The divergence between cotton futures and physical prices is widening: this week, the average settlement price of the main Zhengzhou cotton contract reached 16,913 yuan/ton, up 3.5% week-on-week, briefly touching 17,130 yuan/ton intraday. In contrast, the China Cotton Price Index B, representing domestic standard-grade lint, rose only 0.7%, narrowing the basis by 217 yuan/ton to 2,290 yuan/ton. This split suggests that the current rally is driven primarily by weather themes and macro sentiment, not actual demand. For textile mills, this means raw material cost volatility is gradually transmitting from futures to physical markets, but with clearly weakened efficiency.
Weather Premium and Macro Turbulence
Deteriorating US cotton crop conditions are the core driver of this round of price increases. 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 expectations. The World Weather Company predicts that West Texas will continue to face high temperatures and little rain over the next ten days, potentially exacerbating crop water stress. Meanwhile, Brazil's cotton harvest is accelerating, with the harvest rate reaching 59.6% as of August 14, 10.7 percentage points higher than the same period last year, and daily exports in the second week of August surged 51.1% year-on-year, partially offsetting US production concerns.
On the macro front, a weaker dollar and geopolitical risks provided additional support. On August 19, the US Treasury announced it would at least double the size of its long-term bond buyback program, which initially drove the 30-year yield down about 10 basis points and the dollar index down nearly 1%, briefly boosting commodity valuations. However, skepticism quickly emerged, and the next day yields rebounded to around 5.24%, indicating the signal was more symbolic than substantive. Additionally, the expiration of US-Iran negotiation window and ongoing Strait of Hormuz shipping stalemate pushed Brent crude above $94 per barrel, adding geopolitical risk premium to commodities.
Resilient Demand but Weak Transmission
Terminal consumption data are not as exuberant as prices. In June, US textile and apparel imports reached $8.898 billion, up 8% year-on-year and 5.2% month-on-month, marking two consecutive months of positive and accelerating growth, showing stronger-than-expected external demand resilience. Domestically, July retail sales of garments, shoes, hats, and knitwear above designated size fell 1.0% year-on-year, but cumulative January-July sales reached 862.8 billion yuan, still up 5.8% year-on-year, outpacing overall retail growth. While the domestic demand base is under short-term pressure, policy signals are clear—on August 17, the State Council executive meeting emphasized prominent insufficient domestic demand and called for greater policy support. Combined with the approaching autumn/winter consumption peak, domestic textile and apparel demand may receive dual support from policy and seasonality.
However, this resilience has not yet transmitted to the yarn segment. This week, the average price of domestic C32S carded yarn was 23,514 yuan/ton, up only 0.3%; imported yarn averaged 23,438 yuan/ton, up 0.4%, with foreign yarn now 76 yuan/ton cheaper than domestic. Polyester staple fiber rose 230 yuan/ton to 7,764 yuan/ton, a relatively larger increase. The sluggish yarn price response indicates squeezed profit margins for downstream weavers and limited acceptance of high-priced raw materials. Although Xinjiang cotton production reduction expectations are difficult to disprove in the short term, reserve cotton sales have entered the fifth week, maintaining a 100% transaction rate with steadily rising average prices and high bidder numbers, reflecting structural shortage of high-quality cotton.
Strategies in a High-Level Game
Current cotton prices are in a sensitive range with intertwined bullish and bearish factors. In the short term, the weather trading window continues, capital sentiment is active, and the market may remain strong; however, if weather risks are disproved or long positions take profits, the risk of a high-level correction cannot be ignored. Continued reserve sales and the approaching new crop will cap upside potential. For all supply chain participants, rational response is more important than chasing highs or selling lows.