China’s cotton futures and cash price mechanism has basically taken shape
Recently, at the “2021 China International Cotton Conference” jointly sponsored by the China Cotton Association and the National Cotton Trading Market, the Deputy Director of the Agricultural Materials and Cotton and Linen Bureau of the All-China Federation of Supply and Marketing Cooperatives and the Vice Chairman of the China Cotton Association President and Secretary-General Wang Jianhong said that in recent years, new technologies have driven the domestic textile consumption market to undergo disruptive changes, and consumers have achieved “all-weather shopping, omni-channel shopping, and personalized shopping.” In 2020, online sales of clothing exceeded offline sales for the first time. Retail sales of clothing consumer goods by enterprises above designated size reached more than 800 billion yuan, an increase of 10.6 times compared with 2001. The financial attributes of China’s cotton have been strengthened, and a price mechanism that integrates internal and external linkages and combines futures and cash has been basically formed.
Cotton’s financial attributes are enhanced
Since China joined the WTO, China’s cotton industry has undergone great changes. The main cotton producing areas are concentrated in Xinjiang, and Xinjiang’s planting area accounts for 78.9% of the country’s total. This year’s total domestic cotton output is stable, with regional distribution concentrated in Xinjiang, and the cotton planting area in the mainland continues to decline sharply. According to statistics from the China Cotton Association, the country’s total output was 5.924 million tons, a year-on-year increase of 0.3%; of which, Xinjiang’s cotton output was 5.244 million tons, a year-on-year increase of 4.1%, accounting for 88% of the total output; the mainland’s output was approximately 644,000 tons, a year-on-year decrease of 22% %.
Over the past 20 years, China has become the world’s largest textile and apparel industry center and supply chain hub, and has a huge consumer market. In 2020, my country’s yarn output was 26.183 million tons and cloth output was 46.03 billion meters, an increase of 244.2% and 58.7% respectively compared with 2001. At present, my country’s textile and clothing exports account for 34% of the world’s total. In 2020, China’s textile and clothing foreign trade totaled US$319.88 billion, an increase of 3.75 times compared with 2001. In the past 15 years, except for 2019, annual cotton consumption has basically remained at 8-10 million tons, ranking first in the world. According to customs statistics, in the first eight months of 2020, my country imported a total of 2.171 million tons of cotton, a year-on-year increase of 88%. Judging from the source countries of my country’s cotton imports in the first eight months of 2020/21, the United States accounted for 45%, Brazil 28%, and India 15%.
In terms of cotton market regulation, the National Development and Reform Commission issued the “Notice on the Action Plan for Deepening the Reform of the Price Mechanism during the “14th Five-Year Plan” Period. It is proposed in the document that we should improve the cotton target price policy, improve the risk sharing mechanism, reasonably adjust the cotton target price level, and continue to explore new sustainable cotton policies. From the perspective of cotton reserve policy, while maintaining the normalization and institutionalization of the policy, the mechanism setting is more in line with market rules. In terms of quota management policies for imported cotton, the amount issued is generally loose. On the basis of the 894,000 tons of tariff quotas, an additional 700,000 tons of cotton import sliding tax quotas will be issued in due course, all of which are non-state trade quotas. The sliding tax rate was lowered at the end of December 2020, which reduced the cost of cotton for textile companies. As of June 16, the annual average price of the China Cotton Price Index (3128B) was 14,968 yuan/ton, a year-on-year increase of 19.2%; the annual average price of the main contract of Zheng Cotton Futures was 14,895 yuan/ton, a year-on-year increase of 19.6%. At present, domestic cotton supply and demand are basically balanced, and market prices are relatively stable. The amplitude of international cotton prices is relatively large, and the price difference between domestic and foreign cotton prices continues to fluctuate. Since September 2020, the maximum price difference between domestic and foreign cotton is 2,311 yuan/ton, the minimum price difference is 378 yuan/ton, and the average price difference is 1,306 yuan/ton. In recent years, the financial attributes of cotton have been enhanced, and a price system that integrates internal and external linkages and combines futures and cash has basically been formed. This year’s cotton situation shows a trend of stable policies, stable production, rebounding demand, increased imports, relatively stable cotton prices, and basically balanced supply and demand.
Futures prices become the “anchor” for spot trading
In the process of increasing concentration in the cotton industry in the past decade, companies that can effectively utilize futures and other financial derivatives tools have obvious competitive advantages.
It is understood that more than 90% of current cotton spot trade is basis trading. Basis trading allows companies to have trading opportunities in both rising and falling markets, and also reduces cotton costs for textile companies. In the changes in the industry, Zhengzhou cotton futures’ functions of hedging risks, forward stock purchasing and forward sales, and price discovery have played a key role. Now the implementation of basis trade has allowed the industry to form a trading model in which cotton purchases and sales are based on futures, and cotton yarn purchases and sales are based on futures, which is more efficient and price transmission is smoother. At the same time, the price discovery function of futures helps the cotton industry chain adjust production and demand, making the development of the industry chain more benign. The hedging function of futures provides companies with a platform to hedge risks. Especially in the process of the country’s implementation of the cotton target price reform in 2014, cotton futures increased cotton sales channels for cotton processing companies and provided an important reference for the government’s sales price collection.
Since the launch of cotton futures in 2004, the number of warehouse receipts and transaction scale have doubled several times, and the use of futures tools by enterprises has also gone through several stages. Wei Gangmin, chairman of Henan Tongzhou Cotton Industry Co., Ltd., said that at first, they believed that the futures market was the same as the spot market, betting on the market. In the second stage, futures are treated more as a purchasing and sales channel. The third stage���They began to consider using the futures market for risk management and to maintain the value of the company’s inventory. After 2016, basis trading gradually became popular, and companies began to study how to use futures to promote new trading models, promote procurement and sales, and increase the company’s market share. The core of the current research is the law of futures price fluctuations. Based on this, the futures market can be rationally utilized based on the company’s situation. At the same time, cotton futures will be used to drive the transformation and upgrading of small, medium and micro enterprises. On the one hand, they communicate their views on market conditions through corporate public accounts, regular meetings, etc. On the other hand, we will improve the varieties of cotton supply and conduct hedging through cotton futures, and transfer the hedging profits to small, medium and micro enterprises. We also work with client companies to study new transaction models and strive to stabilize the procurement costs of client companies.
Wang Jianhong said that the annual cotton consumption in recent years should be stable at 8-9 million tons, and the annual cotton output should be stable at 5.5-6.5 million tons. The development of the cotton industry is guided by highquality. At the same time, it is necessary to establish the brand image of Chinese cotton and realize the sustainable development of Chinese cotton.
AAA
Disclaimer:
Disclaimer: Some of the texts, pictures, audios, and videos of some articles published on this site are from the Internet and do not represent the views of this site. The copyrights belong to the original authors. If you find that the information reproduced on this website infringes upon your rights and interests, please contact us and we will change or delete it as soon as possible.
AA
