Cotton market is in a typical tug-of-war between weather premium and profit-taking. On Aug 28, ICE December cotton fell 1.11% to 91.38 cents/lb, after hitting a two-year high of 92.75 cents/lb intraday. Despite the pullback, the contract posted a sixth consecutive weekly gain, up 3.4% for the week, the largest since early July. The pattern of high-level volatility with limited downside reflects persistent supply-side pricing, though short-term speculative funds are taking profits.
Background
The rally is driven by abnormal weather in major producing regions. Texas remains dry, and India's monsoon rainfall is expected to be about 15% below the long-term average, the weakest in two decades. The USDA Foreign Agricultural Service in New Delhi forecasts India's 2026/27 cotton output at 24.5 million bales, with planted area around 11.5 million hectares. Yields may fall 2% to 464 kg/ha due to below-normal August-September rains, with western and central India at highest risk.
Weather is not an isolated factor. This year's El Nino is expected to be particularly strong, significantly altering global rainfall patterns and affecting commodity prices. For cotton, supply uncertainty is magnified: not only India, but also Texas, the largest US producing state, faces persistent drought. This dual-threat scenario keeps fears of global supply tightening alive, underpinning price floors.
Industry Impact
For the textile chain, high cotton prices mean rising raw material costs. Prices above 91 cents/lb are well above the two-year average, squeezing margins for spinners and fabric mills. Small and medium mills that rely on spot purchases are particularly vulnerable, as input cost swings directly affect finished goods pricing, while order prices adjust slowly, creating a 'high-cost, weak pass-through' dilemma.
On inventories, ICE deliverable cotton stocks stood at 66,327 bales, unchanged from the previous session, suggesting no surge in physical delivery demand. This may indicate that many market participants are hedging or speculating rather than making physical purchases. If prices rise further without inventory growth, near-month contract squeeze risk could intensify, and buyers should be wary of basis volatility.
Macro factors: a stronger dollar and Fed Chair Warsh's hawkish inflation stance raise rate hike odds, pressuring dollar-denominated commodities. Lower oil prices also reduce cotton's appeal as an alternative. However, weather remains the dominant driver in the short term, so prices are likely to stay elevated with wide swings rather than trend down.