Cotton beware of trampling decline

The purchase price of seed cotton determines the cost center of lint processing in the new year. As the price of Xinjiang seed cotton once exceeded 11 yuan/kg after the National Day, the high price of seed cotton pushed Zheng cotton futures to run at a high level. The author believes that the current game in the seed cotton market is still the main factor affecting the cotton market. Although the policy control measures are multi-pronged and the price has been loosened, the speculation in the seed cotton market has not weakened, and the logic of cost pricing will continue to exist on the disk. . With the advancement of seed cotton sales progress, risks gradually shift to the ginning factory, and the disk pricing logic will also settle on the downstream demand situation.

Increased bilateral risks for ginning plants

The impact of policy regulation has not directly settled in the seed cotton market, and the bilateral risk of ginning plants has increased. Behind the current high-priced seed cotton is the contradiction between Xinjiang's overcapacity of ginning and the difficulty in expanding the planting area of Xinjiang seed cotton. However, the overcapacity of ginning has already existed in Xinjiang and was also reflected in the autumn harvest market last year. Therefore, the most direct reason to promote this round of rush to harvest is the reduction of Xinjiang's cotton area in 2021/2022 and the increase in cotton farmers' planting costs. In the context of increasing planting costs, cotton farmers’ demands for planting income protection have formed a price alliance; under the background of overcapacity in ginning, the price of seed cotton has been promoted to 11 yuan/kg.

Despite the multi-pronged control policy after the National Day, only the purchase loan restrictions have curbed the ginning factory’s grabbing behavior, while other measures have not been directly implemented in the seed cotton market, and more concentrated on the supply of the domestic lint market. Such as extending and expanding the daily output of cotton reserves, state-owned cotton merchants organize a special sale of imported cotton, etc. Although seed cotton is the upstream product of lint cotton and determines the cost center of lint cotton, the ginning factory is facing a passive situation of having to purchase, making it difficult to reflect the fundamental situation of short-term abundant lint supply to the pricing logic of seed cotton. This means that the ginning plant will face bilateral risks at the same time, namely the risk of rising costs caused by the rush to harvest the seed cotton and the risk of falling prices when the supply of lint is abundant.

The degree of speculation in the acquisition market has not diminished

Since the target price subsidy policy started in 2014, in order to ensure the effectiveness of the subsidy, the relevant departments have certain requirements for the seed cotton delivery link, which is mainly reflected in the need to deliver the seed cotton to the ginning enterprises that have been publicized before January 31 of the following year. , Otherwise you will not be able to get subsidies. As the price of lint this year has substantially exceeded the target subsidy price, for cotton farmers who sell seed cotton, the free put option provided by the policy will most likely not be exercised. There may be no price subsidies this year, which means that the sales link will not be exercised at all. It must be implemented in accordance with the previous subsidy requirements. This may further stimulate the speculative nature of the seed cotton market: first, cotton farmers can hand over to seed cotton dealers, and middlemen are more gambling; second, there is no mandatory delivery time, and the seed cotton tug-of-war may continue; third, the market’s judgment on the final output Most settled on data such as the number of sales and processing inspections, the delay in sales will inevitably lead to a significant lag in such data, and unexpected production reduction expectations may be fermented in the process of grabbing, stimulating the bullish atmosphere in the seed cotton market.

Signs of weakness in the textile industry appear

At present, signs of weakness in the downstream textile industry are emerging. From the perspective of terminal consumption, the domestic demand and foreign trade of clothing have clearly differentiated: under the promotion of domestic vaccines and the management of epidemic prevention and control, residents' activities have long been normalized, but clothing consumption has seen a bottleneck in growth. Affected by the base effect, the zero growth rate of the clothing industry gradually declined after the first quarter of this year. The growth rate in August turned from positive to negative to -7.6%. In August, retail sales fell below the lowest value in the past five years. Domestic clothing consumption is not optimistic. Although consumption in the European and American markets continues to pick up, clothing imports are running at a high level, and wholesalers continue to replenish their inventory, due to high ocean freight, power shortages, and rising electricity prices, the actual order profits are mostly swallowed.

From the perspective of direct cotton consumption, the spinning end and the weaving end have limited power and production, and the start-up load has dropped significantly, which has a direct impact on the willingness to purchase raw materials. During the National Day, due to the production and electricity restrictions in major textile towns, some textile explosions have accelerated and the inventory is depleted. However, the sluggish industrial chain has led to an overall accumulation of cotton yarn and grey fabrics, and spinning profits have continued to weaken. With the recovery of textile production capacity in Southeast Asia, the relatively high price gap between domestic and foreign cotton yarns may further increase the import volume of cotton yarn, thereby impacting the domestic cotton yarn market.

In addition, the high profitability and sufficient start-up of domestic spinning were mainly from the speculative hoarding demand of cotton yarn traders. If the textile industry orders continue to weaken in the future, the invisible stockpile of cotton yarn may be passively released, which will trigger a stampede drop in cotton prices. (Author's unit: China Securities Construction Investment Futures)

Source: Futures Daily