Settling at 85.41 cents per pound on Aug 18, the ICE cotton December contract showed a modest 0.08% decline, yet earlier it touched 86.33 cents, a three-month high. The market is balancing supply concerns—US crop condition at 38%, the lowest in three years—against a stronger dollar and geopolitical risks. Direction hinges on weather in key US cotton regions.
Background
USDA's weekly crop progress report showed cotton condition at 38% as of Aug 16, down 2 points from the prior week and 17 points below last year's 55%. This is the worst level in three years, signaling deteriorating yield prospects. Meanwhile, key growing areas face persistent heat, with temperatures exceeding 100°F, and lack of rainfall, depleting soil moisture. For cotton in critical growth stages, such conditions raise the risk of production losses.
Notably, this year's El Niño is forecast to be strong, potentially altering global rainfall patterns. Historically, El Niño often exacerbates drought in the US South and affects rainfall in India and Australia. This suggests weather premium may persist through the season. Traders are focused on regions like West Texas and Georgia, where any forecast change could trigger sharp price moves.
Industry Impact
Price sensitivity to weather transmits directly through the supply chain. For ginners and merchants, lower crop ratings imply higher acquisition costs, boosting holding intentions. For mills, raw material costs rise while end-demand recovery remains weak, squeezing margins. This may lead to a stalemate in the cash market—sellers holding, buyers waiting.
A stronger dollar is a key macro headwind. On Aug 18, the dollar index rose, and Middle East uncertainty pushed Treasury yields to multi-year highs, fueling concerns about borrowing costs and inflation. For importers holding other currencies, dollar strength raises actual costs, dampening physical buying. However, if weather worsens, supply fears may outweigh currency effects, pushing prices higher.
From a broader perspective, reduced US output is reshaping global trade flows. Brazil and Australia may gain export share, while China, the largest importer, will likely adopt cautious procurement. Customs data show Chinese cotton imports have declined year-on-year, but if US prices stay elevated due to weather premium, buyers may shift to Brazilian or West African cotton, pressuring US exports.