Cotton Futures Hit Two-Year High: Weather and Geopolitical Risks Tighten Supply, Cost Pass-through May Accelerate

On August 31, ICE cotton futures for December settled at 93.14 cents per pound, up 1.93% on the day, after touching 93.74 cents, the highest since early 2024. The contract gained about 14% in August, marking a second consecutive monthly advance. The rally is driven by multiple factors: persistent hot and dry weather in key US growing areas, and an escalation in US-Iran conflict that pushed oil prices higher, tightening both supply expectations and production costs. Cotton prices are entering a volatile range dominated by uncertainties.

Market Background

Weather conditions in US cotton belts are the immediate trigger. Public data indicates extreme heat and dryness in Texas and other key regions, deteriorating soil moisture and raising concerns about yields and quality ahead of harvest. Traders widely expect the USDA's September 11 supply-demand report to lower production forecasts, and this expectation has already been priced into the futures market.

Meanwhile, US-Iran tensions escalated on August 31. The US struck an Iranian island near the Strait of Hormuz, and Iran retaliated against US targets in Jordan and the UAE. Oil prices surged over 2.5% that day, raising production costs for polyester, cotton's main substitute. Higher oil prices support cotton's competitiveness through the oil-polyester-cotton chain, amplifying the rally in an environment of geopolitical risk.

Industry Impact

For the textile supply chain, rapidly rising cotton prices signal that raw material cost pressures are transmitting downstream. Yarn mills that rely heavily on cotton will see margins squeezed if they have not locked in inventories earlier. Fabric and apparel sectors typically have lagging pricing mechanisms, so a temporary mismatch between high input costs and low output prices may occur, straining the cash flow of small and medium enterprises.

From a substitution perspective, stronger cotton prices may prompt some spinners to increase the use of polyester staple fiber. However, if oil prices remain high, polyester costs will also rise, weakening the economic incentive. Procurement teams must monitor the cotton-polyester spread and adjust raw material mixes dynamically.

Moreover, the USDA report adds uncertainty. The market has already priced in a production cut. If the actual numbers are less bearish, prices could pull back; if the cut is larger than expected, further upside is possible. This expectation gap will test hedging and procurement strategies.

Practical Recommendations

For Procurement Managers - Build positions in batches, avoiding chasing spikes; split purchases into 3-4 tranches to smooth costs. - Closely watch the September 11 USDA report; if data is bearish, wait for the release before restocking; if bullish, lock in some forward supply earlier. - Compare real-time cotton and polyester staple prices; when the spread widens to historical highs, increase polyester usage to reduce costs.

For Exporters - Include raw material price adjustment clauses in export contracts, or use a combination of forward FX hedging and point-priced purchasing to manage price volatility. - Monitor the impact of US-Iran tensions on shipping and oil prices; plan logistics and delivery schedules in advance to avoid margin erosion from higher freight costs. - Use futures to hedge selling positions, locking in raw material costs for confirmed orders, especially long-term contracts.