While US cotton belt drought expanded from 44% to 52%, NY futures jumped 3.67% in a single day to 92.75 cents/lb, the highest since April 2024. In contrast, Zheng cotton traded narrowly around 17,000 yuan/ton, with a weekly gain of less than 1%. The domestic-international price gap narrowed by 547 yuan/ton to 1,743 yuan/ton, revealing a split in pricing logic: overseas markets trade weather premiums, while domestic prices are pinned by policy and consumption realities.
Weather Premium vs Policy Constraints
The international rally is primarily driven by supply-side weather narratives. USDA data showed US cotton condition ratings fell to 37% good/excellent as of August 23, the fifth consecutive weekly decline. Drought alerts indicated over half of the cotton belt is affected, with Texas dryness persisting for another month, pressuring yields. Meanwhile, the probability of a 'very strong' El Nino event in the Northern Hemisphere autumn/winter has risen above 90%, and the India Meteorological Department warned monsoon rainfall could be 15% below normal, the lowest since 2009, adding sustained risk premium to international prices.
Domestically, a different set of variables is at play. Reserve cotton sales continued with 100% of offers taken, cumulatively exceeding 240,000 tons by August 28, easing the temporary supply tightness. Xinjiang cotton has entered the boll-opening stage, with some machine-picked fields reaching 40-50% open bolls, and the new crop is expected to hit the market earlier than usual, capping Zheng cotton's upside. When overseas weather premiums transmitted, Zheng cotton briefly surged to 17,345 yuan/ton on August 28 but quickly retreated, with intense long-short battles, settling the week only 0.7% higher.
Divergence in Industry Chain Profits
The price divergence fundamentally reflects a broken profit transmission along the supply chain. National Bureau of Statistics data showed industrial profits grew 17.6% year-on-year in January-July, but textile industry profits only rose 7.9%, down sharply from 16.6% in the first half. Textile and apparel profits narrowed to -17.2% but remained in contraction, while chemical fiber manufacturing profits surged 107.7%. This pattern of 'chemical fiber strong, spinning weak, apparel cold' means rising raw material costs cannot be effectively passed downstream, squeezing spinning margins and suppressing raw material purchases.
In the yarn market, domestic and imported yarn prices rose slightly, but imported yarn outperformed: C32S combed yarn averaged 23,548 yuan/ton domestically (up 0.1% weekly), while imported yarn averaged 23,594 yuan/ton (up 0.7%), with imported yarn now 46 yuan/ton more expensive than domestic. This inversion reflects that, under RMB depreciation and higher import costs, imported yarn has become more competitive, intensifying substitution pressure on domestic spinners. Meanwhile, polyester staple fiber rose 85 yuan/ton to 7,849 yuan/ton, narrowing cotton's substitution advantage but not yet reversing raw material preferences.
Macro Uncertainties and Demand Window
On the macro front, the US is considering an additional 7.5% tariff on Chinese goods citing 'overcapacity', and Fed Chair Warsh's hawkish speech at Jackson Hole raised market expectations of further rate hikes, pushing long-term yields higher and tightening financial conditions, which pressures commodities. China's textile and apparel exports to the US already face tariffs of 20-37.5%; additional tariffs would further weaken competitiveness and dampen cotton demand. The Ministry of Commerce has voiced firm opposition, but trade policy uncertainty will continue to roil sentiment.
Demand-wise, surveys at the China International Textile Yarn (Autumn/Winter) Exhibition in Shanghai (August 25-27) indicated market conditions improved from last month but far below spring heat, with orders diverging and caution prevailing. Some companies worry that if the peak season window is delayed, effective duration will be compressed, making order release uncertain. This means even with overseas weather premiums, domestic cotton upside is limited by the pace of end-consumption recovery.
Short-term Outlook and Risks
In the near term, international cotton prices may remain firm with volatility, but watch for weather risk easing, macro shifts, and profit-taking. Domestically, reduced output concerns and seasonal demand expectations support prices, but reserve sales, approaching new crop supply, and poor downstream transmission will cap gains, likely leading to high-level consolidation. The tug-of-war between overseas weather premiums and domestic policy constraints remains the core contradiction in the coming weeks.