On July 7, the ICE cotton futures market experienced a sharp rally, with the most active December contract rising 2.99 cents to settle at 81.29 cents per pound, a gain of 3.82% and the highest close since June 2. Market participants attribute this surge to a combination of worsening weather conditions in major U.S. growing regions and improving demand expectations.
Weather Impact: Texas Drought Deteriorates Cotton Quality
The latest USDA crop progress report shows that U.S. cotton condition ratings dropped to 46% good-to-excellent for the week ending July 5, down from 48% the previous week and significantly below 52% a year ago. The squaring rate reached 49%, slightly above the five-year average of 47%, but faster growth has not translated into better quality.
Texas, the largest cotton-producing state in the U.S., continues to suffer from severe drought. Local farmers face dual pressures of limited irrigation water and insufficient soil moisture. Keith Brown, a cotton broker from Georgia, noted that the drought in Texas and poor weather across major growing regions are casting a shadow over crop prospects. If effective rainfall does not arrive in the next two weeks, the quality rating could decline further, reducing the supply of high-grade cotton available for delivery in the 2026/27 season.
For Chinese import cotton buyers, declining U.S. cotton quality will directly widen premiums for high-grade cotton in bonded zones. The buying hesitation caused by previous trade uncertainties may accelerate into actual purchases.
Demand Expectations: Multiple Factors Boost Market Confidence
Beyond weather, expectations of increased cotton demand are also heating up. Recent signs of recovery in U.S. soybean exports, coupled with adjustments in the implementation pace of the Phase One trade agreement between China and the U.S., have led some traders to anticipate a moderate rebound in textile end-demand in the third quarter.
CFTC positioning data shows that as of the week ending June 30, speculative net long positions in ICE cotton decreased by 3,740 contracts to 54,512. This suggests that speculative funds had already reduced positions before the rally, and the July 7 surge was driven more by short covering and new long entry. The upcoming export sales report on Thursday and the USDA World Agricultural Supply and Demand Estimates (WASDE) report on Friday will be key to verifying whether demand is truly recovering.
Notably, the Nasdaq composite index fell sharply on Tuesday, pressured by tech stocks. However, commodity markets moved independently, indicating a phase of capital rotation from equities into commodities.
Substitution Effect: Crude Oil Rally Strengthens Cotton Support
Rising crude oil prices were another major driver of the cotton surge. On July 7, NYMEX crude oil futures closed up over 2.7% and extended gains after hours. The triggers included the U.S. termination of sanctions waivers on Iranian oil and renewed supply disruption fears after reports of an attack on a vessel near the Strait of Hormuz.
Higher oil prices directly increase the production cost of polyester fiber, the main substitute for cotton. When polyester becomes more expensive, textile mills tend to favor cotton in their raw material mix, providing indirect support for cotton prices. This transmission chain from crude oil to chemicals to cotton has been repeatedly observed in history, and this time is no exception.
From an industry perspective, the current cotton price rally is not purely driven by fundamentals but rather by a confluence of weather, geopolitics, and speculative sentiment. Therefore, buyers and exporters should be cautious about potential pullbacks after the initial spike.