Guotai Haitong: Domestic cotton subsidy prices are grounded. Optimistic about the performance elasticity of leading yarn companies benefiting from the rise in US cotton prices.

Guotai Haitong released a research report stating that last week, the price of American cotton rose by 3%, while Xinjiang cotton saw a slight increase, and the price difference remained high. The drought in American cotton producing areas is still at a near five-year high, and the latest planting progress is lower than the same period last year. The domestic cotton subsidy price has been implemented, continuing the previous round of regulations. Guotai Haitong's main points are as follows: Last week, the price of American cotton rose by 3%, while Xinjiang cotton saw a slight increase, and the price difference remained high. As of May 29, the price of Xinjiang cotton was 17,635 yuan/ton, an increase of 0.2% this week, a 21% increase year-on-year, and a 13% increase since the beginning of the year; the price of American cotton was 79.51 cents/pound, an increase of 3% this week, a 22% increase year-on-year, and a 24% increase since the beginning of the year. The price difference between Xinjiang cotton and American cotton is 5,771 yuan/ton, equivalent to the 92nd percentile since 2015, narrowing from the 95th percentile last week. The drought in American cotton producing areas is still at a near five-year high, and the latest planting progress is lower than the same period last year. The USDA report shows that as of May 26, drought coverage in the entire American cotton producing area reached 94%, with destructive D3 and above extreme drought coverage reaching 33%, the most severe drought since 2021; the drought coverage in the main producing state of Texas reached 85%, with D3 and above extreme drought coverage reaching 22%, second only to the level in 2022 (90%/47%) since 2021. Although rainfall has improved the drought situation in the cotton producing areas compared to last week, it is still at a near five-year high and needs to be observed in the future. As of May 24, the planting progress of American cotton reached 50%, lower than the 57% in the same period last year and the average level of 53% in the past 5 years. The domestic cotton subsidy price has been implemented, continuing the previous round of regulations. The National Development and Reform Commission and the Ministry of Finance issued a notice on the cotton target price policy for 2026-2028, setting the target price for Xinjiang cotton at 18,600 yuan/ton for each of those years and providing subsidies for a fixed production volume of 5.1 million tons of Xinjiang cotton. The target price and subsidy volume continue the policy provisions for 2023-2025. Currently, the price of Xinjiang cotton at 17,635 yuan/ton is lower than the target price. It is expected that under the support of the policy, there is limited room for cotton price decline. Risk warning: Consumer willingness is lower than expected, raw material price fluctuations, and intensified industry competition.