Source: ccfgroup.com

July 29, 2021

In July, Zhengzhou cotton futures market goes firmer after the state cotton reserves sales policy is settled, and the futures hit a new high since 2018 on Jul 27. The cotton futures only have a short-time fall on Jul 19-20 amid the worries over the global epidemic.

The strong rise in July is mainly attributed to the expectations over the high new seed cotton prices and coming traditional buoyant season, and there is no big bearish news from the macro economy. Besides, the Central Bank of China said on Jul 9 to cut the reserve requirement ratio (RRR) by 50 basis points for all banks, effective from July 15, which brought certain positive mood to the market. By Jul 27, Chinese cotton 3128 price rose by 1,455yuan/mt from Jun 30 and ZCE cotton futures rose by 1,420yuan/mt, up 8.8%. 

 

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In 2021/22 season, cotton planting areas in Xinjiang are expected to reduce slightly due to the policies, returning farmland to forests and food safety. In mid-Apr to mid-May, the bad weather in Xinjiang impacted the new cotton crop growing somewhat. In addition, cotton planting costs increase this year due to higher rent, fertilizer and water prices and the ginning capacity in Xinjiang continues to rise.

Therefore, market players expect a higher seed cotton prices in 2021/22 season. In late May, there were rumors that a few ginners booked the seed cotton prices at 7.5-8yuan/kg, and currently, market players mainly expect that the new seed cotton prices may reach 7.5-8.5yuan/kg. Viewed from the prices last year, the purchasing prices of machine-picked seed cotton with ginning yield of 40% were highly at 7yuan/kg in Xinjiang, and the average prices were at around 6.2yuan/kg in 2020/21, and cotton seed prices at 2.35yuan/kg.

In recent years, ginning capacity has risen fast, especially in 2020. To avoid the disorderly expansion of the ginning capacity, the Xinjiang Production and Construction Corps has issued an announcement to strengthen the approval and management of new cotton processing plants. The newly-added ginning capacity this year is mainly from the delayed construction last year affected by the epidemic. Therefore, new capacity reduces somewhat compared with last year. However, ginners may have higher enthusiasm to procure seed cotton this year as they have gained good profits last year. 

 

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In addition to the expectations over high new seed cotton prices, market players also have certain expectations over the coming traditional buoyant season, and reflect on the cotton futures market. Currently, cotton yarn inventory remains low, and is hard to accumulate as downstream traders and some end-users replenish stocks in advance. So, in late Jul, ZCE cotton yarn futures market faces the short squeeze and stimulates the cotton futures. 

 

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In short, Chinese cotton prices may continue to be easy to rise but hard to decline amid the good fundamental. But in fact, downstream grey fabric prices are hard to rise, and downstream plants are hard to accept a higher cotton yarn prices. Therefore, after cotton prices rise to a certain high level, be cautious about the coming buoyant season and the actual situation of competition for the new seed cotton prices. (Source: ccfgroup.com)