US cotton futures closed marginally higher on August 6, with the most-active December contract settling at 83.16 cents/lb, up 0.17%. The seemingly flat move belies two opposing forces: an accumulating weather premium and a rare divergence within export data. For domestic mills relying on imported cotton, understanding this divergence matters more than watching the tick-by-tick price action.
Export Data: Old-Crop Contraction vs. New-Crop Expansion
The latest USDA export sales report presents a contradictory picture. Current-year upland cotton net sales were -55,855 bales, down 288% from the prior week and 223% below the four-week average, with China taking only 4,136 bales. However, next-year net sales reached 242,052 bales, and despite China's absence from the buyer list, overall orders remained robust. Shipments of 222,830 bales fell 5% week-over-week and 7% below the four-week average, including 7,248 bales to China. This divergence during the old-to-new crop transition typically signals that the market is shifting its pricing focus from old-crop inventories to new-crop weather and planted acreage.
Notably, Brazil exported 154,965.56 tons of cotton in July, up 22% year-on-year. This incremental supply is quietly reshaping global trade flows—when US old-crop sales falter, Brazilian cotton is filling part of the gap. For buyers, this means more abundant alternatives beyond US cotton, potentially opening up negotiation room.
Weather Premium: El Nino Expectations and Drought in Key Regions
The real support for the market comes from weather. Cotton yields in the US Plains—from Texas through Oklahoma and Kansas—are highly dependent on rainfall and soil moisture. The USDA daily weather report shows persistent hot and dry conditions in the Southern Plains, with high temperatures returning to the Northern Plains, and only scattered showers around Kansas. This drought pattern directly raises expectations of lower yields and tighter global supply, giving bullish funds a reason to step in.
A more macro variable is El Nino. This year's forecast for a strong El Nino event could significantly alter rainfall patterns. India's monsoon is already delayed, with July rainfall expected to be below average, which will likely exacerbate concerns over Northern Hemisphere cotton supply. The weather premium is therefore a key support for current cotton prices, but its fragility lies in the fact that if rains improve, the premium could quickly unwind.
Macro and Geopolitical Headwinds: Stronger Dollar Caps Gains
Despite a fundamentally bullish backdrop, the macro environment is not cooperative. A stronger dollar directly reduces the appeal of dollar-denominated cotton to non-US buyers, while US stocks took a breather after a strong rally, with investors digesting corporate earnings and geopolitical news. Oil prices rose more than $3, driven by reports that Iran's parliament is considering a bill to ban US and Israeli ships from the Strait of Hormuz, which could raise energy transport costs and indirectly push up cotton production and logistics expenses. These factors explain the limited gains in futures.
For domestic textile mills, current US cotton prices are caught in a tug-of-war between weather premium and macro pressure. Procurement decisions should not rely solely on screen prices but should integrate exchange rate fluctuations, freight cost changes, and the cost-effectiveness of Brazilian cotton.