US Cotton Quality Drops to 37%, ICE Futures Break 92 Cents: Weather or Capital Behind the Rally?

On August 27, the ICE cotton futures for December settled at 92.41 cents per pound, up 3.67% on the day, touching an intraday high of 92.75 cents, the highest since April 2024. This is the first time since early 2024 that cotton futures have broken above the 90-cent mark, with a monthly gain of over 13%.

Event Background

The core driver of this rally is on the supply side. The latest USDA crop progress report shows the good-to-excellent rating for US cotton at only 37%, far below the 54% of the same period last year. Field surveys indicate significant deterioration of crops, and concerns that El Niño could alter rainfall patterns have fueled speculative buying in cotton futures.

However, it is noteworthy that demand has not warmed up in tandem. The USDA export sales report shows that for the week ending August 20, current-year US cotton export sales were net 95,726 bales, down 54% from the previous week, with net sales to China of only 1,628 bales. For the next marketing year, net sales to China were zero. This pattern of supply speculation and weak demand implies that current prices contain a significant weather premium. If weather expectations improve or demand remains sluggish, the risk of a price correction will increase markedly.

Industry Impact

For domestic textile mills, raw material cost pressure is rising. The Cotlook A index climbed to 98.30 cents per pound, up 70 points from the previous day, pushing up the landed cost of imported cotton. However, downstream orders have not surged, yarn prices have lagged, and spinning margins are being squeezed.

More critically, US cotton sales to China are nearly stagnant, reflecting that uncertainty in Sino-US trade relations continues to dampen purchasing intentions. If mills chase high prices now, they face the dual risks of inventory depreciation and order default if prices fall or trade policies change.

Looking at the industry chain, rising cotton prices will gradually transmit to yarn, grey fabric, and even apparel, but the speed and magnitude depend on end demand. Currently, global textile and apparel consumption recovery is weak, with limited order growth from Europe and Southeast Asia. Domestic weaving mills operate at low utilization rates, and demand cannot absorb the rapid rise in costs.

Practical Recommendations

For Purchasers - Build positions in batches, avoid one-time high-level stockpiling, and extend procurement cycles to 1-2 months to average costs. - Closely monitor weekly USDA crop progress and export sales reports; if ratings improve or exports continue to decline, delay purchases and wait for a pullback. - Use futures hedging tools to lock in future raw material costs, especially for mills with existing orders; consider buying call options to hedge upside risk.

For Foreign Trade Companies - Include raw material price linkage clauses in contracts with overseas clients to share price fluctuation risks. - Prioritize developing non-US cotton suppliers, such as Brazilian, Australian, or West African cotton, to diversify supply risks. - Monitor exchange rate fluctuations; the dollar index is slightly down but volatile, so consider forward settlement or RMB-denominated pricing to lock in profits.