Cotton futures were listed on the Zhengzhou Commodity Exchange on June 1, 2004. After 20 years of continuous development, cotton futures have not only become one of the representative varieties of the Zhengzhou Commodity Exchange, but have also achieved enormous influence globally.
Louis Dreyfus former chairman, Chen Tao, witnessed the growth of cotton futures from nothing to something, from small to large. "Although it has only been 20 years, it is a young variety among international bulk commodities. But we can proudly say that we have succeeded. It is not only attracting attention within the Chinese industry, but also receiving affirmation, recognition, and even participation from international parties."
Since its listing, the correlation between cotton futures and spot prices has reached 0.95. In the market-wide and variety-wide functional assessment organized by the China Securities Regulatory Commission, this variety has achieved Class A for five consecutive years.
For China, which has the world's largest consumer market and the second-largest production capacity, having futures prices that reflect its own market changes and price expectations is crucial.
Toward Price Autonomy
The development history of Zhengzhou cotton futures is also the history of the continuous improvement of China's cotton pricing system.
Before 1999, cotton, as an important strategic material, was subject to unified purchase and distribution in China; in 2001, cotton circulation system reform was implemented, and in December of the same year, China joined the World Trade Organization (WTO).
With the gradual establishment of a market-oriented pricing mechanism, the cotton spot market entered a new stage of development, and cotton price fluctuations began to increase. Against this backdrop, cotton futures emerged, opening the curtain for the coordinated development of China's cotton futures and spot markets.
"I have a special affection for cotton futures. When cotton futures were first listed from 2004 to 2008, the holding volume and trading volume were not large." Ma Wensheng, chairman of New Lake Futures, said. In May 2005, the Zhengzhou Commodity Exchange began publishing monthly market reports. That month, the open interest and trading volume of "No. 1 cotton" were 95,000 lots and 1.795 million lots, respectively.
When the above monthly market report was released in April of this year, the end-of-month open interest of cotton futures had increased to 655,000 lots, and the trading volume had increased to 8.22 million lots.
In the 2011 price surge, which left a deep impression on many market participants, the trading volume of cotton futures reached 139 million lots for the whole year, ranking second in global commodity futures trading volume for that period.
The increase in trading and open interest data shows the continuous expansion of the cotton futures market scale over the past 20 years, but the evaluation standards for futures varieties are clearly more than that; at least it requires the participation of a wide range of industrial investors.
"To date, 95% of large and medium-sized cotton ginning and trading companies participate in cotton futures trading." A Zhengzhou Commodity Exchange official recently stated.
Relevant data shows that the number of industrial clients of cotton futures has reached more than 1,400, and more than 90% of cotton processing enterprises in Xinjiang, the main producing area, participate in the futures market directly or indirectly. The proportion of holdings by industrial investors has remained above 60% for many years.
Thanks to its deep industrial participation, the correlation coefficient between cotton futures and major spot price indices (CNcottonB and CCIndex) has been above 0.95 since its listing, and it has become a "barometer" reflecting the industry's supply and demand situation.
It is reported that government departments such as the National Development and Reform Commission and the Ministry of Agriculture and Rural Affairs have used the operating situation of cotton futures prices as one of the bases for predicting the effectiveness of industrial regulation and attach great importance to changes in cotton futures prices, regularly organizing relevant industry experts for discussions.
"Before 2009, China's cotton (prices) certainly looked to the United States, but now China's prices are more valuable for reference. Because we know best about changes in inventory and consumption, the price is not transmitted from the United States, but a price discovered domestically." Ma Wensheng said that although the current operating trend of domestic cotton futures is similar to that of US cotton, the detailed prices fully reflect the domestic fundamentals.
Today, the Zhengzhou Commodity Exchange has gradually formed a cotton textile industry derivatives system with cotton futures as the core, along with cotton options, cotton yarn futures, and an over-the-counter market.
Serving the Industry, Continuously Evolving
Price discovery is fundamental, but the goal of introducing futures is for risk management, providing hedging tools for industry participants including cotton farmers, ginning mills, traders, and textile mills.
Taking ginning mills that receive cotton from farmers and traders as an example, market prices fluctuate constantly during the process of farmers selling seed cotton and processing it into lint cotton, and losses may occur if the selling price is lower than the cost.
With the help of cotton futures, after calculating all costs, ginning mills can sell for hedging based on their profit expectations when the futures price reaches the ideal level, locking in profits through "pre-sales" in the futures market and achieving stable income.
Henan Tongzhou Cotton Industry Co., Ltd., with annual operations exceeding 450,000 tons of cotton and cotton yarn and annual sales revenue exceeding 8 billion yuan, is one of the leading large-scale cotton-related enterprises in China. However, during the most difficult period, Tongzhou Cotton shareholders withdrew one after another, and only one small shareholder remained. "Being able to survive and reach where we are today, I feel it's because of the cotton futures variety on the Zhengzhou Commodity Exchange. Without it, my company might have disappeared long ago." Wei Gangmin, chairman of Tongzhou Cotton, said.
For example, in May 2017, Tongzhou Cotton used hedging to sell 5,000 tons of cotton at a price of 16,000 yuan/ton in the CF1709 contract, and gradually closed its positions at 15,400 yuan/ton and 15,100 yuan/ton in June of that year. After deducting the establishment cost, the profit was 700 yuan/ton, making up for the company's loss of 3.5 million yuan in spot trading.
It should be pointed out that with the continuous deepening of the integration of cotton futures and spot markets, the industry ecosystem has also undergone tremendous changes.
Taking Xinjiang, the main producing area, as an example, the simple cotton spot price has disappeared, and the basis trading model has replaced the traditional "one-price" trading model, becoming the mainstream in the cotton trading market.
Peng Lihu, director of the futures department of Xinjiang Guanong Co., Ltd., also said that the industry now basically uses the futures price as a pricing anchor point, plus the basis for pricing and sales. Futures play a very positive role not only in the production and operation of enterprises, but also in the pricing process.
For the exchange, it also needs to make adjustments in the combination of futures and spot markets that are closer to the industry. In September 2017, the Zhengzhou Commodity Exchange adjusted the cotton benchmark delivery location from inland areas to Xinjiang, promoting the faster transfer of the cotton industry to Xinjiang. "Serving the high-quality development of the cotton industry is our core goal." A Zhengzhou Commodity Exchange official said.
He introduced that Zhengzhou Commodity Exchange has set up 12 delivery warehouses in Xinjiang, which is in line with the trend of the cotton industry accelerating its transfer to Xinjiang. Roughly estimated, 700,000 tons of cotton are hedged and sold through the futures market every year, mainly in the form of registered warehouse receipts.
“Previously, cotton that had completed inspection at Xinjiang delivery warehouses for a month could not be registered for warehouse receipts. We listened to the industry's voice and cancelled this restriction. Starting September 1, 2024, all Xinjiang cotton that has been re-licensed can be registered for warehouse receipts this year,” said the person in charge.
In the future, Zhengzhou Commodity Exchange will continue to respond to industry calls and adapt to market changes, continuously optimizing the rules and regulations system for cotton, and further enhancing the ability of cotton futures to serve the real economy.
