On August 27, ICE cotton futures broke above the 90 cents/lb threshold for the first time since early 2024, with the December contract settling at 92.41 cents/lb, up 3.67% on the day and hitting an intraday high of 92.75 cents—the highest since April 2024. The monthly gain now exceeds 13%, signaling a clear bullish shift. However, this rally is not driven by demand recovery but by supply-side weather speculation, which carries a potential correction risk.
Background
The key driver behind the breakout is the deteriorating condition of US cotton crops. The latest USDA crop progress report shows only 37% of US cotton in good-to-excellent condition, down sharply from 54% a year earlier. Field tours have reported significant crop deterioration, and expectations of a strong El Niño event have reinforced concerns about reduced yields. This suggests US production may fall below initial estimates, making supply contraction the core logic for speculative buying.
Additionally, strength in the grain complex and a rebound in oil prices provided extra support. Brent crude rose 2.1%, ending a three-day losing streak, driven by geopolitical factors. The US dollar index slipped slightly, also supportive for dollar-denominated cotton. However, these macro factors may not be sustainable; once weather trading cools, prices could quickly give back gains.
Industry Impact
In stark contrast to the futures rally, physical export demand remains weak. USDA export sales data show that net sales of upland cotton for the current marketing year were 95,726 bales for the week ending August 20, down 54% from the previous week. Sales to China were a mere 1,628 bales, with zero sales for the next marketing year. China is one of the largest buyers of US cotton, and this near-halt in purchases sends a critical demand-side signal.
This divergence—rising futures and falling exports—means higher raw material costs for textile mills, but without a corresponding improvement in end-order demand. For spinners relying on imported cotton, high prices will squeeze profit margins and may force some to postpone restocking or switch to substitutes. For traders, increased volatility from the weather premium makes hedging operations more challenging.
Looking at the supply chain, the Cotlook A index also moved higher, reaching 98.30 cents/lb on August 27, up 70 points, indicating that physical prices are following futures. However, if export data continue to disappoint, physical prices may struggle to sustain these levels, and the futures-physical spread could widen, creating arbitrage opportunities.