I. Zhengmian (China's cotton futures contract)

(1) Positive Factors

1) The price difference between the futures and spot market is still too large, providing support from below. The average acquisition cost for cotton ginning mills is around 25000, which is still significantly different from the current futures market price. As May approaches delivery, ginning mills are unwilling to suffer significant losses, and futures prices must converge towards spot prices.

2) Import profit inversion, market is optimistic about the narrowing of the price difference between domestic and international markets. Currently, the import profit of American cotton is negative, and market transactions have widened the price difference between domestic and international markets, leading to the entry of funds for international arbitrage.

3) Ginning mills have little debt repayment pressure and still have the willingness to support prices. Upstream ginning mills have temporarily passed the repayment period at the end of March, and the repayment pressure for some mills has temporarily eased, giving them the willingness to support prices.

4) Low downstream raw material inventory, rigid replenishment is still ongoing. Raw material inventories of yarn and fabric mills have fallen to the lowest level in the same period of history, and rigid demand replenishment is still ongoing after the Qingming Festival.

(2) Negative Factors

1) Weak economic performance, insufficient consumer momentum. The PMI fell below the boom-bust line in March, with both new orders and new export orders falling, indicating weak domestic and foreign demand and a serious drag on the economy by the epidemic.

2) Slow progress in new cotton sales, debt repayment pressure forces cotton mills to sell at a loss. By the end of March, the sales progress in Xinjiang was only 41.7%, 40 percentage points less than the same period last year. Ginning mills must accelerate sales progress in the future.

3) Insufficient orders, inactive raw material replenishment. The traditional 'golden March and silver April' did not arrive, yarn mills' expectations were dashed, orders were insufficient, yarn mills bought raw materials as needed, and there was no motivation to actively stock up.

4) Serious losses in spot market profits, high-priced cotton cannot be passed on. The cotton price of 22500 cannot be passed on to downstream, yarn mills' spot profit is more than 1000 yuan loss, and the high cotton price forces yarn mills to stockpile less or even no raw materials.

5) The ban on Xinjiang cotton accelerates the outflow of orders. Southeast Asia has adopted an open policy for the epidemic, production and business activities in Southeast Asia are no longer affected by the epidemic, coupled with the US-called ban on Xinjiang cotton, accelerating the outflow of orders.

II. American Cotton

(1) Positive Factors

1) Terminal clothing consumption has not turned around and is still growing. US clothing retail sales hit a new high in February, and terminal consumption still has resilience.

2) The Russia-Ukraine war restricts the export of food and fertilizers. Fertilizer costs are rising, increasing cotton planting costs.

3) The highest ever price without a fixed price, the squeeze has not yet ended. The contracts without a fixed price for May and July are at the highest level in the same period of history. May is approaching the first notification date, but the volume without a fixed price is decreasing slowly.

4) Loading progress accelerates, low inventory of American cotton futures. American cotton contracts have been over-fulfilled, and the recent loading progress has generally improved. If the loading progress accelerates later, the end-of-term circulating inventory of American cotton will be even tighter.

5) Reduced production in India, pushing up global cotton prices. In April, the daily amount of cotton listed in India is decreasing, and the final output of India may be 5.1 to 5.4 million tons.

6) Drought in Texas, the abandonment rate of American cotton may increase. So far, the drought in Texas and the entire United States has not eased, and it is still considered a serious drought. The abandonment rate in Texas is closely related to the weather.

(2) Negative Factors

1) Personal income declines, and subsequent consumer momentum is insufficient. US private net savings have fallen to pre-epidemic levels, government subsidies to individuals during the epidemic have ended, and people's savings have fallen to pre-epidemic levels, and subsequent consumer momentum is insufficient.

2) China's import profits are zero, reducing imports of American cotton. The price of American cotton has exceeded that of Xinjiang cotton, and there is a lack of motivation for domestic imports, reducing subsequent imports of American cotton.

3) Southeast Asian countries are suffering serious losses, and demand for American cotton is decreasing. Downstream sectors in Southeast Asian countries and India are unable to consume high-priced cotton, yarn mill profits are increasing, negative feedback is being transmitted, and the market is gradually reducing demand for cotton.

4) Increased planting area for the next year. At the end of March, the US Department of Agriculture announced its cotton planting intentions report, with the planting area increasing by 9% year-on-year.

Summary: Currently, the trend of cotton prices is no longer in line with the fundamentals, mainly because funds are using high contracts without a fixed price to create a squeeze. From a one-sided perspective, domestically, there is no driving force for price increases except for the rigid demand replenishment by yarn mills. Internationally, due to the very high volume of contracts without a fixed price for May, there may be further increases, and the drought situation needs to be continuously monitored. When the supply and demand pattern of American cotton is tight and the fixed price has not come down, don't easily short the near-month contract.

Points to watch: Changes in on-call