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Global inventory increase negative, cotton price upward resistance increased

On August 12, the expected USDA supply and demand forecast was released. According to the market survey, analysts generally expect that the US cotton production will decrease, the export volume will increase, and the global inventory will increase. The US cotton production is expected to be 17.2 million bales, about 300000 bales less than last month's estimate. Therefore, the US cotton final inventory should be reduced to 6.3 million bales, lower than the 6.8 million bales estimated last month. At the same time, affected by the epidemic situation, the global ending inventory is expected to increase by 530000 bags.

Unexpected is that last night's USDA supply and demand forecast and market expectations are far from each other, forming a huge negative for the cotton market. Cotton production in the United States did not decrease, but increased to 18.08 million bales. As the abandonment rate of the United States increased from 16% to 24%, the cotton yield per unit area in the United States increased by 14% compared with that of last year, and the reduction in yield caused by hurricane in Texas of the United States is not worth mentioning. Due to the large increase in production, the U.S. final inventory increased from 6.8 million bales to 7.6 million bales. At the same time, global consumption decreased by 1.24 million bales, and ending inventory increased to 104.91 million bales, which exceeded market expectations.

At the same time, the inventory outside China remained relatively stable. With the decline of global reserve stocks, cotton prices began to maintain a relatively strong trend, making cotton production outside China stable. However, China's import demand decreased from 2014 / 15 to 2018 / 19, and the international cotton price fell, which also inhibited the increase of inventory outside China. In the past two years, China's reserve cotton inventory has remained stable after a sharp decline.

It is worth noting that India's MSP price rise in 2019 / 20 stimulated the country's cotton production, forcing CCI to purchase a large number, resulting in a sharp increase in India's cotton inventory. At the same time, Brazil also has three consecutive years of cotton harvest.

The U.S. Department of agriculture's Agricultural Outlook Forum in February this year predicted that global consumption will increase and inventory will decline in 2020 / 21, but the outbreak of the new crown epidemic will lead to a significant decrease in global consumption. At present, USDA estimates that the consumption in 2019 / 20 and 2020 / 21 will be reduced by 25 million bales, and the consumption in 2020 / 21 will be reduced by 15% compared with February, while the global production and February will remain basically unchanged. The outbreak of the epidemic is relatively late, and the planting intention of most cotton producing countries has not been changed. Therefore, the global inventory consumption ratio has risen to 90% again.

On August 12, after the release of USDA supply and demand data, ice futures fell sharply, and the December contract showed the rebound rate of the previous two trading days. Ed Jernigan, chief executive officer of cotton supply chain management, said US cotton is now much more expensive than Brazilian cotton, and countries are buying cheaper cotton, which has also pushed up US cotton stocks. As for the evaluation of the first phase agreement between China and the United States on Friday, although it is generally believed that China will continue to implement the agreement, he believes that the focus of the negotiation is soybean and corn, because China has already purchased a large amount of cotton, and in order to fulfill the agreement, it only needs to buy more later. Overall, the market is cautious about this. It is understood that the meeting will last from Friday to the weekend.

For this week's US cotton export weekly report, the market continues to expect China to continue to sign a large number of contracts, but what is more important is whether a large number of undelivered cotton last year is carried forward to this year or cancelled in large quantities.

In the long run, China and India's cotton policies have largely avoided the negative impact of price fluctuations on cotton planting intention, and global cotton production has been guaranteed. In recent months, the sharp decline in cotton demand is not due to the price, but the result of the epidemic situation, so the impact of simple low price on cotton demand is very limited. The final consumption demand must recover from the epidemic situation in order to make the global inventory fall back to the normal level.