On July 7, ICE cotton futures surged 2.99 cents, or 3.82%, to settle at 81.29 cents per pound for the December contract, hitting the highest intraday level since June 2. The rally was fueled by a convergence of supply concerns, demand optimism, and higher crude oil prices.
Weather: Texas Drought Tightens Supply Outlook
The primary catalyst came from deteriorating crop conditions in the U.S. Cotton Belt. USDA’s weekly crop progress report showed the cotton good-to-excellent rating fell to 46% as of July 5, down from 48% the prior week and well below 52% a year ago. Squaring reached 49%, slightly above the five-year average of 47%, indicating the crop is entering a critical growth phase under drought stress.
Texas, the largest cotton-producing state, is experiencing severe drought. According to a Georgia-based cotton broker, the dry conditions in Texas and generally poor weather across major growing areas continue to threaten yield prospects. Without significant rainfall in the coming weeks, U.S. cotton production estimates may be revised downward, providing sustained support for futures prices.
Demand: Export Expectations and Macro Sentiment
Optimism about cotton demand also contributed to the rally. Recent signs of recovery in U.S. soybean trade boosted overall agricultural commodity sentiment, with cotton benefiting from spillover effects. Meanwhile, the U.S. termination of sanctions waivers on Iranian oil and reports of attacks on vessels near the Strait of Hormuz pushed crude oil prices up over 2.7% on the day, raising the production cost of polyester—cotton’s main synthetic substitute—and indirectly enhancing cotton’s competitiveness.
CFTC data showed speculative net long positions in ICE cotton fell by 3,740 contracts to 54,512 as of June 30, suggesting capital had been retreating. However, the volume surge on July 7 indicates new longs are re-entering, betting on a tightening fundamental outlook.
Key Reports This Week: Exports and Supply-Demand Balance
Three critical reports are due this week: the delayed CFTC commitments of traders report, Thursday’s export sales data, and Friday’s USDA World Agricultural Supply and Demand Estimates (WASDE). These documents will provide fresh benchmarks for speculative positioning, actual export demand, and the global supply-demand balance for the new crop year.
Friday’s WASDE report is particularly important. If USDA lowers its U.S. production forecast based on current drought conditions, the 81-cent level could be the starting point for a new leg higher. Conversely, if the reduction is smaller than expected, profit-taking may trigger a pullback.
Substitution Effect: Oil Price Transmission
The link between crude oil and cotton is clear: higher oil raises costs for polyester feedstocks (PTA and MEG), making polyester fiber more expensive and thus improving cotton’s relative attractiveness. With Brent crude trading around $80/barrel, continued geopolitical risks could narrow the polyester-cotton spread, supporting cotton demand.
However, this transmission is not instantaneous. Polyester price adjustments typically lag crude oil by one to two weeks, and end-use fabric buyers focus on actual price differentials rather than short-term volatility. Therefore, oil’s support for cotton is more emotional than substantive in terms of demand switching.
Cash Market: Lagging Rally
On the cash side, the Cotlook A index rose 150 points to 87.30 cents/lb. The slower pace of cash price increases reflects limited willingness among downstream mills to pay higher prices. Mills in China and Vietnam, the top importers, are operating with thin margins and are buying only for immediate needs, lacking appetite for speculative stockpiling.
This suggests that the futures rally may face a ceiling from the cash market. Once prices break above 85 cents/lb, mills may shift toward increased polyester usage or delay price fixing, capping further gains.