After losing the key psychological level of 17,000 yuan/ton on September 2, the main contract of Zhengzhou cotton futures continued to decline the next day, closing at 16,825 yuan/ton, down 110 yuan. This price level not only erased most of the premium brought by the previous rally in external markets but also forced the market to reassess the supply-demand balance for the new season. On the surface, it appears to be a technical correction, but in reality, it reveals a rebalancing of bullish and bearish forces in the fundamentals.
Supply and Demand Outlook Turns Looser
The International Cotton Advisory Committee (ICAC) released its monthly report on September 2, providing the latest global supply-demand coordinates. The report estimates 2026/27 global cotton production at 26.2 million tons, while consumption is projected at 25.9 million tons, implying a surplus of about 300,000 tons. For bullish funds that had bet on a supply shortage following the external rally, this data certainly adds pressure.
However, this surplus is not particularly ample, accounting for only about 1% of global production. Cotton growing seasons are always fraught with variables – weather anomalies, pest outbreaks – that could quickly erode this thin buffer. Thus, the surplus projection is more like a sword of Damocles than a definitive bearish signal. The market should focus on how actual production unfolds.
Weather and Harvest Pace as Key Variables
Domestically, Xinjiang cotton areas have entered the critical boll-opening period, with growth progress ahead of the same period last year, setting the stage for an earlier new-crop harvest. Given current growth, defoliant spraying will begin in early September across major production areas, and machine-picked cotton may hit the market earlier than usual. Northern Xinjiang has seen only sporadic rain, while southern Xinjiang remains dry, generally favoring boll opening and sun-drying operations.
This weather window means supply pressure from the new crop could arrive sooner than expected. For downstream mills, an earlier harvest helps alleviate raw material inventory pressure but may also intensify short-term oversupply expectations. Meanwhile, drought conditions in US cotton areas continue to worsen, with quality ratings declining, fueling expectations of reduced US production. The divergence in weather between China and the US adds significant uncertainty to the global supply-demand balance.
Weak Downstream Recovery and Inventory Pressure
As the traditional textile peak season arrives, downstream markets show a weak recovery. Yarn and fabric mills are gradually increasing operating rates, and yarn shipments have improved slightly week-on-week, indicating marginal demand improvement. However, the recovery is clearly weaker than in previous years, with industry-wide inventory pressure remaining high and yarn destocking slow. Regular reserve cotton auctions continue to supplement market supply, keeping spot transactions subdued and buyers cautious.
This 'weak recovery' offers limited support to cotton prices. On one hand, seasonal demand has not provided a strong boost; on the other, high inventories curb mills' restocking intentions. The tug-of-war between upstream and downstream leaves cotton prices hovering in a narrow range.
Rangebound Near Term, Awaiting Catalyst
In summary, the cotton market is characterized by intense long-short battles, with prices facing pressure from both sides. Support comes from El Niño-related production cut expectations, low-to-mid domestic inventory levels, and peak-season demand expectations. Resistance stems from continued reserve releases, high downstream yarn inventories, fully priced-in bullish factors, and a bearish macro backdrop.
In the near term, cotton prices are likely to remain rangebound, with directional movement awaiting a substantive driver – either a weather shock in key growing regions or an upside surprise in seasonal demand. For all players along the supply chain, risk management should take precedence over one-sided bets.