On July 7, ICE cotton futures for the most-active December contract surged nearly 4%, settling at 81.29 cents per pound, the highest in five weeks. This price spike reflects the convergence of weather-related production cuts and rising demand expectations. For the textile industry, raw material price volatility is shifting from expectations to actual procurement pressure.
Drought and Good-to-Excellent Rate: Strengthening the Production Cut Narrative
The latest USDA crop progress report shows the US cotton good-to-excellent rate has dropped to 46%, down from 48% the previous week and significantly below 52% a year ago. Texas, the largest cotton-producing state, continues to suffer from drought, weighing on crop prospects. The squaring rate reached 49%, slightly above the five-year average, but the moisture deficit during the growing phase could directly impact final yields. Historically, each percentage point decline in the good-to-excellent rate tends to be priced into futures by 5-8 cents. At 46%, the current rate is in the low range for the past five years; if hot and dry weather persists, production cut expectations will intensify.
Energy Market Transmission: Polyester Substitution Effect Emerges
Another driver of cotton's rise came from energy markets. NYMEX crude futures gained over 2.7% on the day, driven by the US revocation of Iran's oil sanctions waiver and geopolitical risks in the Strait of Hormuz. Higher oil prices directly increase polyester production costs, and as the main substitute for cotton, polyester's cost rise enhances cotton's relative competitiveness. This cross-commodity price linkage has been repeatedly observed: when crude rises more than 2%, cotton futures typically follow with a 1.5%-2% gain over the next three sessions. This time, cotton's gain exceeded that average, indicating that weather and demand factors are dominating short-term pricing.
Demand Side Shows Support, but Speculative Sentiment Cools
Expectations of increased cotton demand are not baseless. Active US soybean trade and improving export sales data suggest global textile consumption may be gradually recovering post-pandemic. However, the latest CFTC data show that as of June 30, speculative net long positions in ICE cotton fell by 3,740 lots to 54,512 lots, indicating that professional money has begun to reduce positions at higher prices. This divergence—prices rising while longs decline—is a warning sign: the short-term rally is more driven by short covering than new buying.
Key Data This Week: Three Reports to Set Direction
This week, the market will digest three key reports: the delayed CFTC commitments of traders report, Thursday's export sales report, and Friday's USDA World Agricultural Supply and Demand Estimates (WASDE) report. The WASDE report will provide the first new-crop production estimate based on actual planted acreage and current weather conditions. If US production cuts exceed expectations, the 81-cent level may be decisively broken; conversely, weak export data could trigger profit-taking. For textile mills, prices are at a cyclical high, but the production cut narrative is not yet fully priced. Procurement decisions require careful balancing between 'chasing the rally' and 'waiting and seeing'.