Just as the market celebrated cotton futures hitting a two-year high, profit-taking poured cold water. On August 28, the ICE December contract fell 1.11% to 91.38 cents/lb, after hitting an intraday high of 92.75 cents/lb the previous day. This pattern of sharp rises followed by pullbacks reveals the core contradiction in today's cotton market: the weather premium on the supply side versus the profit-taking urge on the capital side.
Weather Premium: The Sword of Damocles over Supply
The main driver behind the rally is not demand recovery, but a chain of supply alarms. Texas, the largest cotton-producing state in the US, continues to face drought threats, deteriorating crop prospects. Meanwhile, the Indian Meteorological Department has issued a rare warning that the country is experiencing its weakest monsoon in nearly two decades, with rainfall expected to be about 15% below the long-term average. As the world's second-largest cotton producer, India's western and central cotton belts face the highest drought risk, casting a shadow over yield prospects.
The USDA FAS office in New Delhi predicts India's 2026/27 cotton production at 24.5 million bales, with planted area around 11.5 million hectares. However, due to below-normal rainfall in August-September, yields are expected to drop 2% to 464 kg per hectare. This means that even with stable planting area, actual output may fall short. Weather factors have escalated from seasonal disruptions to structural threats, extending their impact on prices.
Capital Behavior: High-Level Profit-Taking and Position Game
Parallel to weather risks, subtle shifts are occurring in futures market capital. The August 28 decline was interpreted by market participants as "weekend profit-taking"—after prices hit a two-year high, some longs chose to lock in gains. This pullback is not a signal of trend reversal; the sixth consecutive weekly gain and this week's 3.4% rise indicate that funds are still buying on dips.
Notably, ICE deliverable No.2 cotton futures contract stocks remained at 66,327 bales, unchanged from the previous session, indicating limited physical delivery pressure. However, the stronger US dollar and lower US stocks following Fed Chair Warsh's reaffirmation of anti-inflation stance are tightening the macro environment. Oil prices also weakened, further undermining cost support for cotton. These intertwined factors suggest that cotton prices will likely maintain high-level wide fluctuations in the short term, rather than a one-way decline.
Spot Transmission: The Barometer of Cotlook A Index
Futures market volatility is transmitting to the spot market. On August 28, the Cotlook A index rose 300 points to 101.30 cents/lb, hitting a recent high. This increase was significantly larger than futures, indicating that physical traders are becoming more accepting of high cotton prices, or more accurately, that supply concerns are prompting buyers to lock in sources early.
For textile enterprises, this means a rigid rise in raw material procurement costs. Cotton accounts for about 70% of yarn cost; each 1 cent/lb increase in cotton prices raises the theoretical cost of 32s combed cotton yarn by about 150 yuan per ton. With the Cotlook A index already above the 100 cent/lb psychological threshold, if weather risks persist, spot prices may converge further with futures, squeezing spinners' profit margins.
Combined Effects of Policy and Weather
This year's El Niño is expected to be particularly strong, significantly altering global rainfall patterns. Besides India and the US, other major producers like Brazil and Australia may also be affected. This climatic backdrop amplifies supply-side uncertainty for the 2026/27 season. Meanwhile, if the Fed's rate hike expectations materialize, the stronger dollar will pressure dollar-denominated cotton—a variable to watch in the medium term.
For buyers, the key now is not predicting the price peak, but managing volatility risk. The futures market has accumulated substantial profits, and any weather improvement could trigger a deep correction. Conversely, as long as drought and weak monsoon do not materially ease, any pullback may be seen as a buying opportunity.