The "Golden Pit" Of The Domestic Cotton Market Is Coming!

The beginning of 2020 is destined to be extraordinary. We witness the history of the Black Swan under the shadow of the new crown virus. At present, the new crown virus has been improved in China. The peak of the epidemic has basically gone, but it is bursts in the world. The situation is similar to that in the early days of Wuhan. Many countries adopted isolation, shutdown, closure of schools, suspension of routes between Europe and America, and other important leaders in some countries also tested positive, which had a huge impact on the global economy. Of course, "danger" and "machine" coexist. Can cotton prices usher in the opportunity of "golden pit" under this background?


The impact of the epidemic and crude oil slump on cotton prices

Because the consumption elasticity of cotton is relatively large, the response to economic shocks is relatively intense. Under the current background, the impact of the new crown epidemic is the first to bear the brunt. At home, cotton spinning enterprises are mainly busy with the completion of the order years ago, but the follow up orders have never been heard. With the spread of the international epidemic, the export orders which had been given hope before are now being wasted. If foreign epidemics continue to develop or affect consumption in the United States, the European Union, Japan and South Korea, the market is expected to affect about 2 million 600 thousand tons of cotton consumption. According to the March USDA report, the global cotton output and ending inventory increased in March, and the consumption volume decreased by 800 thousand packages, of which China reduced 1 million packages, while Bangladesh and Turkey increased slightly. Global output has increased by about 250 thousand packs, mainly from Brazil, Chad and Tajikistan. The end of the world inventory ring ratio increased by 1 million 300 thousand packages, an increase of 3 million 200 thousand packages compared to the same period, the overall continue to lose cotton market. The price of crude oil has also been greatly affected. From Russia's refusal to cut production to Saudi Arabia's substantial increase in production, crude oil prices plummeted to around $30 / barrel, driving the price of chemical fibre down sharply. Viscose staple fiber and other chemical fibers are widely used. As a substitute for cotton, after falling prices, it will also affect the consumption demand of cotton. Despite the drop in cotton prices, the market also has some positive support. Cotton still has the theme of upward speculation.


US cotton cut production but export hit new high again

The US Department of agriculture's March global supply and demand forecast showed that the US cotton production, ending inventory and farm prices were down by 2019/20 in the year. US cotton output has been reduced by 300 thousand to 19 million 800 thousand bales, consumption and exports have not changed, and the final inventory has been reduced by 300 thousand to 5 million 100 thousand bales. US cotton export volume has reached a new high of the year, and China continues to import large quantities. According to the USDA report, on February 28, 2020 5 -3, the net signing amount of 2019/20 in the US 2019/20 was 109 thousand and 800 tons, an increase of 22% over last week, an increase of 62% over the previous four weeks average. The new contracts mainly came from Pakistan (36 thousand and 600 tons), China (20 thousand and 600 tons), Turkey (19 thousand and 100 tons), Vietnam (10 thousand and 700 tons) and Bangladesh (7439 tons), and the cancellation of contracts was mainly in Japan (884 tons) and Thailand (272 tons).


National reserve stock low cost cotton cost

Before the outbreak, the stock of state-owned cotton stores has been at a low level. Despite the round off policy, due to various factors such as market and quality, the total volume of round trips is lower than expected. As for the reduction of terminal consumption under the influence of the global epidemic, it is necessary to make up for the shortage of the terminal consumption in the late stage or to increase the production intensity, and at the same time, to balance the demand with inventory and import. Because of the popularization and popularization of machine picked cotton, the cost of cotton planting in China has also declined significantly. Specifically, the purchase price of seed cotton in 2017/18 was around 7 yuan / kg, of which 3.5 yuan / kg of manual picking cotton cost, and with the popularity of machine picked cotton, the picking cost of machine picked cotton was only 0.6 yuan / kg. Xinjiang seed cotton purchase price of 5.41 yuan / kg, down 16.77% over the same period last year. The average processing cost of Xinjiang machine picked cotton in 2019/20 was about 12200 yuan per ton. Recently, the 05 contract has fallen below the cost, and there is also an undervalued interval in the far month contract. It is expected that there will be emotional support for the cost side. At present, it is the main concern of domestic cotton prices to focus on port import yarn pressure and the resumption of downstream production and continue to focus on subsequent orders.


Decrease in planting intention and continue to focus on locust disaster

At the moment, there is still no shortage of hot spots for cotton in the new year. In particular, cotton planting will start in April. Will the continuation of the epidemic slow down the rhythm of spring plowing? Will the continued downturn in cotton prices hurt cotton growers' enthusiasm for planting? A series of problems need to be followed up. At the end of February 2020, the cotton association of China conducted third surveys on the area of cotton planting intention in 2425 provinces in the 12 provinces and municipalities in the mainland and in Xinjiang autonomous region. The results showed that the cotton planting area in 2020 was 45 million 735 thousand and 700 mu, down 5.03% from the same period last year, and the decrease was 0.33 percentage points lower than that in the previous period. Among them, the decline in Xinjiang was narrower than that in the previous period, while the decline in the Yangtze River Basin and the the Yellow River River Basin has been widened. In addition, the impact of locust plague on India and Pakistan needs to be observed. If the outbreak occurs in 5-6 months, the output of cotton will be affected in the new year. We should pay attention to the reaction of the above two hype points on the 09 contracts.


Overall, under the background of the epidemic, cotton prices have been hit hard, and once fell below the cost line, but the US cotton production reduction and India MSP purchase price support cotton prices, and the space under the US cotton is limited. Domestic cotton prices also once fell to the cost line. In the short term, 09 contracts were supported near 12000 yuan / ton. If there were no other bad events, the "golden pit" or bottoming out in this vicinity, while the hype of spring ploughing and locust plague, or the 09 contract, could be built in batches in the vicinity of 12000 yuan / ton, waiting for speculation.