This week, international and domestic cotton markets followed divergent logics: the external market broke higher on extreme weather expectations, while the domestic market lagged under policy control and weak demand. By August 28, the price gap narrowed to 1,743 yuan per ton, down 547 yuan from the previous week, reshaping downstream procurement and trade decisions.
Weather Premium vs. Policy Ceiling
International cotton prices were driven by supply-side factors. USDA data showed U.S. cotton good-to-excellent ratings fell for a fifth consecutive week to 37%, with drought-affected areas rising from 44% to 52%. Texas drought is unlikely to ease soon. Meanwhile, the probability of a very strong El Niño in the Northern Hemisphere autumn/winter exceeds 90%, and India's monsoon rainfall could be 15% below normal, potentially the lowest since 2009. These factors pushed NY futures up 3.67% on August 27 to 92.75 cents/lb, a high since April 2024.
The domestic market faced different pressures. Zhengzhou futures rose to 17,345 yuan/ton but retreated, with weekly average settling at 17,033 yuan/ton, up only 0.7%. Reserve cotton sales continued at 100% transaction rates, with cumulative sales exceeding 240,000 tons by August 28, easing supply tightness. New crop arrivals are expected earlier, with some machine-picked fields already 40-50% open. The policy ceiling and weather floor will keep prices volatile in the near term.
Divergence in Industry Profits
Cotton price transmission is not smooth, and downstream textile pressure is evident. National Bureau of Statistics data show textile industry profits grew 7.9% in January-July, down from 16.6% in January-June. Textile and apparel profits remained in contraction at -17.2%, though narrowing. In contrast, chemical fiber profits surged 107.7%, highlighting the divergence between strong upstream raw material profitability and weak terminal demand.
This is reflected in yarn prices: domestic C32S combed yarn rose only 0.1% to 23,548 yuan/ton, while imported yarn rose 0.7% to 23,594 yuan/ton, now 46 yuan/ton higher than domestic. Spinning mills' profit margins remain squeezed, dampening raw material purchasing. A survey at the Shanghai Yarn Expo (August 25-27) showed market conditions improved slightly from last month but far below spring heat, with orders diverging and cautious sentiment.
Policy Risks and New International Variables
On the macro front, the U.S. is considering an additional 7.5% tariff on Chinese goods citing overcapacity. Current combined tariffs on Chinese textiles and apparel to the U.S. already range 20-37.5%, and further tariffs would weaken export competitiveness. Fed Chair Warsh signaled a hawkish stance at Jackson Hole, emphasizing the 2% inflation target, raising rate hike expectations and pressuring commodities.
A new variable is India. Under its duty-free policy, June cotton imports reached 96,000 tons, up 175% year-on-year, with cumulative imports of 1.079 million tons exceeding USDA's forecast of 1.043 million tons. Brazil's harvest is 70.5% complete, 10.2 percentage points faster than last year. These factors may keep international prices firm in the short term, but risks of weather relief and profit-taking remain.
Practical Recommendations
For Buyers - With the narrowed price gap, imported cotton is more cost-effective; consider increasing foreign cotton purchases, but monitor exchange rates and tariff policy changes. - With new crop approaching, if production decline expectations are not confirmed, spot prices may correct; adopt phased buying rather than chasing highs. - Monitor downstream order recovery; if peak season is delayed, shorten inventory cycles to avoid capital tie-up.
For Exporters - With rising U.S. tariff risks, accelerate market diversification to non-U.S. destinations. - Imported yarn prices are firm; export quotes can be adjusted upward, but assess customer acceptance to avoid order losses. - Use futures to lock in raw material costs and hedge against high price volatility.
In summary, cotton prices will likely remain range-bound amid weather premiums and policy pressures. The core contradictions of profit divergence and weak demand persist, and actual peak-season demand will determine the next direction.