The US cotton belt is enduring its most severe drought test in a decade. According to the latest USDA agricultural drought monitor data, as of July 7, 2026, 55% of the US cotton-producing region is in drought, a staggering 52 percentage points higher than the 3% recorded during the same period last year. Although the weekly figure edged down 1 percentage point, the severity and breadth of the drought far exceed normal years, turning market concerns about the 2026/27 US cotton crop from speculation into reality.
Drought Depth: Beyond the Headline Figure
Looking at the drought severity structure, the share of D2 (severe drought) and above within the cotton belt has increased significantly. Within the 55% drought coverage, a considerable portion falls under severe or extreme categories. This means not only are cotton emergence and squaring facing water stress, but subsequent boll development will also be persistently impacted. Compared to the less than 5% drought coverage in the same period last year, the soil moisture conditions in cotton fields have deteriorated precipitously.
Geographically, western Texas and Oklahoma are the hardest-hit areas. These regions account for nearly 40% of the nation's planted cotton acreage and are heavily reliant on dryland farming, making them extremely dependent on rainfall. Currently, the crop is in its critical growth phase—from squaring to flowering. A lack of water directly leads to boll shedding, making a decline in yields almost inevitable.
Price Pass-Through: Production Cut Expectations Being Priced In
Following the drought data release, the Zhengzhou Cotton main contract (2609) closed at 15,930 yuan/ton on July 9, rebounding from previous lows. Historically, for every 10 percentage point increase in the US cotton belt drought ratio, ICE cotton futures typically rise 3% to 5%. The current 55% drought ratio has already far exceeded this threshold.
For domestic cotton textile enterprises, the expectation of a US cotton production cut implies a higher cost floor for imported cotton. China imports approximately 800,000 to 1 million tons of US cotton annually, accounting for over 40% of its total imports. If the 2026/27 US cotton crop shrinks by 10% to 15% due to drought, the global cotton supply-demand balance will shift from loose to tight, potentially narrowing or even inverting the domestic-imported cotton price spread.
However, the demand side has not yet provided a positive signal. The recovery in global textile and apparel end-consumption remains weak, and the diversion of orders to Southeast Asia continues. For Zhengzhou Cotton to break through the 16,000 yuan/ton mark, supply contraction must resonate with a demand recovery. A rally driven solely by weather-related bullish sentiment lacks a solid foundation.
Industry Chain Impact: The Game from Farmers to Mills
Upstream cotton farmers face a dilemma: if the drought persists, lower yields will directly erode profits; but if cotton prices rise due to the production cut, it may partially compensate for the losses. The USDA will make its first substantive adjustment to the 2026/27 production estimate in its August supply-demand report, providing the market with a clearer indication of the scale of the reduction.
Midstream ginners and traders are adjusting their procurement pace. Some have already increased inquiries for Brazilian and Australian cotton to diversify US supply risk. Meanwhile, weather conditions in China's Xinjiang cotton region remain relatively stable, and the target price subsidy policy for 2026 Xinjiang cotton has been clarified, offering domestic mills a stable alternative source.
Downstream weavers and garment manufacturers face cost pass-through pressure. Cotton yarn prices have already shown signs of following the uptick, but resistance to price increases for grey fabrics and finished garments is significant. Brand owners and retailers have limited tolerance for upstream price hikes. This means that profit distribution along the chain will tilt toward the cotton growing end, while the processing and manufacturing segments may see their margins squeezed.