

From a static point of view, in the October USDA report, global cotton supply and demand gave a partial view, while China was slightly tighter.

From the American perspective:

Despite the decline in planting area this year, it is estimated that US cotton production will reach 4 million 730 thousand tons in 2019/2020, an increase of 730 thousand tons (+18%) compared with the same period last year, and export growth of 380 thousand tons to 3 million 590 thousand tons, but the end of term inventory will increase by 470 thousand tons to 1 million 530 thousand tons.

From the perspective of global supply and demand:

In 2019/2020, the world's cotton production increased by 1 million 250 thousand tonnes to 27 million 200 thousand tons compared with the same period of last year, but the annual consumption increased by 300 thousand tons to 26 million 510 thousand tons. This shows that the balance between production and demand has returned to a relaxed state, resulting in an increase of 640 thousand tons in the final inventory of 18 million 240 thousand tons and a slight increase in inventory consumption to 68%. In view of this, it is difficult for the outer cotton to fluctuate upward. Unless there is a big adjustment in production and demand later.

From the perspective of supply and demand in China:

In 2019/2020, cotton output in China basically remained unchanged at 6 million 40 thousand tons, consumption remained unchanged at 8 million 610 thousand tons, imports remained at 2 million 70 thousand tons, but ending inventory dropped by 520 thousand tons to 7 million 240 thousand tons (to sink to 84%). Compared with 2018/2019, China's final inventory dropped by 500 thousand tons to 7 million 770 thousand tons (90% to 90%).

Thus, from the perspective of China, the gap between production and sales in 2019/2020 is still relatively high, maintained at 2 million 560 thousand tons, and inventory will decrease year by year, and supply and demand will be tightened. Now, China and the US are about to reach a preliminary agreement. China is bound to increase imports of US cotton and improve the supply and demand relationship between us and cotton, so as to replenish national reserve stocks. At the same time, easing trade relations between China and the United States will also boost global consumption.

In addition, next spring's cotton planting area in the United States and the global and Chinese consumption will become the dominant factor in the evolution of the market.

How will Zheng cotton market evolve?

In October, new cotton came on stream. Although Xinjiang cotton has a slight reduction in production, it will not affect the characteristics of annual output, and the subsequent supply will gradually increase. With the rising price of Zheng cotton, the sale of hedging will be increased.

At the same time, the prospects for Sino US consultations are optimistic. We expect that a fundamental agreement will be reached between the two sides in November 16th. If the tariffs on some commodities are abolished in the first stage trade agreement, the export of Chinese textile and clothing to the United States will stabilize and recover. At that time, whether it is cotton or Zheng cotton, its rise is supported by consumption.

At the current stage, there are support for the procurement cost of both inside and outside cotton, and there are layers of suppression of new cotton hedging. We expect: Zheng cotton will fluctuate around the cost of procurement and gradually build the bottom of the market.

Entering the deep winter season, New York cotton will usually form a wave of seasonal rise. If Zheng cotton is still near the cost, then driven by the traditional peak season of consumption, the market is expected to form a wave of phased rise and continue to spring.