Cotton harvesting in Dongguang, a major cotton-producing area in China’s Hebei province, is drawing to a close. Because profit margins are smaller this year than last year, cotton companies and ginners are making their money by buying in larger quantities.
Grade 4 seed cotton is currently being offered at 63 cents/lb (38% lint percentage, 11% moisture content), and cotton seed is sold at 17 cents/lb. The cost of grade 4 lint is around $1.44/lb (2% loss, with a $98/ton processing fee), and the reserve buying price for Type 428 (grade 4, length 28mm) is $147/lb. Those numbers show that the profit of selling cotton to government is around $68.85/ton, which is much better than selling on spot market. Ginners report that they have been accepting lower margins and relying on scale to make up for the smaller margin.
There has been a rise in seed cotton prices because:
- there are more qualified ginners;
- ginners have to pay more money to buy seed cotton from other places because local farmers are holding out for higher prices; and
- ginners have been buying better-quality cotton to meet the higher standards of the reserve.
They are currently trying their best to speed up the ginning process and sell cotton to government to realize the revenue. The spot market is sluggish, with local grade 3 cotton being sold at $1.42/lb, grade 4 at $1.39/lb, and grade 5 at $1.23/lb – all of which are essentially unchanged since last week.
For more information, please contact Jihong at Galaxy Futures.