Zheng Cotton Is At The Starting Point Of The New Round Of Rally.

After a brief upturn after the Spring Festival, Zheng cotton futures plunged into a vicious circle because the spot price was insufficient and the price rise was too high.

Especially in Zhengzhou cotton CF0807 near delivery, the huge warehouse receipts pressure continues to play an unusual role, the price of the month spot price up to 550 yuan / ton upside down! Clear "air force more" characteristics, let the market in an uproar.

In the face of the great decline in cotton planting area in the United States, the reduction of domestic cotton planting area and the spot price going out of the bottom, can Zheng cotton futures fix the bruising in the price system and get out of the real effective trend?

International cotton situation

Fundamentals

In 2008/2009, the most important event in the international cotton market is the complete weakness of US cotton in the battle of planting area.

Because of the low planting efficiency, the cotton planting area is occupied by wheat and corn.

According to the US Department of agriculture's forecast of planting area in June 30th, the cotton area in the United States this year is only 9 million 240 thousand acres, with an annual reduction of 1 million 590 thousand acres, a drop of 14.7%.

Although this data is higher than the average expectation of 8 million 890 thousand acres, the fact that we can not avoid the fact is that no matter the annual data or the monthly forecast data, we can clearly see that the downward trend of cotton planting area in the United States continues.

At the same time, because of bad weather, the growth of cotton in the United States has a very large negative impact.

According to the growth of the US Department of agriculture in July 6th, the rate of buds in the United States is 60%, which is 3% less than that in last year and nearly five years. The current bell rate is 15%, which is 5% less than that in the same period last year and nearly five years. The growth rate is 45%, which is lower than 55% in the same period last year.

American cotton production will soon become a reality.

It is expected that the output of American cotton will fall to 3 million 160 thousand tons in 2008/2009, of which 940 thousand tons are used by themselves and the rest are used for export.

The number of exports is expected to exceed production in 2000, the first time since then.

Looking at the world, ICAC (International Cotton Association) predicted in July 2nd that the global cotton production in July 2nd will be reduced by 25 million 500 thousand tons due to the same decline in the two main products.

Consumption will increase to 26 million 600 thousand tons due to the increase in China and India, and the end of the world inventory will be reduced to 11 million tons, or more than 1 million tons. The year will be second consecutive years higher than consumption.

ICAC also expects global cotton prices to be 82 cents per pound in 2008/2009, higher than 73 cents in 2007/2008, while the US Department of agriculture believes that global cotton stocks will be at the most intense in 5 years.

There is no doubt that the information pmitted on the fundamentals is clear and profitable.

But under the suppression of high inventory (inventory consumption ratio of 41.3%), such profits should continue to accumulate and imperceptibly.

Technical aspect

We analyze Wen Hua's US cotton futures index and COTLOOKA index.

Wenhua US cotton futures index: we compare the trend of the price index with the position of the fund. See below.

As can be seen from Figure 1, the market price broke through 2005-2007 years' two years' [48, 58] finishing platform is to promote the fund's long positions, and the fund has always maintained a net long position since then.

As the main driver of market trends, it is obvious that the fund continues to maintain a long mindset.

* fund net position = fund long position fund short position.

The COTLOOKA index is the average value of the lowest Nordic spot CIF in 15 countries, which is selected from the international cotton trade.

The benchmark quality standard of the A index is M 1-3/32 inches (equivalent to China's 327 level). The geographical basis of the offer is Nordic. The terms are quoted on the basis of CIF (CIF), including pportation charges, insurance premiums, and commission of profits and agents.

At present, the 15 cotton quotations include China (grade 329).

The above is the daily trend of the COTLOOKA index from January 2007 to July 2008. We can see that the trend of the price trend is upward.

In spite of the reverse promotion of the depreciation of the US dollar, the price increase of 37.8% during the period was far beyond the maximum 15.3% of the US dollar depreciation over the same period.

It is clear that price increases are driven by demand, and there is no sign of turning.

Domestic cotton price dilemma

Fundamentals

In 2007, China's cotton harvest again reached a record 7 million 600 thousand tons (National Bureau of statistics data), an annual increase of 1.3%.

In 2008, as the country continued to subsidize cotton varieties, the domestic cotton planting area remained stable, but the total output was uncertain due to the large change in yield per unit area.

China Cotton Information Network planting survey shows that in 2008, the domestic cotton planting area was about 84 million 730 thousand mu, with a total output of about 7 million 230 thousand tons.

Under the continuous high yield, the corresponding growth rate of the textile industry is reduced after the 2007 national textile export tax rebate rate is lowered and the RMB appreciation is accelerated.

According to the statistics of China Textile Industry Association, the textile industry growth slowed down in the first quarter of 2008.

In 1-3 months, the yarn production of Enterprises above designated size increased by 10.17%; cloth production increased by 9.48%; cotton cloth grew by 10.4% over the same period last year.

The output growth of the above three products is lower than the average increase of nearly 7% in 2007.

In 1-2 months, the export delivery value of textile enterprises above designated size was 53 billion 241 million yuan, an increase of 8.22% over the same period last year. The overall industry debt ratio was 60.15%, the average gross profit margin was 1.26%, and the loss of enterprises was 24.13%.

