Cotton prices are entering a new phase of high-level volatility, caught between weather premiums and macro disturbances. This week, Zheng cotton futures broke above 17,000 yuan/ton, reaching a high of 17,130 yuan/ton, with an average settlement price up 3.5% from the previous week. ICE cotton futures averaged 87.19 cents/lb, touching 89.45 cents/lb intraday, the highest since April 2024. Notably, futures and spot prices diverged sharply—futures rallied aggressively while spot prices rose only 0.7%, narrowing the basis by 217 yuan/ton. This divergence signals that market expectations for distant-month prices have significantly outpaced spot demand, widening the gap between speculative sentiment and industrial reality.
Weather Premium: Why Production Cut Expectations Are Hard to Disprove
The core supply-side driver is the deteriorating US cotton crop condition. USDA data show that as of August 16, the US cotton good-to-excellent rate fell to 38%, down 2 percentage points from the previous week, the lowest for the same period in three years. Drought in major producing areas has increased boll shedding and hard locks, pressuring new-crop yield and production expectations. The World Weather Company predicts that the West Texas region will continue to face hot, dry weather for the next 10 days, potentially exacerbating crop water stress. This means the weather trading window is unlikely to close soon, and production cut expectations are being reinforced by data.
Meanwhile, Brazil's cotton harvest has accelerated to 59.6%, up from 48.9% a year earlier, and daily exports in the second week of August surged 51.1% year-on-year, partially offsetting the supply gap from the US crop shortfall. However, US cotton export commitments remain steady, with net sales of 48,000 tons for the 2026/27 season in the week ending August 13, above the three-year average. This indicates that global buyers' reliance on US cotton has not weakened despite the production cut; instead, they are scrambling for quality resources, further supporting international prices.
Domestically, Xinjiang cotton is in the late boll-setting to early boll-opening stage. Previous high temperatures have reduced boll numbers in some areas, fueling concerns about a new-crop production cut. Weather forecasts show brief rains in northern Xinjiang, but the hot, clear pattern persists in southern Xinjiang, making it difficult to disprove production cut expectations in the short term. Reserve cotton sales entered their fifth week, with a 100% transaction rate and steadily rising average prices, reflecting a structural shortage of high-quality cotton.
Macro Disturbances: Signals Over Substance, Domestic Policy Support
On the macro front, the US Treasury buyback operation was a key variable this week. On August 19, the US Treasury announced it would at least double the size of its long-term bond liquidity support buyback. The 30-year Treasury yield fell about 10 basis points that day, and the dollar index dropped nearly 1%, providing a temporary boost to dollar-denominated commodities. However, market skepticism quickly emerged, and the 30-year yield rebounded to around 5.24% the next day, erasing almost all the decline. Given the $40 trillion debt, widening fiscal deficits, and inflation concerns, the existing buyback scale is deemed "insignificant," and the signal outweighs substance. This means the risk of dollar rebound remains, and cotton price upside will be constrained by tighter financial conditions.
Geopolitical risks persist as the US-Iran 60-day negotiation window expired on August 18, with both sides indicating no extension. The Strait of Hormuz shipping stalemate continues, and Brent crude briefly surpassed $94/barrel this week. Geopolitical risk premiums continue to disturb commodity risk appetite, indirectly affecting cotton shipping costs and downstream chemical fiber substitute prices. Domestically, July retail sales grew only 0.6% year-on-year, down 0.4 percentage points from June. Clothing, footwear, and knitwear retail sales at units above designated size fell 1.0% year-on-year, but cumulative January-July sales reached 862.8 billion yuan, still up 5.8% and outpacing overall retail growth, indicating resilience in domestic demand. The State Council meeting on August 17 emphasized that "insufficient domestic demand remains prominent," focusing on expanding demand and removing bottlenecks. Policy is shifting from "stimulating consumption" to "enhancing residents' spending capacity." With the autumn/winter peak season approaching, textile and apparel demand is expected to benefit from both policy and seasonal support.
Industry Transmission: Yarn Prices Lag, Buyers Cautious
In the textile market, domestic and imported yarn prices rose only marginally. Domestic C32S combed yarn averaged 23,514 yuan/ton, up just 62 yuan/ton (0.3%); imported C32S combed yarn averaged 23,438 yuan/ton, up 94 yuan/ton (0.4%). Imported yarn was 76 yuan/ton cheaper than domestic. Polyester staple fiber rose 230 yuan/ton to 7,764 yuan/ton, further enhancing its substitution advantage over cotton. The sluggish yarn price response indicates limited cost pass-through ability for downstream weavers and garment makers, and terminal orders have not shown significant volume growth. Although the "golden September and silver October" season is approaching, with autumn/winter fabric orders gradually being released and inquiries increasing, spinning mills remain rational in raw material purchases and are limiting restocking. This pattern of "hot futures, lukewarm spot, cold yarn" highlights significant differences in price acceptance across the supply chain, with high-level volatility risks accumulating downstream.