When cotton fields in Xinjiang began to open earlier due to water shortages, and when the USDA cut global ending stocks by 330,000 tons, domestic and international cotton prices staged a rare synchronized rally in mid-August. Zhengzhou futures averaged 16,336 yuan/ton, up 2.3% weekly, while New York futures touched 85.25 cents/lb, a three-month high. Yet beneath this rally, downstream order momentum remains weak—spinning mills' operating rate recovered to 80.6%, but fabric sales fell. The tug-of-war between supply tightening expectations and sluggish demand is set to define the market.
Supply Side: Weather and USDA Report Reinforce Tightening
Abnormal weather in the Northern Hemisphere was the direct trigger. Drought in Xinjiang not only raised output cut expectations but also advanced cotton opening, with some mills planning to start purchasing in late August. Meanwhile, Texas drought persisted, with the U.S. cotton condition rating falling to 40% good/excellent, far below last year's 53%. The USDA August report raised harvested area but cut yield to 798 lbs/acre, reducing U.S. production by about 20,000 tons. Global ending stocks fell by 330,000 tons month-on-month to 15.19 million tons, down 1.11 million tons year-on-year.
Notably, the USDA raised both global production and consumption, but the consumption increase was larger, tilting the balance sheet toward tightening. India's sowing is complete, but rainfall in the next two weeks is expected below normal, keeping growth risks alive. In the Southern Hemisphere, Brazil's harvest reached 28.4%, and Australia's June exports nearly tripled month-on-month, but these supplies may be offset by Northern Hemisphere weather concerns. U.S. export commitments surged 273% week-on-week in the new season's first week, indicating buyers are acting on supply fears.
Price Transmission: Spread Widens, Yarn Lags
Cotton prices rose in both markets, but unevenly. Domestic prices gained 1.8% weekly, while international rose 1.3%, widening the spread to 2,507 yuan/ton, making imports less competitive and pressuring mills that use foreign cotton. The pass-through to yarn was weak: domestic C32S yarn rose only 0.3%, while imported yarn rose 0.9%, pushing imported yarn 108 yuan/ton above domestic. This cotton-up-yarn-flat pattern is squeezing mill margins.
Polyester staple fiber rose 66 yuan/ton to 7,534 yuan/ton, potentially enhancing substitution in blends. Reserve sales continued with 100% turnover, with cumulative sales reaching 160,320 tons by August 14, adding supply. Macro data show U.S. CPI at 3.4% and retail sales down 0.6%, cooling Fed hike expectations; China's CPI rose only 0.5%, with the central bank maintaining a moderately loose policy, supporting financing conditions. Yet weak demand caps upside.
Outlook: Range-bound Firm, but Correction Risks Ahead
Supply concerns will likely dominate short-term sentiment, but support will fade as new crop output becomes clearer. Xinjiang's opening is imminent; if yields beat expectations, the output-cut narrative could be debunked. Internationally, strong U.S. exports and lower stocks provide support, but Southern Hemisphere supply and geopolitical risks (e.g., Hormuz negotiations) may cause volatility. Domestic autumn/winter orders are trickling in, and mills are destocking, but fabric sales declines suggest final demand is not yet robust.
Overall, cotton prices are expected to remain firm but range-bound, with upside limited by weak demand and reserve sales. For the industry, the focus should be on order sustainability rather than chasing rallies.