On August 7, the main Zhengzhou cotton contract hit a one-month high of 16,305 yuan/ton, but gains narrowed to close up 0.56%. The rally, however, is not demand-driven; it reflects a confluence of short-term factors: persistent heat in Xinjiang, rising expectations of a smaller new crop, and firmer overseas markets. Notably, over the week, cotton futures gained 2.95%, while textile mills reduced operating rates and built up inventories. This divergence between price and fundamentals reveals the market's core tension—weather premium versus off-season reality.
Weather Premium and Supply Concerns
Xinjiang's cotton belt is suffering from prolonged high temperatures, significantly impacting the boll-setting stage. According to the China Cotton Association, by late July, most cotton in Xinjiang was at the flowering stage, with some areas entering the boll-opening phase. Heat has reduced pollen viability and increased boll shedding. In contrast, the Yellow River valley has seen favorable conditions, while the Yangtze River basin experienced waterlogging due to heavy rains, leading to regional disparities.
These weather issues have translated into a risk premium in futures. Overseas, adverse weather in the U.S. and other major producing regions raised supply concerns, with ICE cotton for December up 0.17% to 83.16 cents/lb, providing external support. Yet, whether the weather premium persists depends on actual weather evolution and crop losses, which remain speculative at this stage.
Weak Demand and Reserve Sales Cap Gains
Demand remains subdued. The textile industry is in its traditional off-season, with mills accumulating finished goods inventories and cutting operating rates. Purchases are limited to essential restocking. This cautious stance is reflected in the spot market, which has lagged futures, widening the basis. The rally appears more speculative than demand-driven.
Reserve cotton auctions are a key cap on prices. On August 6, 8,011.902 tonnes were offered and fully sold, with an average price of 17,070 yuan/ton, down 32 yuan/ton from the previous day. Since the start of the auctions on July 20, daily offerings of about 8,000 tonnes have consistently sold out. This incremental supply helps keep prices from breaking higher despite weather-driven bullishness.
Market Outlook and Strategies
Expectations of a pick-up in autumn/winter orders ahead of the 'golden September and silver October' season, along with concentrated buying by large enterprises, provide some support. However, as Guangda Futures notes, ample supply from reserves and lackluster demand suggest limited upside. Prices are likely to remain range-bound, with weather and auction progress as key watchpoints.
For buyers, chasing prices at current highs is risky; better to wait for pullbacks to support levels. For exporters, a firmer overseas market supports export quotes, but currency fluctuations and overseas demand uncertainties warrant caution. Hedging strategies are advisable.