According to a research report, U.S. cotton prices rose 3% last week, while Xinjiang cotton saw a slight increase, with the price gap remaining at a high level. Drought conditions in U.S. cotton-producing regions are still at a near five-year high, and the latest sowing progress lags behind the same period last year. The domestic cotton subsidy price has been confirmed, continuing the previous round's stipulations.

With the materialization of Brazil's reduced production and the U.S. and China entering the cotton sowing season, March to May represents a critical window for potential catalysts in U.S. cotton prices. The report maintains a positive outlook on yarn industry leaders that stand to benefit from the performance elasticity driven by rising U.S. cotton prices.

Recommendations also include leading companies with currently solid fundamentals and high dividend yields, as well as undervalued leaders possessing unique and scarce brand portfolios.

The key points from the report are as follows:

Last week, U.S. cotton prices increased by 3%, while Xinjiang cotton experienced a minor rise, keeping the price differential elevated. As of May 29, Xinjiang cotton was quoted at 17,635 yuan per ton, up 0.2% for the week, 21% year-on-year, and 13% year-to-date. U.S. cotton was quoted at 79.51 cents per pound, rising 3% for the week, 22% year-on-year, and 24% year-to-date. The price gap between Xinjiang and U.S. cotton stands at 5,771 yuan per ton, equivalent to the 92nd percentile since 2015, though it has narrowed slightly from the 95th percentile recorded the previous weekend.

Drought conditions in U.S. cotton-producing regions remain at a near five-year high, with the latest sowing progress trailing last year's levels. A USDA report indicates that as of May 26, drought coverage in U.S. cotton regions reached 94%, with extreme drought conditions at the destructive D3 level and above covering 33% of areas, marking the most severe drought since 2021. In the major producing state of Texas, drought coverage is at 85%, with D3+ extreme drought at 22%, second only to 2022 levels (90%/47%) since 2021. Although recent rainfall has led to a slight week-on-week improvement in drought conditions, they remain significantly elevated compared to the past five years, and the situation requires continued monitoring. As of May 24, U.S. cotton sowing progress reached 50%, below last year's 57% and the five-year average of 53%.

The domestic cotton subsidy price has been finalized, continuing the regulations from the previous cycle. The National Development and Reform Commission and the Ministry of Finance issued a notice regarding the cotton target price policy for 2026–2028, setting the target price for Xinjiang cotton at 18,600 yuan per ton and stipulating subsidies based on a fixed production volume of 5.1 million tons. Both the target price and the subsidized production volume延续 the policies set for 2023-2025. The current Xinjiang cotton price of 17,635 yuan per ton is below the target price. It is anticipated that, supported by this policy floor, the downside potential for cotton prices is limited.

Risk factors include consumer demand falling short of expectations, volatility in raw material prices, and intensifying industry competition.