The cotton market has been very lively recently. Not only has Sino-US economic and trade negotiations made substantial progress, but the central reserve cotton rotation policy has finally been implemented. Of course, there are still many factors that are unfavorable to the increase in cotton prices. Under the long-short game, can Zheng cotton prices move in the future? How high to look forward to. In order to clear the air and analyze the driving forces behind the current market rise and fall, a reporter from China Cotton Network interviewed Zhang Wenmin, a consultant at the cotton business headquarters of Xinhu Futures Co., Ltd. and a senior analyst at Zhengzhou Commercial Exchange. The following is the transcript of the interview.
Reporter: Now that the cotton harvest is coming to an end, the outside world has generally reported that Xinjiang’s cotton production has decreased. According to your field research and visits, what is the yield and quality of Xinjiang’s cotton this year?
Zhang Wenmin: From October 27th to November 3rd, I participated in the “Large-scale Research Group on Cotton Production and Acquisition Situation in Southern Xinjiang” organized by the Zhengzhou Commodity Exchange and the China Reserve Cotton Information Center to conduct a survey on the cotton production and acquisition situation in southern Xinjiang. Extensive and in-depth field investigations were conducted on Xinjiang’s cotton planting area, yield, picking progress, purchase and processing, lint sales, market prices and trends, etc., and a large amount of first-hand information was obtained. Based on incomplete statistics from October to November, Xinjiang’s cotton output is expected to be 4.6-5 million tons, with a production reduction of 5-8% or more. The main reasons for the reduction in cotton production in Xinjiang in 2019/20 are as follows:
First, the seedling emergence period in northern and southern Xinjiang generally continued to be low and rainy from April to June, causing rotten seeds and seedlings in large areas in many places. After repeated sowing, The delay delays the normal growth of cotton seedlings. At the end of September, the temperature in northern Xinjiang dropped to 6-8 degrees, and cotton stopped growing. Frosts began to fall in early and mid-October, 15-25 days earlier than in previous years. Southern Xinjiang has experienced abnormal climate conditions of low temperature and rain, so the yield of seed cotton per mu in the same plot in southern and northern Xinjiang has dropped by 40-80 kilograms from last year’s 350-400 kilograms/mu respectively.
Second, the amount of XPCC cotton flowing into local gins this year has decreased, resulting in a 10-20% reduction in seed cotton purchases by local gins in various prefectures and counties.
Third, the proportion of high-quality cotton varieties in some prefectures, counties and corps divisions has dropped sharply, resulting in a decline in both yield and quality. Quality indicators such as length, breaking ratio, and micronaire are far inferior to last year. In 2018, ” It is not easy for land parcels in production areas dominated by double 29 to reach “double 28” this year.
Reporter: What do you think are the main factors affecting the current rise and fall of the market?
Zhang Wenmin: There are many factors that affect the rise and fall of cotton, such as global and Xinjiang cotton supply and demand, cotton reserve volume, import volume, carryover inventory, futures option hedging, seed cotton and lint prices, cotton production, supply and marketing stocks relationship, etc., resulting in mild and slight fluctuations in cotton prices in various markets this year. What needs to be focused on is whether the Sino-US economic and trade negotiations can reach a phased or final bilateral agreement, especially whether the US$40-50 billion in agricultural products imported at the request of the US can include 1-3 million tons of US cotton imported in a three-year period.
Reporter: What are the characteristics of Xinjiang cotton prices in 2019?
Zhang Wenmin: The early and medium-term purchase prices of local seed cotton and lint sales prices of local seed cotton in southern and northern Xinjiang have gradually declined alternately. However, affected by the easing of Sino-US trade friction and the reduction of cotton production in Xinjiang, the purchase of machine-picked cotton in southern and northern Xinjiang has gradually declined. The price has gradually risen to 4.6-5.9 yuan/kg in recent days (the initial purchase price is 4.35-5.6 yuan/kg), and the hand-picked cotton has risen to 5.3-6.5 yuan/kg (the initial purchase price is 5.0-6.0 yuan/kg). Although the Zheng cotton 2001 futures price has rebounded from 11,970 yuan/ton to around 13,200 yuan/ton, it is still difficult to change the reality that the current price of Xinjiang cotton futures is upside down. In the early period, cotton companies that sold futures at 12,000-12,600 yuan/ton to protect their value have already sold 500-1,000 yuan. and above floating losses. At present, most cotton and textile companies believe that only when cotton prices rise to more than 13,600-14,000 yuan/ton can they make a small profit.
