Zheng Cotton'S "Epidemic Bottom" Is Not Far Away.

The global spread of the new crown pneumonia epidemic has severely damaged the textile and garment industry, and the collapse of consumption is a direct result of the price of Zheng cotton, which has hit a historical low. Does the current cotton price reflect the negative impact of consumption? Does the cotton price at historical lows have the bottom value?

Consumption has shrunk to the limit.

At present, there is a difference between the new crown and the epidemic. China has controlled the epidemic and overseas is growing. In order to cope with the epidemic, countries have entered the isolation state, and cotton textile consumption is facing a revaluation. From the domestic market, from 1 to February, China's textile and apparel exports were 29 billion 840 million US dollars, down 19.96% compared to the same period last year, and the retail sales volume of clothing was 110 billion 300 million yuan, down 33.20% from the same period last year. Domestic demand will gradually resume in the future, but exports will continue downward. Based on the above data, the author will cut domestic cotton consumption in 2019/2020 from 1 million 100 thousand tons to 7 million 100 thousand tons. From December 2, 2019 to March 27, 2020, the total number of state-owned cotton stores reached 357 thousand tons, which had a partial impact on consumption. The worst period of cotton sales seems to have passed, and sales progress has begun to climb slowly. According to the national cotton market monitoring system data, as of March 27th, the national cotton sales progress was 57.7%, an increase of 0.5 percentage points over the same period last year.

The downstream spinning mill's finished product inventory is heading upward, and the immediate spinning profit is higher, which still stimulates the replenishment of raw materials. However, under the impact of the collapse of external demand, the high spinning profit is bound to be unsustainable. In the downstream weaving mill, the inventory of finished products is turning upwards, and raw materials replenishment is very cautious. When there is a reduction in foreign trade orders, the worst period of consumption in reality is yet to come.

Then, how should we adjust the consumption of the global market? A stress test can be done in the worst case. Assuming that all countries have an epidemic situation, based on the evolution rule of China's cotton textile market in the epidemic period, it is estimated that global cotton consumption will drop 3 million 510 thousand tons to 22 million 660 thousand tons in 2019/2020, and the end of the world cotton inventory will increase from 3 million 810 thousand tons to 21 million 270 thousand tons. This inventory level is slightly higher than that of 2015/2016, but it is lower than that of 2014/2015. In this period, the lowest price of the US cotton index is 54.44 cents / pound, and the current US cotton index is at a low price of 51.15 cents / pound. We can see through the analogy study that the current cotton price has completely reflected the expectation of consumer collapse. It can be said that after the double strike of Sino US trade frictions and the new crown pneumonia epidemic, the logic of the shrinking cotton consumption has been deducted to the extreme, and it will be very difficult to get worse in the future. At present, the absolute price of cotton has fallen to the lowest level since the listing, and the valuation of commodities is also the lowest since listing. For asset allocation, the margin of safety is very high.

Three major drivers of rebound

Looking ahead, counter cyclical regulation, easing trade friction between China and the United States and the new annual reduction are the three driving forces to drive the bottom up of cotton prices. To counter the impact of the epidemic, the world has stepped up its anti cyclical regulation, and the G20 announced a $5 trillion stimulus package. Take the Fed as an example, after the outbreak, the cumulative interest rate cut 150 basis points to 0 to 0.25%, and launched an unlimited amount of QE, the joint Treasury launched a $2 trillion stimulus plan. Commodities are denominated in currencies, and global money supply is bound to push up asset prices, which will stimulate cotton prices. At present, Sino US trade is at the first stage of the implementation of the agreement, and the major trend is phased easing. In March 8th, the United States was exempt from more than 100 medical device products in China. The epidemic is the enemy of all mankind. It may accelerate the process of easing trade friction between China and the United States, thereby boosting cotton consumption. At present, the US cotton export is still the best in the last five years. As of March 17th, the US cotton net sales signed a total of 3 million 560 thousand tons in 2019/2020 and completed 99.1% of the USDA estimate. The average cash plantation cost of US cotton is about 54 cents / pound, and the total planting cost is about 69 cents / pound. At present, cotton price has fallen below the cost of US cotton planting. At the same time, the price of corn and cotton is the highest in the past four years, and the cotton planting area will decrease in the next year. Prior to February, the USDA forum predicted that next year the US cotton planting area will be reduced by 9%. Prior to the desert locusts, 80% of cotton and 5% of India's cotton area have been attacked by Pakistan. The output of cotton in India and Pakistan accounts for about 30% of the world's total. The FAO is expected to have a more serious locust disaster in June. Under the background of the decline of planting area, the yield is threatened by locust plague. The next year's global cotton production is expected to be strengthened, which may stimulate the price rise in the future market.

To sum up, the global spread of the epidemic has led to the collapse of consumption expectations. China's cotton consumption has been lowered by 1 million 100 thousand tons and the global market has been reduced by 3 million 510 thousand tons. However, the current cotton price has completely reflected the negative impact, and the "epidemic bottom" is not far away from us. The expected deviation is mainly due to epidemic situation, Sino US trade friction, new year reduction, cotton policy and chemical fiber substitution. Based on the above conclusions, we can focus on three risk management strategies: first, negative profits in the present, more profits in the future, support for the reverse set; two, the textile mills can buy a small number of real options, and establish a low price virtual raw material inventory, layout the consumption recovery after the end of the epidemic; three, the ginning factory traders can strengthen spot sales, while Ping futures earn high base.