Global cotton market supply is expected to reach a new high in the new year, while consumption may remain sluggish. This judgment has become a consensus among the guests attending the "China Cotton Industry Development Summit Forum" at the end of May, further strengthening the pessimistic expectation of long-term cotton prices among domestic cotton-related enterprises.
Currently, the oversupply situation is clearly reflected in the US cotton futures market. The price of the main contract of New York cotton futures has fallen by 51% from its high point two years ago, and the price of the main contract of domestic cotton futures has also fallen by 33%. Despite such a large price drop, the sales progress of raw cotton in the market is still slow.
Faced with the double pressure of raw material supply shocks and insufficient effective demand at the end-user level, the operation of China's cotton textile industry is under significant pressure, and the difficulty of enterprise profitability continues to increase. Industry experts remind cotton-related enterprises to strengthen market judgment and make full use of financial tools to hedge risks.
Global cotton faces a new round of oversupply.
"The US Department of Agriculture's forecast for cotton consumption is too optimistic, as it has been for the past two years." Mitesh Shah, head of cotton in Asia for Louis Dreyfus Company, a global raw material trading giant, said at the forum that the international market has had production exceeding consumption for three consecutive years, and end-of-year inventories may be larger than the report predicts.
According to the US Department of Agriculture's May supply and demand report, global cotton production in the 2024-2025 season is predicted to be 25.92 million tons, an increase of 1.19 million tons year-on-year; cotton consumption is 25.44 million tons, an increase of 760,000 tons year-on-year. The increase in cotton production far exceeds the increase in consumption, resulting in a significant easing of the cotton supply situation.
Among them, the significant increase in US cotton production is a key focus of the market. The report predicts a harvested area of 55.389 million mu for US cotton, a year-on-year increase of 41.7%. In addition, Brazil continues to have a bumper harvest, reaching a record high, and Australian production is at a historical high, leading to a significant increase in global cotton supply for the new season, becoming a major factor in the market's long-term bearish outlook on cotton prices.
In the international market, as of May 31, the settlement price of the main contract of New York cotton futures was 76.15 cents/lb, a 51% drop from the previous high of 155.95 cents/lb on May 4, 2022. In the domestic futures market, the settlement price of the main contract of Zhengzhou cotton futures was 15,270 yuan/ton, a 33% drop from the previous high of 22,960 yuan/ton on October 18, 2021.
"The US weather conditions are one of the few remaining variables." Wei Gangmin, chairman of Henan Tongzhou Cotton Industry Co., Ltd., said at the conference forum that the expectation of a bumper harvest in the United States in the new season is strong, but the futures market has fully priced in the possibility of a significant increase in US cotton production, so the future price trend needs to closely monitor the important variables of weather in Texas and southeastern hurricanes.
On the sales side, weak global cotton demand has lasted for more than three years. "Domestic cotton consumption in the past three years has still not recovered to more than 8 million tons. Yarn production in 2023 has decreased by 40% compared to the previous high point in 2016." Wang Jianhong, executive vice president and secretary-general of the China Cotton Association, said that against the backdrop of shrinking global demand and weakening expectations, the sustainability of growth in domestic textile and garment consumption is insufficient, and both domestic demand and exports face considerable pressure.
In addition, according to data from the National Cotton Market Monitoring System, as of May 16, the national raw cotton sales rate for the 2023/2024 season was 74.7%, down 11.2 percentage points year-on-year. The total cumulative sales of raw cotton are estimated to be 4.412 million tons, a decrease of 1.36 million tons year-on-year, and a decrease of 362,000 tons compared to the average of the past four years. The sales progress remains generally slow.
"If there are no weather problems in the new season's cotton planting and there is no significant improvement in downstream consumption as time goes on, the cotton market will face a new round of spot selling pressure." said a person in charge of a cotton import and export company in Huai'an, Jiangsu Province.
Cotton-related enterprises should make full use of financial tools to hedge risks.
Faced with a new round of oversupply crisis in global cotton, the demand for risk management among domestic cotton-related enterprises is also very urgent. In this regard, Xu Xiaoyuan, deputy secretary-general of the China Cotton Textile Industry Association, reminded that under the double pressure of raw material supply-side shocks and insufficient effective end-user demand, the operation of the cotton textile industry is under significant pressure, and the difficulty of enterprise profitability continues to increase, and the profit margins of leading listed companies are also shrinking. In this regard, enterprises should strengthen market judgment and make full use of financial tools to hedge risks.
Faced with fluctuating markets and fierce competition, cotton futures have become a good helper for ginneries and traders to enter the market. Chen Minghong, deputy general manager of China National Textile Import & Export Corporation, said, "After calculating all costs, we will sell futures contracts at the ideal price according to profit expectations, which is equivalent to pre-selling and locking in profits, ensuring the expected profit level while guaranteeing processing costs, and achieving stable income."
Ma Wensheng, chairman of Xinhua Futures Co., Ltd., said that in the past 20 years, China's cotton futures market has gradually improved, its functions have become increasingly apparent, and its liquidity has continued to strengthen. Futures prices have gradually become an important pricing reference for spot transactions. For textile factories, enterprises can use futures companies to purchase at appropriate price points in the cotton futures market, or adopt the form of rights-attached trade, which can alleviate the impact of price fluctuations on industrial enterprises' operations, and problems such as insufficient enterprise funds. This model has changed the traditional bargaining method and brought great convenience to industrial entities.
Data shows that the highest holding volume of domestic cotton futures has exceeded 1 million lots (5 million tons), reaching a level comparable to mature markets such as the US Intercontinental Exchange (ICE) market. Currently, about 80% of domestic cotton trade uses the cotton futures price as the pricing benchmark. More than 1,200 cotton textile enterprises use futures for hedging. From 2004 to 2023, a cumulative of 214,600 registered warehouse receipts have been issued, exceeding 8 million tons.
Regarding the future development of cotton futures, a relevant person in charge of Zhengzhou Commodity Exchange said that it will continue to optimize the rules and regulations of cotton futures to better meet the needs of industrial customers. Previously, Zhengzhou Commodity Exchange has notified that from the new cotton season (September 1, 2024), after Xinjiang warehouses' cotton enters the warehouse and a public inspection certificate is generated, the owner of the goods can submit a cotton inspection report to the warehouse during the validity period of the public inspection certificate and within the current cotton season. At the same time, the cotton yarn futures have also further expanded the range of deliverable goods.
