The divergence between domestic and international cotton prices became pronounced this week: NY futures gained 3.2% to 90.02 cents/lb, while Zhengzhou cotton rose only 0.7%, narrowing the price gap to 1,743 yuan/ton. Behind this lies a clash between supply-side weather premiums and demand-side policy constraints. For textile mills, raw material cost volatility is shifting from one-way rallies to range-bound swings, making procurement timing more challenging.
Weather premium dominates overseas market
The strength in international prices is largely driven by supply-side weather narratives. USDA data show US cotton condition ratings fell for a fifth consecutive week to 37% as of August 23, with drought-affected acreage rising from 44% to 52%. Texas dryness is expected to persist over the next month. Meanwhile, the probability of a very strong El Nino event in the Northern Hemisphere autumn-winter exceeds 90%, and the India Meteorological Department projects monsoon rainfall about 15% below normal, the lowest since 2009. These factors, combined with a weaker dollar, pushed NY futures up 3.67% on August 27 to 92.75 cents/lb, a record high since April 2024.
The weather premium is not merely speculative. Although Brazil's harvest is progressing faster than usual, production risks in the two major Northern Hemisphere producers are still accumulating. Notably, India's duty-free policy spurred June imports to 96,000 tons, up 175% year-on-year, pushing cumulative imports above USDA's August forecast. This suggests that even with faster Southern Hemisphere supply, global demand support remains firm, and overseas prices may stay firm in the short term.
Domestic market lacks follow-through
In contrast to the sharp overseas rally, Zhengzhou cotton's weekly average settlement price rose only 0.7% to 17,033 yuan/ton. Although it surged to 17,345 yuan/ton on August 28, it quickly retreated, reflecting intense long-short battles. The limited domestic follow-through is mainly due to dual supply-side pressures: ongoing reserve sales (over 240,000 tons sold cumulatively by August 28) have alleviated tightness, and Xinjiang's new crop is expected to arrive earlier than usual, with some machine-picked fields already 40-50% open. The production increase expectation has not been fully disproved.
Weak downstream consumption also caps upside. Domestic C32S combed yarn prices rose only 0.1% to 23,548 yuan/ton, while imported yarn rose 0.7%, creating an inverted spread of 46 yuan/ton, indicating mills' squeezed margins and pricing difficulty. According to the National Bureau of Statistics, textile industry profits growth slowed sharply from 16.6% in Jan-June to 7.9% in Jan-July, while textile and apparel profits remained down 17.2% (narrowed from -28.0%). Chemical fiber profits surged 107.7%. The profit distribution across the chain is severely imbalanced, with raw material costs failing to transmit downstream, and weak final demand suppressing mills' purchasing appetite.
Policy and macro uncertainties
On the macro front, US tariff threats have resurfaced. The US is considering an additional 7.5% tariff on Chinese goods citing overcapacity. Current comprehensive tariffs on Chinese textile and apparel exports to the US already range from 20% to 37.5%, and further tariffs would weaken competitiveness. Meanwhile, Fed Chair Warsh's hawkish remarks at Jackson Hole, emphasizing a firm 2% inflation target, have raised rate hike expectations, tightening financial conditions and pressuring commodity prices. These policy uncertainties make cotton price trends even harder to predict.
Outlook and strategies
In the short term, international cotton prices may stay firm on weather support, but corrections could occur if weather risks ease or funds take profits. Domestic prices are likely to fluctuate at high levels, balancing production concerns and peak-season expectations against reserve sales and new crop arrivals. A survey at the Shanghai Yarn Expo (August 25-27) showed market conditions slightly improved from last month but far below spring levels, with orders diverging and uncertainty about the peak season window. Companies should focus on actual order fulfillment rather than chasing raw material rallies.