Recently, the domestic cotton price rose strongly driven by the supply side. The main 2309 contract once stood at the integer level of 16000 yuan/ton, and the difference between domestic and foreign cotton prices also turned from negative to positive.
In macro terms, the Federal Reserve announced at its interest rate meeting in May that it would raise the target range of the federal funds interest rate by 25 basis points to 5% - 5.25%, that is, another 25 basis points increase in interest rates, in line with market expectations. It is noteworthy that the relevant wording of "suitable for further interest rate increase" was deleted at this meeting, suggesting that the Federal Reserve may suspend interest rate increase. With the shift of the Federal Reserve's tightening monetary policy, market liquidity will be improved, the dollar index is expected to peak and fall, and the overall suppression of bulk commodities will gradually weaken.
In terms of industrial policies, the target price policy for cotton was implemented as scheduled, the policy framework remained unchanged, and the support remained stable. However, the newly added measure of "subsidy with fixed output of 5.1 million tons" attracted market attention. From the data of the past few years, the domestic cotton output basically exceeded the subsidy of 5.1 million tons. Therefore, the subsidy of only 5.1 million tons in 2023-2025 may greatly reduce the enthusiasm of cotton farmers and reduce the supply of cotton in the new year.
On the supply side, the latest survey results of the China Cotton Association show that in 2023, the intended cotton planting area nationwide will be 41.5575 million mu, a year-on-year decrease of 7.4%, 3.7 percentage points more than the previous period. Among them, the area of interest in Xinjiang decreased by 4.3% year on year, 3.8 percentage points more than the previous period. The decrease of planting area was larger than expected, which strengthened the expectation of domestic production reduction in 2023/2024. Since April, low temperature, rain and snow have occurred in Xinjiang, which has had a negative impact on cotton sowing and seedling emergence. The progress is slower than that of the same period last year, which further aggravates the market's concern about the big drop in output in the new year, and also provides a boost for the speculation of yield reduction.
On the demand side, since 2023, domestic clothing consumption has continued to recover. From January to March, domestic clothing retail sales data improved significantly. At the same time, under the influence of China's steady foreign trade policy, China's textile and clothing exports rebounded in March, and the export volume exceeded that of February and the same period last year. At present, the start-up rate of domestic downstream textile enterprises is still high, and there is no obvious accumulation of finished product inventory. The overall performance is fair, and the negative feedback from the demand side is not obvious. However, with the arrival of the industry off-season, the demand is expected to weaken, which may form a certain pressure on cotton prices in the short term, but the logic of sustained recovery of domestic demand in the medium and long term remains unchanged.
To sum up, under the dual effects of the decline in the intended planting area and the cold weather at the sowing date, the probability of cotton yield reduction in the new year in China has greatly increased. On the whole, the core driving factors for the decline of domestic cotton production and the repair of domestic demand have not changed this year, and the center of gravity of cotton prices is expected to continue to move upward in the medium and long term.