Cotton Prices Approach 90 Cents: Weather Premium vs. Dollar Dynamics Reshape Supply-Demand Pricing

On August 26, ICE cotton futures for December settled at 89.14 cents per pound, up 0.91% on the day, approaching the psychological 90-cent level. The rally is not driven by demand recovery but by supply contraction fears from drought in major US growing regions—crop condition ratings have fallen to 37% good-to-excellent, down 17 percentage points from a year ago. As weather premium clashes with a stronger dollar, cotton prices are at a delicate repricing juncture.

Weather premium dominates, dollar shadow lingers

The latest USDA crop progress report shows US cotton condition ratings at only 37%, versus 54% last year. Extreme heat and drought in Texas and across the Cotton Belt have steadily deteriorated crop prospects. Over recent weeks, futures have climbed steadily, with the front-month contract touching the highest level since April 2024. Weather is the bulls' strongest argument, but not without opposition—the dollar index rose 0.2% after US annual inflation unexpectedly held steady in July, dampening hopes for rate cuts. A stronger dollar makes dollar-denominated cotton more expensive for overseas buyers, capping buying enthusiasm.

From stocks to basis: chain reactions across the industry

ICE data shows deliverable No. 2 cotton futures stocks at 66,327 bales as of August 25, down 2,567 bales from the prior session. The continued drawdown in stocks, combined with rising prices, signals growing concern over deliverable supplies. Meanwhile, the Cotlook A index stood at 97.60 cents per pound, about 8.5 cents above futures, implying a significant basis that raises spot procurement costs for mills. For Asian buyers reliant on imported cotton, current prices are near cost ceilings. If the weather premium persists, basis may widen further, prompting some mills to pause purchases or seek substitute fibers.

Macro variables vs. weather: who prevails?

Notably, the latest inflation data was mixed, offering no clear direction, leaving the Fed's debate between hiking and holding rates unresolved. If inflation reignites, a stronger dollar will cap cotton's upside; conversely, weak economic data could weaken the dollar and help prices break above 90 cents. Additionally, corn and wheat futures hit multi-year highs on Wednesday, as global grain supply uncertainty spilled over into cotton markets, raising risk appetite for agricultural commodities. For the cotton textile chain, current prices have partially priced in weather optimism—any rainfall forecast could trigger a sharp correction.

Practical recommendations

For buyers - Monitor two-week rainfall forecasts in key US growing regions; if weather improves, wait for pullbacks before fixing prices. - Given the high basis, consider hedging on ICE to lock forward raw material costs, and negotiate basis trade contracts with suppliers to mitigate basis risk. - Track the dollar index and Fed statements; if the dollar strengthens, defer foreign cotton purchases and prioritize domestic inventory.

For trading companies - Incorporate exchange rate volatility into export quotes; use forward settlement or RMB pricing to avoid dollar exposure. - If long-term export orders are signed, establish long positions in futures to lock cotton costs and protect margins from further price increases. - Watch weekly US crop condition data; if ratings improve for two consecutive weeks, reduce procurement budgets and seize opportunistic buying at lower levels.