Why Chinese cotton prices rise significantly?

Zhengzhou cotton futures market has been volatile after the Mid-Autumn Festival holiday (Sep 19-21). The futures market was weak first during the first two trading days returning from the holiday affected by the sharp fall of ICE cotton futures during the holiday, and later, the market began to rebound. On Sep 27, the market climbed up significantly, with Jan contract, the major contract, up by 995yuan/mt from 17,515yuan/mt to 18,510yuan/mt, a daily increase of 5.68%, and on Sep 28, the market extended upswing, with Jan contract closing at 18,745yuan/mt, up 235yuan/mt further.

On the one hand, investors held certain positive anticipation towards the relations between China and the United States again after Meng Wanzhou returned back to China on the night of Sep 25. Macro sentiment was favorable to the cotton market, shoring up both ICE and ZCE cotton futures. On the other hand, seed cotton prices in Xinjiang also ticked up after the holiday. The new cotton costs have been close to 21,200-22,000yuan/mt gross weight on theory on Sep 27. Currently, small quantity of machine-picked seed cotton begins to arrive in North Xinjiang, and prices are high. In Manas, machine-picked seed cotton prices are at 9-9.2yuan/kg with ginning yield of 40-41%, and cotton seed prices at 3.2yuan/kg, with the cotton costs at 21,200-21,500yuan/mt gross weight on theory. On concern about high prices, some ginners plan to delay the procurement.

Nevertheless, arrivals of new seed cotton are still limited currently. Some machine-picked seed cotton is procured at 9.4-9.5yuan/kg, while most purchase prices are at 9.2yuan/kg and below. In addition, one ginner only purchases dozens of tons of seed cotton, and some ginners even stop purchasing. Ginners are cautious to purchase, but growers expect a higher price, so the market is at a stalemate somewhat.

Currently, 2021/22 seed cotton prices keep high, which is supportive to cotton prices in short. However, in fact, spinners have face slight deficits with cotton prices around 19,000yuan/mt, but they can accept, and if cotton prices rise above 20,000yuan/mt, spinners basically cannot accept the price level. The energy situation remains tight in China, and the production curtailment may continue in the fourth quarter. Then the demand for cotton yarn may reduce further, so the risks for high cotton prices may be intensified gradually. Last night, China Cotton Association has issued an industry risk warning. The relevant departments will promptly adopt measures such as increasing the supply of reserve cotton and increasing cotton imports to strengthen market regulation in accordance with market changes and the situation of textile demand, and strengthen the supervision of the spot market to maintain the order of new cotton purchases. Pay attention to whether there are any further measures in the later policy.