Narrowing Gap: Weather-Driven Rally Meets Policy Supply in China's Cotton Market

The domestic-international cotton price gap narrowed by 547 yuan per ton within a week, a number that underscores a direct confrontation between weather speculation and policy supply. International prices broke previous highs on U.S. crop concerns and El Niño expectations, while domestic futures lagged due to reserve sales and weak consumption. For textile mills, this divergence is reshaping procurement strategies.

Background

On August 27, the NYBOT cotton futures main contract jumped 3.67% to 92.75 cents per pound, the highest since April 2024. The rally was driven by a fifth straight weekly decline in U.S. cotton condition ratings to 37% and drought coverage expanding from 44% to 52%. Meanwhile, the probability of a 'very strong' El Niño this autumn-winter exceeded 90%, and India's monsoon rainfall could hit a low not seen since 2009, creating a confluence of supply-side bullish factors.

In contrast, China's Zhengzhou cotton futures averaged 17,033 yuan per ton for the week, up only 0.7%, significantly weaker than the 3.2% gain offshore. The China Cotton Price B Index stood at 18,150 yuan per ton, with the domestic-international spread narrowing to 1,743 yuan per ton. This divergence suggests domestic prices are not lacking upward momentum but face a clear policy ceiling.

Industry Impact

Reserve cotton sales achieved a 100% sell-through rate, with cumulative sales exceeding 240,000 tons as of August 28, alleviating short-term supply tightness. Additionally, Xinjiang's new crop is arriving earlier, with some machine-picked fields already 40-50% open. This explains why domestic futures retreated after an initial surge on U.S. gains—the market's focus has shifted from weather to policy release pace and peak-season demand realization.

Profit structures downstream reinforce this caution. National Bureau of Statistics data show textile industry profits grew 7.9% in January-July, down sharply from 16.6% in the first five months. Apparel profits narrowed losses to -17.2% but remain deeply negative. Chemical fiber profits surged 107.7%, highlighting a structural imbalance where raw material costs fail to transmit downstream, dampening mill purchasing enthusiasm.

Internationally, India's cotton imports in June reached 96,000 tons, up 175% year-on-year, surpassing the USDA's full-year estimate. Duty-free policies may sustain high import demand, supporting global prices. However, Brazil's harvest progress at 70.5%, 10.2 percentage points ahead of last year, could offset some Northern Hemisphere weather premium.

Practical Recommendations

For Sourcing Managers - With the price gap narrowed to 1,743 yuan per ton, imported cotton's cost advantage has diminished. Evaluate domestic and reserve cotton options, and monitor basis fluctuations for point-pricing opportunities. - As new crop arrivals approach and yield concerns remain unverified, consider phased purchasing to avoid peak weather-driven prices and maintain buffer stock for potential order delays.

For Exporters - U.S. tariff policy remains a key variable. If an additional 7.5% tariff is imposed, combined rates could reach 27.5-45%, necessitating order restructuring and diversification into Southeast Asian and Middle Eastern markets. - With foreign yarn prices rising slightly faster than domestic (C32S foreign yarn is 46 yuan/ton higher), lock in forward exchange rates and monitor RMB volatility to protect margins.