On August 4, ICE cotton futures for December settled at 82.46 cents/lb, down 0.13% from the previous session. The contract had risen for three straight sessions on concerns over hot, dry weather in Texas, reaching a three-week high on Monday. The pullback was driven by profit-taking after the rally, compounded by a sharp 5% drop in global oil prices.
Background
The USDA crop progress report showed that as of August 2, the US cotton condition rating stood at 42% good-to-excellent, down from 46% the prior week and well below 55% a year ago. Texas, the largest cotton-producing state, has been suffering from persistent heat and dryness, raising concerns about lower yields. ICE certified cotton stocks also declined to 86,371 bales from 87,606 bales the previous day, indicating tighter physical supply.
Meanwhile, oil prices plunged over 5% on August 4 to a three-week low, as remarks from Qatari and US officials raised hopes for a diplomatic resolution to the Iran conflict, easing concerns about oil transport through the Strait of Hormuz. Lower oil prices reduce the production cost of polyester, a key substitute for cotton, thereby pressuring cotton values. This tug-of-war between weather premium and oil-driven headwinds defines the current market.
Industry Impact
For Chinese textile mills, the declining US cotton condition suggests potential supply tightness in the new crop, but ICE futures have not shown a strong upward trend, instead consolidating due to oil weakness. This reminds buyers that external price movements often reflect sentiment and speculative flows rather than a linear supply-demand picture. If rains improve in Texas, the weather premium could quickly evaporate; conversely, if drought persists and the condition rating falls below 40%, cotton prices may shift higher.
From a substitution perspective, lower oil prices make polyester cheaper, enhancing its competitive edge over cotton, especially in low-to-mid count yarns. Exporters should watch for shifts in overseas orders regarding material choices as the cotton-polyester spread widens. The dollar index weakened, while US stocks hit record highs, suggesting stable risk appetite. However, oil volatility underscores geopolitical uncertainty. Further easing in Iran tensions could keep oil and cotton prices under pressure.