The global cotton market supply is expected to hit a new high in the new year, while consumption may continue to be depressed. This judgment became the consensus of the participants in the "China Cotton Industry Development Summit Forum" at the end of May. The pessimistic expectation of cotton prices in the medium and long term is further strengthened among domestic cotton related enterprises.
At present, the situation of excess inventory has been clearly reflected in American cotton futures. The price of the main contract of cotton futures in New York has dropped 51% from the peak two years ago, and the price of the main contract of domestic cotton futures has also dropped by 33%. Despite such a large price decline, the progress of lint sales in the market is still slow.
Faced with the dual pressure of the impact of raw material supply and the lack of effective demand at the end, the domestic cotton textile industry is under obvious pressure to operate, and the difficulty of enterprise profitability continues to increase. Experts in the industry remind cotton related enterprises to strengthen market research and judgment, and make full use of financial instruments to hedge risks.
Global cotton ushers in a new round of surplus
"The prediction of cotton consumption in the USDA report is too optimistic, which has been the case in the past two years." Mitesh Shah, head of cotton in Asia of the global raw material trade giant "Louis Dreyfus", said at the forum that the international market has been producing more than consumption for three consecutive years, and the ending inventory may be larger than the report predicted.
According to the forecast in the May supply and demand report of the US Department of Agriculture, the global cotton output from 2024 to 2025 will be 25.92 million tons, an increase of 1.19 million tons year on year; The cotton consumption was 25.44 million tons, with a year-on-year increase of 760000 tons. The growth rate of cotton production far exceeded the growth rate of consumption, and the cotton supply situation was significantly relaxed.
Among them, the production of American cotton increased significantly, which is the focus of the market. The report predicts that the US cotton harvest area is 55.389 million mu, with a year-on-year increase of 41.7%. In addition, Brazil continues to achieve a record high yield, while Australia's output is at a historical high, leading to a significant increase in the global cotton supply in the new year, which has become a major factor in the market's long-term bearish cotton prices.
In the international market, as of May 31, the settlement price of the main contract of cotton futures in New York was 76.15 cents/pound, which was 51% lower than the previous high of 155.95 cents/pound on May 4, 2022. On the domestic futures market, the settlement price of the main contract of Zhengzhou cotton futures is 15270 yuan/ton, which is 22960 yuan/ton from the previous high on October 18, 2021, a decline of 33%.
"The weather situation in the United States is the next few variables." Wei Gangmin, chairman of Henan Tongzhou Cotton Industry Co., Ltd., said at the conference forum that the United States is expected to have a strong harvest in the new year, but the futures market has fully priced the possible significant increase in American cotton production, so the future price trend needs to pay close attention to the important variable of Texas weather and southeast hurricanes in the United States.
On the sales side, global cotton demand has been weak for more than three years. "China's cotton consumption in the past three years has still not recovered to more than 8 million tons. The output of yarn in 2023 is 40% lower than the previous peak in 2016." Wang Jianhong, executive vice president and secretary-general of the China Cotton Association, said that under the background of shrinking global demand and expected weakening, the growth of domestic textile and clothing consumption is not sustainable enough, Both domestic demand and export are under great pressure.
In addition, according to the data of the National Cotton Market Monitoring System, as of May 16, the national lint sales rate in 2023/2024 was 74.7%, a year-on-year decrease of 11.2 percentage points. It is estimated that the national cumulative sales of lint were 4.412 million tons, a year-on-year decrease of 1.36 million tons, 362000 tons less than the average of the past four years. The overall sales progress is still slow.
"As time goes by, if there is no weather problem at the cotton planting end of the new season, or there is no obvious sign of improvement in downstream consumption, the cotton market will usher in a new round of selling pressure on spot goods," said the head of a cotton import and export enterprise in Huai'an, Jiangsu.
Cotton related enterprises should make full use of financial instruments to hedge risks
In the face of a new round of global cotton surplus crisis, domestic cotton related enterprises also have an urgent need for risk management. In this regard, Xu Xiaoyuan, Deputy Secretary General of China Cotton Textile Industry Association, reminded that under the dual pressure of the impact of raw material supply and the lack of effective demand at the end, the cotton textile industry is under obvious pressure, the difficulty of enterprise profitability continues to increase, and the profit margin of listed leading enterprises is also shrinking. In this regard, enterprises should strengthen market research and judgment, and make full use of financial instruments to hedge risks.
In the face of unpredictable market and fierce competition, cotton futures have become a good helper for ginning mills and traders to enter the market. Chen Minghong, the deputy general manager of China National Textile Group Co., Ltd., said, "After accounting for various costs, we will sell hedges when the futures price reaches the ideal price according to the profit expectation, which is equivalent to the pre-sale locking profits. On the premise of ensuring the processing costs, we will guarantee the expected profit level and achieve stable income."
Ma Wensheng, chairman of Xinhu Futures Co., Ltd., said that in the past two decades, China's cotton futures market has gradually improved, its functions have become increasingly apparent, and its liquidity has continued to increase. Futures prices have gradually become one of the important pricing references for spot transactions. For textile mills, enterprises can purchase cotton futures at the appropriate point through futures companies, or take the form of rights bearing trade, which can alleviate the operational impact of price fluctuations on industrial enterprises, enterprise capital shortage and other problems. This model has changed the traditional way of price negotiation and brought great convenience to the industrial subject.
According to the data, the maximum position size of domestic cotton futures exceeded 1 million hands (5 million tons), reaching a level comparable to mature markets such as the American Intercontinental Exchange (ICE) market. At present, about 80% of domestic cotton trade takes cotton futures price as the pricing benchmark. More than 1200 cotton textile enterprises used futures to avoid risks. From 2004 to 2023, there will be 214600 registered warehouse receipts, more than 8 million tons.
For the future development of cotton futures, the relevant person in charge of Zheng Commercial Exchange said that he would continue to optimize the rules and systems of cotton futures to better meet the needs of industrial customers. Previously, Zheng Merchants Exchange has informed that since the new cotton year (September 1, 2024), after the cotton in Xinjiang warehouse has been put into public inspection and the public inspection certificate has been generated, the cargo owner can submit futures cotton to the warehouse for inspection within the validity period of the public inspection certificate and this cotton year. At the same time, cotton yarn futures have further expanded the scope of delivery products.
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