Reporter: How should we rationally view the impact of Sino-US economic and trade negotiations on cotton prices at this stage?
Zhang Wenmin: There are three possible trends in the Sino-US trade war. Trend 1: If Sino-US economic and trade negotiations break down and the confrontation between the two sides intensifies, the United States will increase taxes on China by US$250-500 billion, China will no longer import US cotton, textile and clothing exports will decrease sharply, and the price of cotton futures on the Zhengzhou Commodity Exchange may continue to fall. to below 11,000-12,000 yuan/ton.
Trend 2: Sino-US economic and trade negotiations have made progress, but differences are still large. It is difficult to reach a stage or final bilateral agreement in the near future. The cotton futures market continues to remain low and volatile.
Trend 3: If the Sino-US economic and trade negotiations finally reach a bilateral agreement, China can import 2-3 million tons of US cotton, causing ICE futures to rise by 5-15 cents/pound, and the price of Zheng cotton will also rise. The price has risen to 13,500-14,500 yuan/ton, and Xinjiang’s 500,000-1 million tons of inventory balance has been sold out. The sales situation of new cotton will improve overall in the new year. The cotton inventory reserves of textile enterprises have increased to 3-6 months, and the market prices of cotton, cotton yarn, textiles and clothing will increase across the board.
Reporter: Last Thursday, the national competent authorities announced the arrival of 500,000 tons of cotton. What impact will it have on the market price in the future?
Zhang Wenmin: On November 14, the national competent authorities issued an announcement to import 500,000 tons of Xinjiang cotton: “About 7,000 tons per day, and the transaction will be auctioned downwards based on the estimated maximum price.” The expected transaction price is 12,700-13,200 yuan. Machine-picked cotton from northern Xinjiang will be the main force in the rotation. Machine-picked cotton from southern Xinjiang, hand-picked cotton and old cotton in stock from the previous year basically have no chance to participate in the auction. The scale of this round of 500,000 tons and its impact on market price trends are relatively limited, but it may be the first phase of practice for continuing to increase the number of rounds in the future. As the current Sino-U.S. trade negotiations have not determined whether it is possible to import a large amount of U.S. cotton, the country will not increase its rotation of Xinjiang cotton in the near future, and it will depend on the amount of U.S. cotton imported. China�Cotton reserves are limited, with domestic average annual consumption of 7-7.5 million tons, and only 3-4 million tons of reserves can reach above the national cotton safety reserve warning line. China needs to actively participate in the international and domestic cotton markets and explore a low-risk, high-efficiency comprehensive model to stabilize market prices.
Reporter: According to the trend of registered warehouse receipts, Zheng cotton warehouse receipts will remain high again this year. Do you think this represents a weak rise in the market?
Zhang Wenmin: This year, the number of cotton futures warehouse receipts has reached a record high of 900,000-1.2 million tons. Zhengzhou Commodity Exchange has established 8 delivery warehouses in Xinjiang, with a static storage capacity of 1.8 million tons, and has formed transactions with 22 delivery warehouses in the mainland. Delivery, warehousing and logistics linkage. It will continue to grow to a larger scale in 2019, which will inevitably change the business model and innovate efficient and low-risk practices. Xinjiang is vigorously developing the textile and apparel industry. There are currently more than 18-20 million cotton spinning spindles, and the amount of cotton used in Xinjiang’s textile industry is more than 1.5 million tons. Direct procurement of cotton and textile enterprises will become an innovative and efficient form of new financing loans and transaction delivery this year. With the wide-scale popularization of cotton futures pricing models, basis trading, financing loans, warehouse receipt pledge loans, futures option hedging and other business models, Xinjiang’s upstream cotton has effectively connected with the spot futures trading and delivery of mainland textile trading companies. Zheng The cotton futures warehouse receipts of the exchange will remain at 1 million to 2 million tons, which will be the normal quantity in the coming years. For example, if the China-U.S. economic and trade negotiations finally reach a bilateral agreement, 2-3 million tons of U.S. cotton can be imported, causing ICE futures to rise by 5-15 cents, and cotton futures warehouse receipts will be traded in large quantities; future cotton sales will be based on spot prices. The market-oriented market will transform into a diversified operating structure of spot, futures, reserves, and imports. The turnover volume of cotton futures operations in 2019-2022 will reach 2-3 million tons. </p
