US cotton futures turned lower after a three-session rally that had pushed prices to their highest since July 13. On August 4, the most-active December contract settled at 82.46 cents per pound, down 0.11 cent, or 0.13 percent. On the surface, this was a routine profit-taking pullback, but beneath it lay a sharp 5 percent drop in oil prices—two forces converging on the cotton market, making this correction more significant than it appears.
Background
Weather premium drove the recent rally. Persistent heat and drought in Texas fueled concerns over crop conditions, prompting speculative buying. However, as prices reached higher levels, some longs chose to lock in gains, as noted by VarnerBrokerage president Rogers Varner. Profit-taking directly weighed on the market.
Meanwhile, international oil prices plunged more than 5 percent to a three-week low, following statements from Qatari and US officials that raised hopes for a diplomatic resolution to the Iran conflict, potentially improving oil shipments through the Strait of Hormuz. Lower oil prices reduce the production cost of polyester—a substitute fiber—thereby undermining cotton's competitive edge.
Industry Impact
Notably, the USDA's weekly crop progress report showed that as of August 2, the US cotton condition rating fell to 42 percent good-to-excellent, down from 46 percent the previous week and 55 percent a year ago. This suggests that despite the short-term pullback due to profit-taking and oil weakness, the fundamental supply support remains intact. A significantly lower rating could impact final yields and total output, providing a floor under prices.
Data from ICE showed that certified cotton stocks declined to 86,371 bales as of August 3, from 87,606 bales the prior session. Falling stocks typically reflect adequate physical demand or weak delivery intentions, which helps cushion the downside. Meanwhile, the Cotlook A index rose 90 points to 93.70 cents per pound, indicating firm physical prices. The divergence between futures and spot suggests a narrowing basis, which is crucial for hedging strategies.
For the textile supply chain, short-term cotton volatility directly affects yarn costs. If oil remains weak, polyester prices may come under pressure, widening the cotton-polyester spread. This could shift some orders toward blended or pure synthetic products. However, given the low crop ratings, supply concerns ahead of the new crop are not resolved, limiting the downside potential.