US Cotton Futures Surge 3.8%: Textile Raw Material Market Squeezed by Drought and Geopolitics

On July 7, the ICE cotton futures December contract surged 3.82% to settle at 81.29 cents per pound, hitting its highest intraday level since June 2. This marks the most dramatic single-day move in nearly a month for US cotton, driven by a confluence of adverse weather and geopolitical tensions. For the textile industry, this signals renewed pressure on raw material costs.

Weather Factor: Texas Drought Persists, Crop Condition Rating Falls Below Key Threshold

The USDA's weekly crop progress report, released Monday, showed the US cotton crop condition rating at just 46% good-to-excellent, down from 48% the previous week and significantly below 52% a year ago. This data directly triggered risk-averse buying. Texas, the largest cotton-producing state in the US, continues to suffer from drought, casting a shadow over the new crop outlook. The squaring rate reached 49%, slightly above the five-year average of 47%, but faster development does not guarantee higher yields, and the actual impact of drought on boll development requires further monitoring.

Geopolitical Transmission: Oil Prices Rise, Pushing Up Polyester Costs and Enhancing Cotton's Substitution Appeal

International oil prices rose over 2.7% on the day, driven by the US termination of sanctions waivers on Iranian oil and reports of an attack on a vessel near the Strait of Hormuz, reigniting supply disruption fears. Higher oil prices directly increase production costs for polyester fiber, a substitute for cotton. When the price gap between polyester staple fiber and cotton narrows, downstream mills tend to increase cotton usage, providing additional support for cotton demand. Analysts noted that recent activity in the soybean trade also indirectly strengthened expectations of a broader recovery in agricultural product demand, with capital spilling over from soybeans to cotton.

Positioning: Speculative Net Longs Declined, Signaling Short-Term Overbought Risk

However, the positioning picture is mixed. CFTC data showed that as of the week ending June 30, speculative net longs in ICE cotton fell by 3,740 contracts to 54,512. This suggests that speculative funds were reducing positions before the price surge. The current 4% rally appears to be more of a short-covering and weather-themed squeeze. The market is now awaiting three key reports this week—the CFTC commitments of traders report, the weekly export sales report, and the USDA WASDE report—to validate the sustainability of this rally. If export data does not strengthen in tandem, cotton prices may face profit-taking pressure.

Industry Impact: Spinning Mills Face Higher Costs, Synthetic Substitution Logic Needs Reassessment

For Chinese textile mills, this rally in US cotton has directly widened the price gap between imported and Xinjiang cotton. At current exchange rates, 81.29 cents per pound translates to an imported cotton cost exceeding 14,000 RMB per ton, while domestic Grade 3128B cotton is priced around 15,500 RMB per ton, narrowing the internal-external spread. Downstream weaving mills face a dilemma: if they continue buying imported cotton, cost pressures will pass to grey fabrics and finished goods; if they switch to domestic cotton, they must contend with tight Xinjiang cotton supply. Meanwhile, polyester prices are supported by oil, reducing the cost advantage of synthetic fiber substitution, which may actually solidify cotton's share in blended fabrics.

Practical Recommendations

For Procurement Managers - Consider delaying imported cotton purchases until after the USDA WASDE report to avoid chasing prices at emotional peaks. - Monitor the USDA's adjustment to US cotton production estimates on July 10; if yield expectations are lowered, consider building long positions in deferred contracts in batches. - Evaluate the price spread between polyester staple fiber and cotton; if synthetic costs continue to rise, lock in some cotton purchases early to hedge substitution risk.

For Foreign Trade Enterprises - Include floating price clauses in export order quotes to protect margins from raw material volatility. - Monitor the impact of Middle East tensions on shipping insurance premiums; the Strait of Hormuz incident may raise freight costs—negotiate cost-sharing mechanisms with clients. - Use options to hedge cotton price volatility; current implied volatility is moderate, making call options or spread strategies relatively cost-effective.