US Cotton Quality Drops Sharply Combined with Speculative Fund Buying, Short-Term Support for ICE Cotton Strengthens

The US cotton good-to-excellent rating dropped by 5 percentage points in one week, from 53% to 48%, falling below both the previous week and the same period last year (51%). Despite this, the ICE cotton futures market saw only a marginal gain on June 29—the most-active December contract rose 0.07 cents to 76.45 cents per pound. However, when combined with a continued increase in speculative fund positions, the market's sensitivity to supply-side risks is quietly rising.

Fund Flows and Substitute Effects CFTC data shows that as of the week ending June 23, speculative net long positions in ICE cotton increased by 7,247 contracts to 58,252. This marks the second consecutive weekly rise, indicating that funds are turning cautiously optimistic on short-term cotton prices. At the same time, the US dollar index weakened for a third straight session, making dollar-denominated cotton cheaper for overseas buyers. More notably, the substitution effect is kicking in. An attack between the US and Iran highlighted the fragility of their temporary peace deal, pushing international oil prices up over 1% on the day. Higher oil prices raise production costs for polyester fiber—cotton's main synthetic substitute. When polyester becomes more expensive, cotton's relative value improves, giving downstream mills an incentive to shift their raw material mix.

Weather Concerns and Acreage Uncertainty As of June 28, US cotton planting progress stood at 97%, slightly ahead of last year's 95% and in line with the five-year average. But the sharp drop in the good-to-excellent rating is the real focus. Weather forecasts indicate a heatwave threat in the US Midwest, while southern cotton regions are also experiencing dry, hot conditions. Industry forecaster Vaisala estimates global cotton production for 2026/2027 at 119.27 million bales—a relatively high level—but if quality continues to deteriorate, yield downgrades could materialize. The biggest near-term event is the USDA acreage report due June 30. The market generally expects a slight increase in planted area, but worsening quality could prompt some farmers to switch to alternative crops. If the actual acreage falls short of expectations, cotton prices could find a floor.

Inventory and Basis Signals Exchange stocks of deliverable No. 2 cotton futures stood at 185,034 bales, down 2,216 bales from the previous week. A decline in stocks usually signals stronger physical market demand, supporting nearby contracts. However, the Cotlook A index fell 50 points to 85.30 cents per pound, indicating that the international physical market is still under pressure. The divergence between a slightly higher futures market and a weaker cash market suggests that the current rally is more fund-driven than demand-driven.

Practical Advice ### For Buyers - Focus on the June 30 USDA acreage report. If the area increase is less than 1%, consider building long positions near 76 cents. - With the futures-cash spread widening, prioritize basis trading to lock in margins and avoid chasing futures prices. - Monitor polyester chip prices. If oil continues to strengthen, cotton's substitution advantage will become more apparent—consider increasing cotton yarn procurement ratios.

For Export Companies - In a weakening dollar environment, raise quotes on RMB-denominated export orders to hedge against exchange rate volatility. - The drop in US cotton quality ratings may affect later export grades. Add quality flexibility clauses in contracts to avoid disputes over grade discrepancies. - Track CFTC net long positions. If holdings decline for three consecutive weeks, it signals a shift in fund sentiment—adjust inventory cycles accordingly.