2022 China state cotton reserves settled, no surprise to the market

On the night of Jul 8, 2022, China announced to organize the first batch of cotton reserves in 2022. ICE cotton futures market climbed up, but then fell down, and ZCE overnight cotton futures also rose first and then slipped. The news about the state cotton reserves gave no big support to cotton market, mainly due to the reserving price. The bidding process will be subjected to a maximum price, which will be settled by the Chinese spot cotton price in prior working day, and If the Chinese spot cotton price is higher than 18,600yuan/mt in the prior working day, the reserves will be suspended. The reserving price is easy to go downward gradually. The changes of cotton reserves in recent years are analyzed below.

1. The changes of reserving price: after the significant fall of cotton prices in 2011, reserving prices were fixed in 2011-2013, at 19,800yuan/mt, 20,400yuan/mt and 20,400yuan/mt respectively, which gave strong support to cotton market. In 2019 and 2020, the bidding process was subjected to a maximum price, but the maximum price was (CCindex 3128B+CNcottonB 3128)/2*(1+2%), slightly higher than market prices, and the price was adjusted every week. When cotton prices declined within the week, the reserving prices would use the higher prices in the previous week, so the support to cotton prices was still larger than this time. In 2020, no reserves were seen as the price spread between Chinese and international cotton failed to be within 800yuan/mt. In 2022, the maximum price of reserves is (CCindex 3128B+CNcottonB 3128)/2, without the coefficient of (1+2%) in 2019, and the price is adjusted on daily basis, and If the Chinese spot cotton price is higher than 18,600yuan/mt in the prior working day, the reserves will be suspended. The reserving price is easy to go downward gradually, and the support to cotton market is lower than market anticipation.

The state cotton reserves will start from July 13, 2022, and the daily ceiling price of reserves is not confirmed currently. Looking from the Chinese spot cotton price index last week, the ceiling price has no big difference from market price. Besides, the ceiling price is the delivered price, and the warehouses of China Reserve Cotton Management Co., Ltd. are basically in inland warehouse, so the reserving price has no obvious advantages. Therefore, the reserving price in 2022 is much closer to the spot market, giving no big support to cotton prices, only adding a method of spot cotton circulation. The reserves will depend on whether ginners can accept the price level.

2. Changes of reserved cotton quality: the requirement on color index relaxes somewhat in 2022 with the coming new season, to be grade-4 white cotton and above and light spotted grade-1 cotton, while the proportion of cotton with Micronaire B-grade and above is no less than 80%.

3. Reserving volumes: currently, the reserved cotton is the first batch, and there is no confirmed news whether there will be further reserves. The quantity is 300-500kt this time, but there is more than 2.00 million tons of 2021/22 Xinjiang cotton to be sold. However, the cotton reserve policy can absorb certain quantity of Xinjiang cotton that is under the impact of Xinjiang cotton ban. Meanwhile, there is rumor that reserved imported cotton will be sold later. Pay attention to the news about the state cotton reserves sales policy.

In general, the reserving price is much closer to the market price this time, and the reserves policy may not reduce the losses of Xinjiang ginners and solve the large quantity of Xinjiang cotton inventory, but may add a new way for Xinjiang cotton to be digested under the impact of Xinjiang cotton ban. Of course, the calculation method is easy to make the price go downward gradually, and the support to cotton market is lower than market anticipation.