US Cotton Quality Deterioration and Fund Flows Push ICE Futures Above 90 Cents

When the US cotton crop rating dropped to 37%, it was only a matter of time before prices broke above 90 cents. On August 27, the ICE December contract settled at 92.41 cents/lb, up 3.67% on the day, reaching an intraday high of 92.75 cents, the highest since April 2024. The month-to-date gain exceeded 13%, driven by supply concerns, but demand signals remain weak.

Background

The latest USDA crop progress report showed cotton condition rated 37% good-to-excellent, compared with 54% a year ago. Field tours reported significant deterioration, and weather worries persist. This year's El Niño is expected to be particularly strong, potentially altering rainfall patterns and threatening production. Grains markets also strengthened, providing additional support.

From a price structure perspective, the December contract has recovered nearly 20% from May lows, with the market starting to price in production shortfalls. However, current prices are above most international merchants' cost lines, and further upside depends on actual output and weather evolution. If condition ratings continue to fall, prices could challenge 95 cents or higher.

Industry Impact

The supply story is compelling, but demand reality is stark. USDA export sales data showed net sales of 95,726 bales for the current marketing year in the week ended August 20, down 54% from the previous week. Sales to China were only 1,628 bales, with zero for the next marketing year. High prices are suppressing buying interest, especially from Chinese buyers.

For domestic textile mills, raw material costs are rising again. The Cotlook A index rose to 98.30 cents/lb, making imported cotton more expensive than domestic cotton in RMB terms, widening the price inversion. If international prices stay high, mill margins will be squeezed, especially for export-oriented enterprises facing a dilemma between accepting loss-making orders or idling capacity.

On the macro side, a slightly weaker dollar and rising crude oil (Brent up 2.1%) provided a bullish backdrop, but geopolitical support for oil is unstable. Once sentiment shifts, high volatility in cotton could amplify downside risks.

Practical Recommendations

For Procurement Teams - Lock in forward volumes in stages to avoid a single high-cost purchase; consider options to hedge against further upside. - Monitor weekly USDA crop condition data and weather models; if ratings stabilize, wait for a pullback to the 88-90 cent range before buying. - Compare costs between domestic and imported cotton, favoring the more economical mix.

For Foreign Trade Companies - Include price adjustment clauses in quotes to avoid locking in costs for long-term orders. - Communicate with overseas clients to pass through some cost pressure via price adjustment mechanisms. - Watch China's buying appetite for US cotton; if it remains weak, international prices may lack sustained momentum, allowing adjustment of order-taking pace.