Why are Chinese buyers canceling U.S. cotton contracts in large numbers?

The U.S. Department of Agriculture’s export report shows that from November 11 to 17, 2022, the net contracted volume of U.S. upland cotton in the 2022/23 year was -26,400 to…

The U.S. Department of Agriculture’s export report shows that from November 11 to 17, 2022, the net contracted volume of U.S. upland cotton in the 2022/23 year was -26,400 tons. Buyers from many countries including China, Pakistan, El Salvador, and Peru canceled early signings, among which China Not only did buyers not continue to sign contracts for 2022/23 US cotton, they instead canceled 24,800 tons of contracts, accounting for 94% of the total US cotton contract cancellations that week. At the same time, buyers from India, Turkey, Indonesia and other countries have also significantly declined in signing contracts for US cotton this year.

An international cotton trader said that although the front-month ICE cotton futures contract continued to consolidate at a relatively high level of 85-90 cents/pound in the week of November 11-17, he was somewhat mentally prepared for the weak new signings of US cotton in 2022/23, but China Cotton traders were generally caught off guard and confused by the substantial cancellation of early contracts by other buyers. Because it is generally expected in the industry that domestic companies will intensively use the remaining quotas before the end of the year, and most of the current export orders are traceable orders, and the RMB exchange rate is “turning from depreciation to appreciation” in stages, the amount of US cotton signed in mid-November may not be satisfactory.

Why are Chinese buyers canceling early contracts in large numbers? Cotton-related companies believe that in addition to the fluctuating increase in ICE near-month contracts in mid-November, it is also directly related to the following factors:

First, some cotton textile mills and traders are increasingly worried about the grade and quality indicators of US cotton in 2022/23, and they have canceled contracts to avoid risks. The continued high temperature and drought in Texas and the excessive rainfall in the southeast cotton region have resulted in the U.S. cotton seedling situation in 2022 being significantly lower than in previous years. Coupled with the damage caused by rainfall during the recent harvest period, buyers judge that this year’s US cotton indicators may be difficult to match the contract.

Second, Australian cotton and Brazilian cotton will be relatively competitive in 2022. Judging from the survey, the Australian cotton quotation for the November/December/January shipping date is not only slightly lower by 2-3 cents/pound than the US cotton 31-3/31-4 36/37, but also has advantages in quality indicators and spinnability. .

Third, due to rainfall, epidemics and other factors in some major producing areas, the purchase, transportation and processing of US cotton have been affected to a certain extent. Some cotton exporters, traders and buyers are worried that the 2022/23 US cotton may not be able to meet the contract and fashion requirements. ship and delivery, so negotiate to postpone contract performance or cancel the contract to reduce losses.

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Author: clsrich