Persistent High Drought Levels in U.S. Cotton Areas Support Strong Zhengzhou Cotton Futures

The persistent high drought levels in U.S. cotton-growing areas are becoming the core variable in current cotton market pricing. Although the latest weekly data shows a slight decline, the year-on-year increase remains as high as 53 percentage points, implying that market expectations of supply contraction are unlikely to dissipate in the short term.

Drought Data and Market Transmission

USDA agricultural drought monitoring data shows that as of June 30, the drought proportion in U.S. cotton areas stood at 56%, down only 2 percentage points from 58% the previous week. Compared to just 3% in the same period last year, the current level is 53 percentage points higher. This pattern of 'sharp year-on-year surge with slight week-on-week decline' indicates that regional soil moisture conditions have not fundamentally improved.

The impact of drought on cotton yields is lagging, but market pricing often reflects expectations in advance. A 56% drought coverage area means a significant portion of cotton fields faces yield reduction risks, especially as the critical growth period in July approaches, where water stress directly affects boll development. Industry data suggests that for every 10 percentage point increase in drought severity, the potential yield reduction ranges from 3% to 5%.

This expectation has smoothly transmitted to the futures market. The main Zhengzhou Cotton futures contract for September 2026 closed at 16,125 yuan/ton on July 2, with open interest reaching 568,900 lots, a bullish score of 1, clearly signaling strong sentiment. Sustained capital inflows reflect a growing consensus on supply-side tightness.

Impact on the Industrial Chain

Ginned cotton, as the core product after cotton processing, is highly linked to raw material prices. The expectation of tight raw material supply from U.S. drought has, through the basic 'cotton to ginned cotton' transmission chain, provided substantial support to spot ginned cotton prices. For textile mills, this means the bottom of procurement costs is rising.

From a regional industrial cluster perspective, textile mills in major cotton-consuming provinces such as Shandong, Henan, and Jiangsu will be most affected. These regions have a high dependence on imported cotton, and tightening supply expectations for U.S. cotton, a key import source, will directly push up cotton costs. When locking in forward orders, mills must incorporate raw material price fluctuation risks into their pricing models.

On the other hand, the transmission to downstream grey fabric and finished fabric segments has a certain time lag. Current weaving mills generally maintain low raw material inventories. If cotton prices continue to strengthen, it will force mills to accelerate restocking, creating a positive feedback loop of 'cost push, restocking demand release, and further price firmness'.

Practical Recommendations

For Buyers - Monitor weekly U.S. cotton area drought data changes, especially rainfall forecasts during the critical July-August growth period, as a key reference for identifying price turning points. - With current high open interest in Zhengzhou Cotton futures and increasing market divergence, consider establishing forward hedging positions in batches to avoid concentrated procurement price risks. - For spot ginned cotton purchases, consider shortening contract cycles to take advantage of futures-spot price spreads to lock in relatively low-cost sources.

For Foreign Trade Enterprises - With tight U.S. cotton supply expectations, foreign cotton quotes may remain strong; export order quotes should reserve room for raw material cost increases. - Monitor the linkage between RMB exchange rates and cotton prices; consider adding price adjustment clauses in USD-denominated orders. - Utilize bonded zones or import cotton quota policies to lock in some low-cost supplies in advance to hedge against future cost increases.