Zheng Cotton and American Cotton Convergence Strengthen Year-end Quotes Analysis

The ratio of the first quarter is well known, and the price correlation coefficient between Zhengzhou cotton and U.S. cotton reaches 0.956, indicating a strong trend of convergence between the two markets. This can be observed through their price movements. By analyzing the ratio of the two, we can compare the trends in cotton prices from previous years. From January to April 2007, the ratio of Zhengzhou cotton to U.S. cotton fluctuated between 250 and 270. In 2008, the same period saw the ratio range from 170 to 210. In 2009, it moved between 230 and 290, while in 2010, it stayed within 190 to 230. From these statistics, we can see that the ratio was relatively high between 2007 and 2009 but declined in 2008 and 2010, showing a pattern of rise, fall, rise, and then decline. On one hand, this suggests that domestic cotton prices may have risen faster than international ones, but on the other hand, exchange rate fluctuations must also be considered. In 2007, the RMB exchange rate was around 7.6, but it began to appreciate after late 2008, reaching about 6.58 today. Therefore, the ratio between Zhengzhou and U.S. cotton has generally remained in a balanced fluctuation range over the years. The time when significant changes in the ratio occur is typically around April, which is also the planting season for new cotton. The foreign market usually sees its year-end peak in late December, around Christmas, while the Chinese New Year falls around February. During the Chinese holiday, the foreign market continues to operate normally, creating potential risks. We will now analyze the returns and volatility of U.S. cotton in the period before the year. First, looking at U.S. cotton returns and volatility in 2006: Around December 26, prices gradually declined, with earnings falling from +7% to -6% by early January 2007. During this period, volatility remained stable, fluctuating around 2%. By March, earnings reached a high of 3%, then started to decline again. Comparing with domestic cotton, returns were below the zero axis from January to February, then rose sharply in mid-February to mid-March, with volatility remaining around 1% in January and February, and increasing slightly from March onward. Next, examining domestic cotton returns and volatility in 2007: Around December 26, earnings were slightly positive, ranging between -0.1% and 0.1%. From early December to late January, earnings increased steadily, with volatility stabilizing and then rising. Mid-to-late February saw higher gains and volatility, reaching 15% in April and 27% in early March. Domestic cotton could be divided into two stages during January to March. From January to February, earnings declined, but from February to March, they rebounded quickly, reaching -2.7% on February 1 and 10.7% on March 5. Fluctuations were between 1% and 2% from January to February, then increased significantly after March, peaking at 5% in April. Looking at 2008, both domestic and foreign cotton showed similar patterns. From December 26 onwards, earnings initially narrowed and then expanded. At the end of December, earnings reached 17%, but as the financial crisis took hold, they dropped to -18.9% on March 5. Volatility ranged between 4% and 7% from December to March. Domestic cotton earnings declined from January to March, hitting -3% on March 6, then rising to 10.1% on April 9. Most volatility remained between 1% and 3%. In 2009, U.S. cotton earnings fell from the start of December to the beginning of February, reaching -10.3% on February 1, then jumping to 18.9% by March. Volatility was between 2% and 4% before February 9, then rose to 9.7% on March 3. Domestic cotton showed a downward trend before February 1, reaching -8.8% on that day, then rebounded to 7.4% by March 9. Volatility gradually increased, reaching 5% on March 4, then rapidly decreased to 1.2% on March 22, fluctuating between 1% and 2.5% afterward. In 2010, U.S. cotton started with a 20-day increase in earnings, followed by a decline. Volatility ranged between 8% and 16%. Domestic cotton also experienced more severe fluctuations than previous years. However, based on historical patterns, returns and volatility are usually moderate in the month following the holiday, with increases becoming more pronounced afterward. This is due to the new cotton season, with predictions about planting areas and government policies increasing market uncertainty and investor concerns. Regarding the second quarter, the volume and positions of domestic and foreign cotton reflected in January to April showed an upward trend, with trading volumes remaining high. Before 2010, domestic cotton had fewer positions, and speculative activity was limited. Therefore, trading volumes were not large. However, in January to April 2010, both volume and positions were high, and after April, they would show significant fluctuations, consistent with our earlier analysis. Section III – Summary: From the above analysis, it's clear that January to April is a critical period. Longitudinal comparisons show that earnings and volatility during this four-month period are less volatile than in other months. From a horizontal perspective, profits in January to February narrowed, while those in late March increased gradually, accompanied by rising volatility. As market speculation in cotton grows, returns and volatility are expected to rise further after 2010. Considering the time difference between domestic and foreign markets, if conditions align, internal and external arbitrage can be a viable strategy.