In the two quarter, the growth of the textile industry is expected to slow down as the appreciation of the renminbi continues to accelerate and the cost of production materials increased after the rise in crude oil prices. At the same time, domestic cotton business inventories have always been higher than market expectations since January 2008, adding to the wait-and-see sentiment of the market.

The new fact is: according to customs statistics, Guangdong textile and clothing exports in the 1-5 months of this year amounted to US $11 billion 510 million, down 15.7% from the same period last year, and the growth rate dropped by 40.3%.

However, we should not lose sight of the fact that some positive factors are emerging.

First of all, the collective dilemma of the textile industry has attracted the attention of the relevant departments of the state. The news about the callback rate of textile export tax rebates has been circulated in the market. It is said that besides the textile export tax rebate rate raised by 2% and the garment export tax rebate rate raised by 4%, the export of viscose fiber from the main raw material of textile will be greatly adjusted. The increase may reach 10 points, from the current 5% to 15%.

The callback policy is likely to be introduced at the end of July.

At the same time, the low efficiency of cotton planting also troubled farmers and local governments in traditional farming areas.

According to Xinhua news agency, July 3: Xinjiang, which occupies 1/3 of China's cotton growing area, plans to compress 7 million mu of cotton planting area in 5 years, accounting for 25.9% of the current planting area. It also ensures the overall efficiency of cotton production by raising the unit area yield, thus making way for the development of animal husbandry.

At present, the income of planting an acre of cotton in Xinjiang is 600-700 yuan, while planting alfalfa and corn to develop animal husbandry, the yield of mu can reach 1000 yuan.

Technical aspect

We are concerned about two issues: the operation of Zhengzhou cotton futures index and the release of warehouse receipts pressure.

Zhengzhou cotton futures index: from Figure 3, we can see that the zhengmian index is in the middle of 14000 yuan / ton since it was launched, and this price is also the index running position of the new cotton purchase period in 2005 and 2007.

In 2007, the cost of cotton planting in China was 930.8 yuan, up 7.07% from 2006, and the increase in labor cost was 10.57%.

Taking a reasonable position and considering the price increase of domestic means of production, we believe that the cost of cotton planting in 2008 may reach a thousand yuan mark.

We make an estimate of the cost of new lint in 2008: (net income of Mu is 600 yuan, cottonseed 1.33 yuan / Jin, lint percentage 0.38, garment loss rate 0.001, processing fee 0.25 yuan / Jin).

According to the prediction data of China cotton information network, in 2008, China produced 85.32 kilograms of lint per mu and 230.6 kg of seed cotton.

According to net income projections, seed cotton purchase price should be changed to 3.47 yuan / Jin.

The cost of cottonseed = (1- lint rate wastage) * purchase cotton seed unit price = (1-0.38-0.01) * 1.33=0.811 yuan.

The cost per kilogram of lint is (= the cost of buying seed cotton - cottonseed cost) / (linen percentage - clothing loss rate) + processing fee.

= (3.47-0.811) / (0.38-0.001) +0.25

=7.266 yuan

It is equivalent to 14532 yuan / ton.

Obviously, the current forward contract price CF0901 is at a reasonable price, considering whether net income should increase reasonably and whether the price of high cottonseed can maintain high. Obviously, the production cost of new lint may continue to increase.

The release of warehouse receipts pressure: cotton futures have been listed for many years, warehouse receipts have always been a magic weapon.

Because speculative funds are too hyped up for long months, or the benchmark price of new contracts is too high, they often cause the current price to be too large.

In 2008, this feature was even put to the extreme. After March, the price fell unilaterally by 2600 points, which is basically the compression process of futures premium.

After entering June, the rate of futures warehouse receipts coming out of the market increased significantly, from 100 outflows per week to 700 rapidly.

CF0807 is close to delivery, and the reversal of 500 yuan / ton makes it possible for the bull to have full access.

(see chart 5)

At the same time, CF0809 also has the phenomenon of current upside down, so that before the new cotton is listed, the scale of warehouse receipts is expected to continue to drop to less than 1500 pieces.

Fig. 4 Comparison between Zheng cotton index and spot index

Fig. 5 Comparison of price difference between Zheng cotton warehouse receipt and current price list

Conclusion and strategy

After analyzing the basic state of the market at home and abroad, we have reason to think that, with the slow development of the international supply and demand situation and the adjustment of the domestic industrial policy to the favorable direction, the domestic textile industry is expected to resume its growth rate, which will bring new vitality to the cotton market.

At the same time, the reasonable revision of the futures market price system has been completed, and the warehouse receipt pressure is also accelerating.

After a sharp adjustment, futures cotton prices have returned to a new starting point.

Despite the need to reverse the great inertia of the market, the road to recovery of cotton prices is also difficult, but we are firmly optimistic about the future.

The most important factor in the early recovery of the price cycle should be cost push. The Bulls must restrain the blind and aggressive style and maintain a reasonable price difference with the spot. When the price difference between the Zheng cotton index and the spot price is controlled within 400, the motivation for short selling of spot goods is often suppressed.

Technically, we suggest that we should focus on the supporting role of CF0901 low point connection, and we can slow down our positions and pay close attention to the follow-up new contracts according to the price difference of 200 every month.

Fig. 6CF0901 technical analysis

Under a bigger train of thought, we think that cotton is in the beginning of a big bull market with structural reconstruction, and how high the future space will be.