On July 7, ICE cotton futures for the most-active December contract surged 3.82%, settling at 81.29 cents per pound and hitting the highest intraday level since June 2. The sharp rally was not an isolated event but the result of several fundamental factors converging in a short period.
Supply Signals: Texas Drought and Declining Crop Ratings
The latest USDA weekly crop progress report showed the US cotton good-to-excellent rating fell to 46% as of July 5, down from 48% the previous week and 52% a year ago. Squaring reached 49%, slightly above the five-year average, but the critical growing period is being severely impacted by water shortages, shrinking yield potential. Texas, the largest cotton-producing state, remains the core supply-side variable. Soil moisture is at historically low levels, directly threatening dryland cotton fields. This implies further downward revision risks for the 2026/27 US cotton production forecast, providing sustained support for deferred contract prices.
Demand Expectations: Soybean Trade and Oil Price Transmission
The cotton rally was not isolated. On the same day, CBOT soybean futures strengthened and corn rose to a one-month high, with the entire agricultural complex driven by weather speculation and demand recovery expectations. The US termination of sanctions waivers on Iranian oil and reports of a vessel attack near the Strait of Hormuz pushed NYMEX crude oil futures up over 2.7%. Higher oil prices directly raised polyester fiber production costs, improving cotton's relative cost competitiveness. Market expectations of increased cotton demand rest on two logics: macro-level recovery in textile and apparel consumption if global trade frictions ease, and substitution effects as higher chemical fiber costs shift some orders toward natural fibers. However, current demand expectations remain sentiment-driven and require confirmation from actual orders.
Positioning: Short Covering After Speculative Longs Exited
CFTC data showed that as of June 30, speculative net long positions in ICE cotton decreased by 3,740 contracts to 54,512. This suggests that earlier long liquidation had already reduced risk, and the sharp rally this week was amplified by forced short covering. The market will focus on three key reports this week: the delayed CFTC commitment of traders report, Thursday's export sales report, and Friday's USDA World Agricultural Supply and Demand Estimates. These reports will collectively validate current price levels. Strong export data combined with a downward US production revision could push prices higher; weak demand data may trigger a correction from overbought levels.
Impact on the Textile Supply Chain
The Cotlook A index rose 150 points to 87.30 cents per pound, with international spot markets following suit. For Chinese textile mills relying on imported cotton, raw material costs are rising rapidly. Small and medium-sized spinning mills with thin margins face particularly acute pressure: each 1 cent/lb increase in cotton adds approximately RMB 150 per ton of yarn. Downstream weaving and garment companies face a dilemma: absorbing upstream price increases while final order prices adjust with a lag, squeezing profits. Some mills may reduce cotton usage and increase viscose or polyester staple fiber blends, but this can affect fabric quality and customer acceptance.