International cotton prices broke through previous highs on weather premiums, while domestic prices lagged, narrowing the price gap by 547 yuan/ton to 1743 yuan/ton in a week. Behind these figures lies a tug-of-war between Northern Hemisphere weather disruptions and domestic reserve sales, weak end-user demand. For textile enterprises, the difficulty in passing on raw material costs persists, demanding cautious procurement strategies.
Background
Weather factors were the core driver of international cotton price gains this week. USDA data showed US cotton crop conditions fell to 37% as of August 23, declining for the fifth consecutive week; drought-affected areas rose from 44% to 52%, with Texas drought expected to persist. Meanwhile, the probability of a strong El Nino event in the Northern Hemisphere autumn/winter exceeded 90%, and India's monsoon rainfall could be 15% below normal, the lowest since 2009. With multiple supply-side bullish factors, NY futures surged 3.67% to 92.75 cents/lb on August 27, the highest since April 2024, with weekly average up 3.2%.
Domestically, Zhengzhou cotton fluctuated higher early in the week, spiking to 17,345 yuan/ton on August 28 but retreating intraday, with weekly settlement average up only 0.7% to 17,033 yuan/ton. The China Cotton Price Index B averaged 18,150 yuan/ton, also up 0.7%. The narrowing price gap to 1,743 yuan/ton signals reduced cost advantage of imported cotton, providing some support but limiting domestic gains.
Industry Impact
Reserve cotton sales and the approaching new crop harvest form two major caps on domestic prices. As of August 28, cumulative reserve sales exceeded 240,000 tons, with full transaction rates last week, easing tight supply. Xinjiang cotton entered the boll-opening stage, with some machine-picked fields at 40-50% open, indicating earlier harvest than usual, further dampening bullish sentiment.
Downstream profit divergence intensified procurement caution. National Bureau of Statistics data show textile industry profits grew 7.9% in Jan-Jul, slowing notably from the first half; textile and apparel profits narrowed losses to -17.2%, still contracting; chemical fiber profits surged 107.7% YoY. This 'strong upstream, weak midstream, weaker downstream' pattern indicates poor cost pass-through, limiting mills' ability to absorb high cotton prices.
Macro headwinds include potential additional US tariffs of 7.5% on Chinese goods, which would raise combined tariffs on textile exports to 27.5%-45%, further hurting competitiveness. Fed Chair Warsh's hawkish signals raised rate hike expectations, tightening financial conditions and pressuring commodities. These factors collectively constrain domestic cotton's upside.
Practical Advice
For Buyers - With weather premiums in the external market but steady reserve supplies, consider point-based purchases for imported cotton as the price gap narrows to lock in lower costs. - With new crop approaching and output cut expectations unconfirmed, procure on a need basis, avoid hoarding, and monitor Xinjiang boll-opening progress and weather.
For Exporters - Escalating US tariff threats increase order uncertainty; negotiate tariff sharing with clients or explore alternative markets like Southeast Asia and the Middle East. - Monitor Fed policy; currency fluctuations affect hedging costs; use forward contracts to manage exchange rate risk.
In summary, international cotton prices may stay firm in the short term, but watch for corrections if weather risks ease; domestic prices face limited upside due to reserve sales, new crop supply, and weak demand, likely fluctuating at high levels. Textile enterprises should maintain flexible inventory strategies, strengthen risk management, and await actual peak-season demand.