Cotton Market Weekly: Weather Premium and USDA Report Drive Price Rally

Domestic and international cotton prices strengthened in tandem this week, driven by supply concerns and macro easing expectations. Zhengzhou futures average settled at 16,336 yuan/ton, up 2.3% weekly, while NY futures touched 85.25 cents/lb, the highest since May 14. The rally is underpinned by weather premiums and a supportive USDA report, but weak downstream demand raises questions about sustainability.

Supply Side: Weather and USDA Report Tighten Global Stocks The USDA August report cut US yield to 798 lbs/acre, trimming production by about 20,000 tons, and lowered global ending stocks by 330,000 tons to 15.19 million tons, down 1.11 million tons year-on-year. This reinforced expectations of tight global supply, a key driver for international prices. US cotton condition ratings fell to 40%, below last year's 53%, with Texas drought stressing bolls. India's main growing regions face below-normal rainfall in the next two weeks. In China, heat and drought in Xinjiang may accelerate boll opening, with some gins planning to start purchasing late August to early September, opening the new season pricing window.

Price and Spreads: Domestic Premium Widens Both domestic and international prices rose, but domestic gains were slightly larger. The China Cotton Index B averaged 17,889 yuan/ton, up 1.8%, while the international index M (CIF China port) averaged 93.33 cents/lb, up 1.8% in yuan terms. The domestic-international spread widened to 2,507 yuan/ton, up 46 yuan from the previous week. In yarn, imported yarn rose more than domestic: C32S combed yarn domestic averaged 23,452 yuan/ton, up 0.3%, while imported averaged 23,344 yuan/ton, up 0.9%, leaving imported yarn 108 yuan cheaper. Polyester staple fiber rose to 7,534 yuan/ton, supporting cotton yarn prices indirectly.

Demand: Sporadic Recovery, Weak Final Orders Downstream shows tentative signs of recovery. Cotton industrial inventories rose 3.8% month-on-month in early August, with mill operating rates up to 80.6%. Yarn production-sales ratios improved, but fabric sales ratios fell, indicating weak final orders. Autumn/winter orders are gradually landing in Hubei, Anhui, and Guangdong, with mills destocking yarn and anticipating the 'golden September and silver October.' Reserve cotton sales continued with 100% transaction rates, cumulative sales reaching 160,320 tons, providing stable supply but also signaling decent spot demand.

Macro data: China's July CPI rose 0.5% year-on-year, core CPI 0.9%, with the central bank reiterating moderately loose monetary policy. In the US, inflation cooled, retail sales fell 0.6% month-on-month, and consumer confidence dropped, reducing rate hike expectations, but geopolitical risks persist.

Outlook: Firm Near-Term, Limited Upside Weather premiums and lower global stocks support prices, but support may fade as new crop output becomes clearer. Domestic demand has not fully recovered, and reserve sales cap upside. International prices are expected to remain firm with volatility, while domestic prices may consolidate. For textile firms, the current price uptrend calls for cautious procurement timing.

Practical Recommendations

For Buyers - Monitor the domestic-international spread; if it widens further, evaluate imported cotton's cost-effectiveness, but factor in quota and FX risks. - Use reserve sales windows to procure in batches based on needs, avoid chasing highs, and watch new crop opening prices.

For Exporters - Imported yarn is rising faster than domestic; consider prioritizing domestic yarn for export orders to lock in cost advantages. - Track Fed policy and geopolitical developments to hedge FX and logistics risks; include price adjustment clauses in contracts.