The U.S. cotton good-to-excellent rate edged up to 45% in mid-July, but that figure remains 12 percentage points below last year's 57%. Lingering forecasts of high temperatures and drought in the cotton belt, combined with renewed disruptions to Black Sea grain shipments, pushed ICE cotton futures to settle at 78.92 cents per pound. For textile mills, this means raw material costs are unlikely to fall soon, and volatility risk is rising.
Weather Remains the Key Variable
The USDA's weekly crop progress report, released July 19, showed the good-to-excellent rating for U.S. cotton rising from 44% to 45%, still far below last year's 57%. From an industry perspective, this marginal improvement does little to reverse market expectations of lower yields—the persistent heat and dryness over the past two weeks have already threatened cotton during its boll-setting phase. Weather models indicate that the main growing regions will continue to experience hot, dry conditions for at least the next two weeks, directly curbing selling sentiment.
For Chinese import cotton buyers, the weather premium embedded in U.S. cotton prices is becoming a rigid cost component. If precipitation remains scarce, the December contract could soon test the 80-cent mark, which would directly raise raw material costs for domestic textile mills.
Dual Support from Substitutes and Geopolitical Risks
Cotton's rally did not happen in isolation. On July 20, CBOT wheat briefly hit a two-year high after renewed attacks on ports and grain vessels by Russia and Ukraine threatened Black Sea grain export routes. Soybeans and corn also rose, providing spillover support to cotton.
Meanwhile, oil prices gained over 1% in choppy trading. Polyester fiber, a major substitute for cotton, has production costs closely linked to oil prices. Higher oil prices make it less attractive for mills to switch to synthetic fibers, thereby supporting cotton demand. This substitution logic has been repeatedly validated in recent markets and is a key reason cotton has remained resilient amid macro headwinds.
Notably, the Houthi announcement of a naval blockade on Saudi Arabia further amplified concerns about supply chain disruptions. While cotton trade is not directly affected by Red Sea routes, the spread of geopolitical risk sentiment tends to synchronize movements across all commodities, and cotton cannot escape.
Spot Market Lags but Direction Is Clear
The Cotlook A Index fell 165 points to 86.75 cents per pound on July 20, indicating that the spot market has not fully followed the futures rally. This discrepancy is common in the industry—downstream mills prefer to digest inventories and stay on the sidelines until orders become clearer. But sustained strength in futures will eventually transmit to the spot side through basis trading, especially in imported cotton purchases.
For Chinese textile enterprises, the domestic-international cotton price spread has narrowed to multi-year lows, eroding the cost advantage of imported cotton. If ICE futures continue to rise, domestic cotton prices will likely follow, squeezing profit margins in the spinning sector.