On August 28, ICE cotton futures for December closed 1.11% lower at 91.38 cents per pound, after touching a two-year high of 92.75 cents intraday. Profit-taking ahead of the weekend triggered the pullback, but the market still posted a sixth consecutive weekly gain, up about 3.4% for the week, the largest since early July. This divergence highlights a market caught between weather premiums and capital sentiment.
Weather Premium Drives Recent Rally
The core driver of this rally is not demand recovery but deteriorating supply expectations. Persistent drought in Texas and a weak Indian monsoon—the weakest in nearly two decades, with rainfall expected to be about 15% below the long-term average—are tightening global supply prospects. A USDA FAS report from New Delhi projects India's 2026/27 cotton output at 24.5 million bales, with planted area around 11.5 million hectares. Due to below-normal rainfall in August-September, yields are expected to drop 2% to 464 kg per hectare, with the highest drought risk in western and central India.
This means supply concerns are simultaneously affecting the world's two largest producers, lifting the price center. Monthly gains have exceeded 12%, far beyond typical seasonal moves, reflecting accelerated pricing of weather risks.
Profit-Taking Does Not Alter Medium-Term Support
Profit-taking before the weekend triggered the pullback, but it did not change market fundamentals. ICE deliverable stocks remained at 66,327 bales, showing no accumulation of selling pressure. Meanwhile, the Cotlook A index rose 300 points to 101.30 cents per pound, indicating firm physical prices and providing support to futures.
From a supply chain perspective, high cotton prices are passing downstream. Textile mills face rising raw material costs, but passing them through to finished goods is difficult, squeezing margins. For buyers, chasing prices at current levels is risky, but if weather issues persist, downside may be limited.
El Niño Risk Could Dominate H2 Pricing
This year's El Niño is expected to be strong, significantly altering rainfall patterns and affecting commodity prices. The weak Indian monsoon is just the beginning; if extreme weather hits other regions like the US or Brazil, global cotton balance sheets could tighten further. This implies elevated volatility, with any weather forecast triggering sharp reactions.
For textile companies, procurement strategies need to be flexible, avoiding one-sided bets. Monitoring USDA monthly reports and meteorological forecasts is advisable. Additionally, currency fluctuations and oil price movements should be factored into cost assessments. A stronger dollar may pressure dollar-denominated cotton prices, but supply-side support remains dominant.