Cotton Price Correction: Short-Term Pressure Meets Medium-to-Long-Term Supply Gap

Cotton prices experienced a rapid surge followed by a sustained decline after the May Day holiday, with the main contract of Zhengzhou cotton futures dropping over 600 points from the 17,000 yuan/ton mark by May 11. This reversal reflects a tug-of-war between short-term demand weakness and medium-term supply tightness.

Surge and Correction: Capital Sentiment vs. Fundamentals

On the first trading day after the holiday, the main contract briefly touched the key 17,000 yuan/ton level but failed to hold, triggering a sell-off by long investors. By May 11, the contract had fallen over 600 points from its peak, confirming a short-term correction. Open interest declined sharply, and trading activity shrank, with market sentiment turning cautious. This contrasts with the tight spot market, where commercial cotton inventories are at a seasonal low. High-quality Xinjiang cotton (double 29 grade, impurity below 3%) remains scarce, with basis firmly at 1,200 yuan/ton, giving sellers strong pricing power. However, spot prices tracked futures downward, and transactions remained thin as end-users held off purchases, creating a negative feedback loop of falling futures, declining spot prices, and cautious demand.

Off-Season Effects and Structural Demand Divergence

May marks the transition from the traditional peak season of 'Golden March and Silver April' to the seasonal demand trough. Current orders are structurally diverging: high-end 40S compact and combed yarn orders are booked through July-August, keeping mills stable, while conventional yarn varieties face weakening orders, leading to rising inventories. Price divergence is evident: high-end 40S yarn holds steady due to firm demand, while other varieties face 100-200 yuan/ton price cuts amid falling futures and weak demand. The gray fabric market is under greater pressure, with circular knitting machine operating rates in core regions like Foshan falling to 40%, down sharply from peak season. Weak consumer demand in apparel and home textiles is forcing downstream mills to destock, further compressing raw material procurement.

Multiple Headwinds vs. Medium-to-Long-Term Support

Beyond fundamentals, the market faces multiple uncertainties. The upcoming visit of U.S. President Donald Trump is stirring sentiment in commodity markets, likely causing short-term volatility in cotton. Persistent rumors of government reserve cotton releases are adding to supply concerns, especially as the off-season weighs on demand. Combined with elevated valuations after the earlier rally, risk aversion is driving long liquidation. In the near term, cotton futures are likely to remain weak, with a core trading range of 16,000-16,800 yuan/ton. However, the medium-to-long-term support remains intact: commercial cotton inventories are low, Xinjiang's planted area is confirmed to have decreased, and industry estimates a 3%-5% drop in new-crop output, widening the annual supply gap. Limited import availability maintains a tight supply-demand balance. As the traditional consumption peak season approaches in the second half of the year, demand is expected to recover, offering valuation repair potential for cotton prices after the correction.

Practical Recommendations

For Buyers - Adopt a hand-to-mouth procurement strategy in the near term, avoiding bulk stockpiling during the weak market. Look for opportunities to build positions on dips within the 16,000-16,800 yuan/ton range. - Focus on scarce high-quality Xinjiang cotton (double 29 grade, impurity below 3%), as its firm basis and strong pricing power make it a suitable medium-to-long-term stocking target.

For Exporters - Monitor macro events such as Trump's visit for short-term market disruptions and use futures hedging tools to lock in long-term procurement costs and mitigate price volatility. - For high-end yarn orders (e.g., 40S compact and combed), consider locking in raw material supply in advance to avoid cost increases during the peak season due to supply gaps.