Economic Observer: US Cotton Drought Index Rises, International Cotton Prices May Rise Easily But Not Fall

Since June, the drought index of major cotton producing areas in the United States has continued to rise, approaching the level of the same period in 2022. As of August 22, the drought index of the main cotton producing areas in the United States was 166, 27 lower than that of the previous year and 36 higher than that of the previous month; The drought index of Texas was 282, a year-on-year decrease of 27 and a month on month increase of 59. As the drought situation worsened, the excellent growth rate of American cotton continued to decline. As of August 27, the excellent growth rate of American cotton was 33%, down 1% year on year. The supply and demand report of the US Department of Agriculture in August increased the abandoned farming rate of US cotton from 14% to 22%. If the weather conditions and excellent rate of US cotton continue to deteriorate, it does not rule out that the abandoned farming rate will be further increased in the future. International cotton prices may easily rise but not fall, supported by the supply side profits.

This year, the commercial inventory of cotton has been reduced rapidly from the high level at the beginning of the year to the low level over the years. According to the data of China Cotton Information Network, as of the end of July, the commercial inventory of cotton nationwide was 2.33 million tons, a month on month decrease of 570000 tons and a year-on-year decrease of 870000 tons. According to the data of Steel Union, as of August 25, the commercial inventory of cotton was 1.3853 million tons, a year-on-year decrease of about 1 million tons.

From July 31, 2023 reserve cotton will be put on the market to alleviate the problem of tight supply. From July 31 to August 25, China Reserve Cotton Management Co., Ltd. listed a total reserve of 208000 tons of cotton, including 15000 tons of Xinjiang cotton and 193000 tons of imported cotton. The average transaction price of reserve cotton wheel is 17659.47 yuan/ton, which is converted to standard (3128) price of 18187.28 yuan/ton. In terms of quantity, by the end of September, the cotton reserve is expected to be no more than 500000 tons. At present, the situation of tight commercial inventory has improved but not changed. From the price point of view, the turnover rate of reserve cotton continues to be 100%, which indicates that the downstream market is highly motivated to buy. The average transaction price is similar to the futures price. The base price for auction and storage is always above 17200 yuan/ton, which has certain support for futures prices.