U.S. cotton-growing regions are facing a historic drought test. According to the latest agricultural drought monitor released by the USDA, as of July 7, the drought coverage rate across major U.S. cotton-producing areas reached 55%, a staggering 52 percentage points higher than the 3% recorded in the same period last year. Although this figure edged down 1 percentage point from the prior week's 56%, it remains at an extreme level by historical standards, meaning more than half of all cotton acreage is under water stress, posing significant risks to both yield and fiber quality for the upcoming 2026/27 season.
The Supply Logic Behind the Drought Data
In absolute terms, a 55% drought rate means approximately 6 million acres of cotton fields are experiencing varying degrees of water deficiency. The historical average for early July over the past decade has been around 20%, making this year's reading close to a record high. More alarmingly, the current period coincides with the critical boll-setting stage—water shortage during the square-to-boll phase directly reduces boll weight, shortens fiber length, and can even cause boll shedding. The USDA's July supply-demand report has not yet made major cuts to its U.S. cotton production estimate, but the persistence of dry conditions makes a more aggressive downward revision in the August report highly likely.
Geographically, Texas, the largest cotton-producing state (accounting for roughly 40% of U.S. output), is the epicenter, with its western and southern plains hit hardest. Many of these areas have low irrigation coverage, leaving dryland cotton fields particularly vulnerable. If the drought extends into mid-August, irreversible crop losses will become locked in.
Futures Prices Already Pricing in a Smaller Crop
The market has not been indifferent. The Zhengzhou Cotton Exchange's main 2609 contract settled at 15,930 yuan/ton on July 9, up more than 400 yuan/ton from its mid-June low. The U.S. drought factor has contributed the lion's share of this premium. Notably, the correlation between domestic and international markets is strengthening: ICE cotton futures rose about 2.5% over the same period, while Zheng cotton gained nearly 3%, reflecting the domestic market's greater sensitivity to tightening imported cotton supply.
Fundamentally, China's cotton imports for the 2025/26 season are expected to remain at 1.8-2.0 million tons, with U.S. cotton accounting for about 40%. If the U.S. crop reduction exceeds expectations, it will directly push up import costs and raise the domestic spot price floor. While Xinjiang cotton inventories are currently ample, a structural shortage of high-grade cotton persists, limiting the substitutability of imported cotton.
Downstream Transmission and Divergence
The impact of rising cotton prices on the supply chain is not linear. Large textile mills that built inventory positions in the 14,000-15,000 yuan/ton range will benefit from price appreciation, but they also face pressure to adjust new order quotations. Small and medium-sized mills face a double squeeze: rising raw material costs coupled with lagging price pass-through to gray fabrics and finished goods, further compressing margins.
By product category, high-count and combed yarns—which rely heavily on high-quality cotton—show greater price elasticity. If the U.S. drought tightens supply of premium grades, these products may see larger price increases than standard yarns. Home textile and apparel buyers should monitor this structural divergence and adjust their cotton grade mix in procurement lists accordingly.