I. China Cotton

(1) Positive Factors

1) On April 15, the central bank lowered the reserve requirement ratio by 0.25 percentage points, using the released funds to support industries and small and micro-enterprises severely affected by the epidemic.

2) The price difference between domestic and international markets is severely divergent, with China's cotton price shifting from the highest globally to the lowest. The price difference under a 1% tariff is -2400, with US cotton significantly higher than Xinjiang cotton, benefiting Xinjiang cotton consumption and export.

3) Ginneries face little repayment pressure and still have the willingness to maintain prices. Upstream ginneries have temporarily passed the repayment period at the end of March, and the repayment pressure for some has temporarily eased, leading to a willingness to maintain prices.

(2) Negative Factors

1) End-consumer demand continues to decline, and clothing orders are sluggish. The newly released March clothing retail sales were down 12.7% year-on-year, the worst year-on-year performance since the epidemic, significantly reducing cotton consumption due to insufficient clothing sales.

2) Xinjiang cotton sales progress is only 43.8%, with a large amount of unsold cotton exacerbating sales pressure on ginneries. Ginneries are now actively seeking to sell their goods and there are instances of price reductions.

3) Insufficient downstream orders, operational difficulties, and the lowest historical willingness to replenish raw materials. Downstream yarn and fabric mills have insufficient orders and cannot afford high cotton prices, resulting in immediate losses of around 1400. Operational difficulties have led to significant reductions in downstream production capacity and a lack of willingness to replenish stocks.

4) The ban on Xinjiang cotton accelerates the outflow of orders. Southeast Asia has adopted an open policy towards the epidemic, and production and business activities in Southeast Asia are no longer affected by the epidemic. Coupled with the US-led ban on Xinjiang cotton, this accelerates the outflow of orders.

II. US Cotton

(1) Positive Factors

1) US bulk commodities are generally at high levels, and the CRB continues to hit new highs. The momentum of US bulk commodities remains strong, inflation is still on the way, and the oil and agricultural products sectors are driving US bulk commodities to new highs, with the CRB reaching 311.9 on Thursday.

2) The Russia-Ukraine conflict continues to worsen, and supply-side issues remain for oil and agricultural products. The Russia-Ukraine conflict has recently worsened, restricting the export of food and fertilizers. Rising fertilizer costs increase cotton planting costs.

3) Undesignated contracts and net long positions of funds have increased, increasing the basis for capital speculation. The volume of undesignated contracts for July and December increased by 3800 contracts month-on-month, and the volume of undesignated contracts for July and December remains at the highest level for the same period in history. The net long position of funds increased by 2 percentage points month-on-month, currently accounting for 38%, the highest proportion for the same period in history.

4) Drought in Texas may increase the rate of US cotton abandonment. To date, the drought in Texas and the entire US has not eased and remains severe. If the drought continues unabated, it will have a significant impact on next year's output.

(2) Negative Factors

1) Personal income is declining, and future consumer demand is insufficient. US private net savings have fallen to pre-pandemic levels, and government subsidies to individuals during the pandemic have ended, with people's savings falling to pre-pandemic levels, and future consumer demand is insufficient.

2) US cotton signing volume has performed poorly in the past two weeks, with China continuing to experience cancellations. US cotton signing volume has been around 14,500 tons in the past two weeks, with a rapid month-on-month decline. China, Turkey, Vietnam, and Pakistan have significant repurchase potential.

3) Southeast Asian countries are experiencing significant losses, reducing demand for US cotton. Downstream industries in Southeast Asian countries and India can no longer afford high cotton prices, resulting in increased losses for yarn mills, and negative feedback is being transmitted, gradually reducing market demand for cotton.

Summary: Currently, cotton prices show a divergence between prices and fundamentals, with a divergence between domestic and international markets. From a domestic perspective, the pessimistic outlook for downstream textile mills and slow sales progress, May has gradually shifted towards spot trading, with prices not following the rise in September and January. The price increases in September and January were due to the influence of foreign cotton and expectations of consumption recovery after the easing of the epidemic. The May-September price difference is almost flat, and the September-January price difference is also narrowing. From an international perspective, US inflation continues, the CRB hit a new high on Thursday, and the Russia-Ukraine conflict has recently continued to worsen, pushing up energy and agricultural product prices. Specifically for US cotton, the large volume of undesignated contracts for July, the high proportion of funds, and the ongoing drought all provide further upward momentum for US cotton, and the domestic-international price difference continues to narrow. Before the end of the foreign cotton squeeze, the domestic-international price difference may continue to narrow.

Points to Watch: Changes in on-call, Texas drought