When New York cotton futures jumped 3.2% in a week while Zhengzhou cotton rose only 0.7%, the spread between domestic and international prices narrowed by 547 yuan/ton to 1,743 yuan/ton—a stark contrast revealing the core tension in today's cotton market: weather premiums dominate the international market, while domestic fundamentals still digest the dual pressure of reserve sales and weak demand.
Weather Premiums vs Policy Offsets
The international market's strength stems from multiple supply-side factors. US cotton good-to-excellent ratings fell for the fifth consecutive week to 37%, with drought-affected areas rising from 44% to 52%. Combined with over 90% probability of a very strong El Nino in the autumn-winter period, expectations of lower yields continue to build. Meanwhile, India's June cotton imports surged 175% year-on-year, driven by tariff-free policies, exceeding USDA projections and further underpinning international prices.
Domestic response has been notably restrained. Reserve cotton sales maintained 100% transaction rates, with cumulative sales reaching 240,000 tons, alleviating tight supply conditions. Xinjiang cotton is entering boll-opening earlier than usual, accelerating new crop supply. Policy offsets have kept Zhengzhou cotton fluctuating around the 17,000 yuan/ton level; on August 28, it spiked to 17,345 yuan/ton following external gains but quickly retreated, reflecting intense bull-bear confrontation.
Widening Profit Divergence
On the macro front, threats of additional 7.5% US tariffs on Chinese goods, coupled with hawkish signals from Fed Chair Warsh, cloud the commodity outlook. China's textile and apparel exports to the US already face tariffs of 20-37.5%; further hikes would squeeze already-strained export margins.
Domestic profit divergence is particularly noteworthy. National Bureau of Statistics data show chemical fiber manufacturing profits surged 107.7% year-on-year in January-July, while textile industry profit growth slowed sharply to 7.9% from 16.6%. Textile and apparel profits, though narrowing losses to -17.2%, remain in contraction. This 'strong upstream, weak downstream' structure means cost pass-through remains blocked, with slow consumption recovery persisting. Spinners remain cautious ahead of the peak season, with orders diverging and limited willingness to stock up.
Short-Term Volatility and Seasonal Uncertainties
In the short term, the northern hemisphere weather window still poses risks, so international prices may remain firm but could correct if weather eases or funds exit. Domestically, crop-reduction concerns and seasonal expectations provide support, but reserve sales and new crop arrivals cap upside potential.
The real variable is demand. August's Shanghai yarn exhibition survey showed slight improvement but far below spring enthusiasm. If the peak season window is delayed, the pace and volume of order releases become uncertain, potentially further dampening restocking intentions. For buyers, the narrowing spread means imported cotton is less cost-effective, requiring more precise timing decisions.