The cotton market in May underwent a rapid shift between policy expectations and actual demand. Early-month progress in Sino-US trade talks and the implementation of Xinjiang's target price policy briefly pushed domestic prices to a 2.5-year high. However, as the traditional off-season deepened, order shortfalls emerged, production slowed, and prices retreated. This volatility reflects an industry rebalancing between high costs and weak demand.
Supply and Demand Dynamics
National Bureau of Statistics data shows May yarn output at 1.869 million tons, up 2.7% year-on-year but down 1% month-on-month. Xinjiang's output reached 319,000 tons, up 18.6% YoY but down 3.6% MoM. The average price of 32s pure cotton yarn rose 795 yuan/ton to 23,277 yuan/ton, but the increase lagged behind cotton, squeezing mill margins. Mills turned cautious, adopting a 'buy on dips' strategy.
Cotton imports fell sharply to 113,000 tons in May, down 31.7% MoM, though up 2.3 times YoY. Brazilian cotton dominated at 57.7%, while US cotton's share rose to 22.1%. The USDA's May report raised global production to 26.702 million tons, consumption to 26.156 million tons, and ending stocks to 16.823 million tons, all near multi-year highs. The global surplus undermines any sustained domestic price rally.
Inventory Signals
By end-May, commercial cotton stocks stood at 3.745 million tons, down 13.3% MoM but up 8.3% YoY. Industrial stocks fell to 846,000 tons, down 3.5% MoM and 10.1% YoY. The divergence—higher commercial stocks but lower industrial stocks—indicates mills are destocking and reluctant to build inventory, reflecting bearish price expectations.
Narrowing Spread and Crop Concerns
Domestic cotton (CCIndex 3128B) averaged 17,789 yuan/ton in May, up 23.1% YoY and 3.6% MoM. The international Cotlook A index averaged 92 US cents/lb, equivalent to 15,518 yuan/ton under 1% tariff, leaving a spread of 2,270 yuan/ton, narrowing by 257 yuan from April. A narrower spread reduces the appeal of imports but also signals global demand pessimism, amplified by a strong USD and weak US cotton exports.
On the supply side, national cotton planting progress reached 99.5%, but seedling conditions are poor. Only 45.9% of surveyed households rated seedlings better than last year, down 34 percentage points. Persistent rain in inland cotton regions caused waterlogging, stunting growth. By end-May, only 85.5% of cotton was at the 4-8 true-leaf stage, down 8.9 percentage points YoY. Poor seedling conditions could reduce yields, adding uncertainty to future supply.