Cotton prices strengthened both domestically and internationally this week, but for different reasons: domestic gains were driven by contract rollover shifting pricing focus to the new crop, while international gains reflected supply concerns ignited by the USDA report and adverse weather. The Zhengzhou Cotton Futures主力 contract averaged 16,336 CNY/ton, up 2.3% week-on-week, while NY futures hit an intraday high of 85.25 US cents/lb, the highest since May 14. The rally masks a tug-of-war between tightening supply expectations and sluggish demand.
Supply Side Tightens: Weather and USDA Report
Major Northern Hemisphere cotton belts are facing unusual weather stress. As of August 9, US cotton good-to-excellent ratings fell to 40%, 13 percentage points lower than a year ago, with Texas drought threatening bolls at a critical stage. The USDA August report raised harvested area but cut yield to 798 lbs/acre, trimming US production by about 20,000 tons. More importantly, global ending stocks were reduced to 15.19 million tons, down 1.11 million tons year-on-year, reinforcing supply tightness expectations.
In India, planting is nearly complete, but rainfall in key regions over the next two weeks is forecast below normal, posing risks to crop development. Southern Hemisphere supplies are accelerating: Brazil's harvest reached 28.4%, and Australia exported 129,000 tons in June, up nearly 200% month-on-month. US export commitments for the new season reached 205,000 tons in the first week, up 273% from the prior week, indicating buyers are securing supplies amid uncertainty.
Demand Reality: Domestic Weakness, Export Resilience
Demand remains subdued compared to supply-side excitement. China's July CPI rose 0.5% year-on-year, with core CPI at only 0.9%, signaling weak consumer spending. In the textile market, domestic C32S combed yarn averaged 23,452 CNY/ton, up just 0.3%, while imported yarn rose 0.9%, narrowing the price gap to 108 CNY/ton. Polyester staple fiber rose 66 CNY/ton to 7,534 CNY/ton, maintaining substitution pressure on cotton.
However, downstream signals are mixed. Cotton industrial inventories rose 3.8% in early August, mill operating rates recovered to 80.6%, and yarn sales improved, but fabric sales declined, indicating incomplete transmission to final orders. Surveys in Hubei, Anhui, and Guangdong show autumn/winter orders are gradually materializing, with mills accelerating destocking and hoping for a strong September-October season. This pattern of expectations ahead of fundamentals suggests limited upside support.
Policy and Macro: Buffer or Catalyst?
Macro conditions provide a floor for cotton prices. US inflation is cooling, with July CPI at 3.4% and PPI at 4.7%, but retail sales fell 0.6% month-on-month and consumer confidence dropped to 51.0, reducing expectations of further Fed hikes. Domestically, the central bank's Q2 monetary policy report on August 12 reaffirmed a moderately loose stance, supporting liquidity for the industry chain.
Reserve cotton sales act as another buffer. This week, reserves sold out at higher prices, with cumulative listings reaching 160,320 tons by August 14. This mechanism stabilizes short-term prices while signaling policy oversight. However, as Xinjiang new crop matures earlier and ginners plan to start purchasing in late August, new supply pressure will gradually weigh on far-month contracts.