Sino-US economic and trade negotiations have achieved significant results, benefiting the cotton market from both supply and demand ends. At present, confidence in the cotton market is gradually recovering. Coupled with the stabilizing mechanism of the rotation of cotton from the state reserve and the expectation of increased future demand, the weak balance sheet of the cotton market has been repaired, and cotton is expected to remain strong in the future.
The conclusion of the economic and trade agreement is expected to provide support
On December 13, China and the United States announced that they had reached agreement on the text of the first phase of the economic and trade agreement. The two sides will stop the tariffs that were planned to be imposed in the early stage and gradually reduce the tariffs that have been imposed in the early stage. China will expand its purchases of agricultural products (000061, stock bar), and the author believes that cotton will be one of the main agricultural products that will increase its purchasing efforts.
The major breakthrough in Sino-US economic and trade negotiations will benefit the cotton market from both supply and demand aspects. On the supply side, China is expected to directly purchase US cotton to replenish its national reserves in the future, directly reducing the global cotton supply. On the demand side, the easing of Sino-US economic and trade relations will directly benefit domestic textile and apparel exports. At the same time, the easing of Sino-US trade friction will benefit global economic growth, thereby increasing global cotton consumption.
However, the previous rise in domestic and foreign cotton prices has partially reflected the market’s expectations for the outcome of Sino-US economic and trade negotiations. Therefore, after the news was announced, the market reaction was muted. Although the futures market has the tradition of “buying expectations and selling facts”, the impact of the progress of Sino-US trade negotiations on the cotton spot market has not yet been reflected. In the next few months, the bullish effect of this event will gradually push up spot prices.
The stabilization mechanism of the State Reserve’s cotton rotation is working
Since December 2, the State Reserve has rotated cotton into the market through downward bidding. 500,000 tons of Xinjiang cotton. Compared with the past purchase and storage mechanism, this year’s cotton reserve rotation mechanism is a stabilizing mechanism. It will not actively push up cotton prices. However, if there is an irrational decline in the futures market, the rotation mechanism will be activated. Balance the market so that futures prices return to spot prices.
Judging from the transactions in the past two weeks after the cotton reserves entered the market, this mechanism has played a role in stabilizing cotton prices. As of December 13, a total of 70,000 tons of cotton have been listed for purchase in Xinjiang, and a total of 32,880 tons have been traded, including 2,560 tons in Xinjiang warehouses and 30,320 tons in mainland warehouses. The highest transaction price is 13,319 yuan/ton, and the lowest transaction price is 12,879 yuan. /Ton. At the beginning of the period, market confidence was pessimistic, futures prices fell rapidly, and the transaction rate of reserve cotton once reached more than 90%. As futures prices gradually rebounded, the transaction rate dropped significantly.
Since the reserve cotton rotation policy will continue until the end of March next year, under the guidance of this mechanism, the fluctuation of the current basis spread will be significantly reduced in the next few months.
The excess supply and demand balance has improved significantly
The global cotton supply and demand balance at the beginning of the 2019/2020 season is not optimistic, with a substantial increase in production and a continued decline in demand. . According to USDA estimates, the maximum supply surplus for the whole year is expected to be more than 700,000 tons. Recently, due to lower than expected production, the surplus has been reduced to less than 200,000 tons. If China later decides to import US cotton to directly replenish its national treasury, the supply situation in the global market will improve significantly this year.
Domestically, although the price trend is weaker than that of the international market, the actual fundamentals have improved significantly compared with previous years. In terms of output, it is expected to be the same as last year, and the net input of the state reserve will be at least 1 million tons less than last year. Due to the unreasonable price difference between domestic and foreign cotton, imported cotton will be significantly reduced this year. In terms of opening inventory, the new year’s inventory increased by 600,000 tons compared with the previous year. Assuming that demand remains at the low level of the previous year, the ending inventory of the new year is expected to decrease by nearly 1 million tons year-on-year, reaching the lowest level in recent years.
To sum up, the current Sino-US trade negotiations have made significant progress, which is good for both supply and demand for cotton; the rotation policy of the state reserve of cotton will continue until March next year, which can stabilize domestic Cotton prices; the supply and demand balance sheet in the international and domestic markets have also improved significantly in recent months. Under the influence of many bullish factors, cotton prices are expected to emerge from weakness and continue to strengthen. </p
