When weekly central reserve cotton listings exceeded 80,000 tons while Xinjiang cotton fields suffered persistent heat and localized drought, the domestic cotton market managed a 'stable with slight decline' trajectory—a signal in itself: policy support and weather premium are wrestling, and for now, the market has chosen the former.
Price Divergence: Two Different Worlds
As of the week ending July 31, the main Zhengzhou cotton futures contract averaged 15,833 yuan/ton, down 0.9% week-on-week; the National Cotton Price B Index averaged 17,511 yuan/ton, down 0.6%. Meanwhile, ICE cotton futures averaged 80.68 US cents/lb, up 0.1%; the International Cotton Index (M) averaged 88.63 US cents/lb, translating to an import cost of 14,648 yuan/ton, with the domestic-import spread narrowing by 128 yuan/ton, a 4.3% decline.
What does the rapid narrowing of the domestic-import spread mean? For domestic mills, the cost advantage of imported cotton is weakening, but the tight supply of high-grade foreign cotton keeps spot basis firm. Notably, cotton yarn prices showed 'domestic stable, foreign rising'—domestic C32S carded yarn averaged 23,328 yuan/ton, nearly flat, while imported C32S rose 0.5% to 23,095 yuan/ton, narrowing the gap to just 233 yuan/ton. Behind these figures: export orders lifting imported yarn demand, while weak domestic consumption suppresses local yarn prices.
Supply Side: Weather Premium and Area Shrinkage Coexist
Northern Hemisphere cotton growth is generally stable, but major producers diverge. US cotton squaring and boll-setting rates improved by 2 and 3 percentage points year-on-year, respectively, but good-to-excellent condition fell to 46%, down 9 points—faster growth does not guarantee quality, and market concerns over US yield are building. India's sowing pace lags by 4%, at only 9.87 million hectares as of July 24, with sugarcane competition potentially keeping actual area below the 13 million hectare forecast.
In Xinjiang, persistent drought has increased irrigation pressure on some fields, and the national meteorological agency warns of a potentially record-breaking El Niño. What does this mean for buyers? Weather premiums may be repriced in coming weeks, especially after reserve sales conclude. Brazil's strong exports—128,000 tons in the first four weeks of July, up 28% daily year-on-year—partially offset US supply uncertainty, but the global supply-demand balance remains tight.
Policy and Geopolitics: Black Swans Reshaping Trade Rules
On July 29, US-Iran conflict escalated, with attacks extending to Saudi Arabia, Jordan, and others, raising Red Sea shipping risks and pushing Brent crude above $91/barrel. Higher oil prices directly raise chemical fiber costs, indirectly supporting international cotton prices, while intensifying global inflation concerns. More alarmingly, on July 31, the US Department of Homeland Security added 43 Chinese companies to the UFLPA Entity List, including well-known textile mills such as Septwolves, Weiqiao, and Tongzhou Cotton—raising compliance thresholds for exports to the US and tightening supply chain traceability requirements.
Domestically, July manufacturing PMI fell to 49.2%, with consumer goods manufacturing PMI dropping to 47.8%, clearly reflecting weak domestic demand. The Politburo meeting emphasized counter-cyclical adjustments, but policy transmission takes time. Currently, mill operating rates remain high, but finished goods inventories are accumulating in Nantong and Foshan, with export orders and profitability significantly better than domestic sales, where price competition squeezes margins. Additionally, stricter tax audits on e-commerce, live-streaming, and cross-border operations are raising compliance costs for online channels.
Outlook: External Strength, Internal Weakness May Persist
Globally, supported by robust Brazilian exports, recovering US cotton sales (weekly commitments jumped to 79,900 tons), and delayed Indian sowing, active consumption demand is likely to continue, keeping international cotton prices firm. Domestically, with continued reserve sales and high mill operating rates, cotton prices are expected to remain relatively stable, but watch for actual yield impacts from heat stress and indirect effects of the Entity List on export orders.