CZCE: Market changes with new policy

CNCotton: What is the biggest uncertainty in the new season? What profound impact will the new policy bring on domestic cotton market?

CZCE: 2014 is the first year of policy shift from reserve stockpiling to target-price subsidy as well as a return to market based price. There will not be market risk for cotton growers and market risk will be passed on to cotton processing and segments afterward. For cotton ginners and marketing units, the market environment will see a major change with increased risk and uncertainties. This has made cotton futures even more important. For cotton spinning mills, the new policy will help reduce production cost and restore their competitiveness in the world market, which benefit the development of textile industry.

Generally speaking, the details of target-price policy is not only a signal of a return to market-based price, it also pave the way for the marketization of the entire agricultural commodities, and therefore exert profound impact on the development of China’s market economy.

CNCotton: What impact will the new policy have on futures market?

CZCE: As the barometer of cotton market, ZCE cotton futures responded to the policy change as early as the beginning of 2014. When the new policy is announced half a year ago, cotton futures saw the following changes: 1. new accounts (cotton-related enterprises) increased 33% from a year ago during January-August period, which means the industry is actively participating in futures trading and have since then become shown a much improved awareness of risk management. 2. Trading volume, value and open interest increased. Through August, the year-to-date trading volume, amount and open interest for CF1501 rose 421%, 289% and 276% respectively from CF1401, which indicates a resumed function of futures market. 3. Much greater price volatility. The trading range of CF1501 expanded 122% from a year ago. As policy change reaches cotton market rapidly, futures price are reflecting the real supply/demand scenario in a much better way. 4. the spread between ICE and ZCE narrowed substantially from a high of 6000 yuan to 2500 at present, which means a strengthening correlation between the two markets.

Overall, the market has accepted the new policy and expects the supply/demand pattern to reflect the real market price. At present, the trading of ZCE cotton futures is getting more active and is running steadily with a good demonstration of its functions.

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