The price gap between domestic and international cotton narrowed by 547 yuan/ton within a week to 1743 yuan/ton, reflecting a head-on clash between international weather premiums and domestic policy controls. When NY futures surged 3.67% in a single day to 92.75 cents/lb, hitting a new high since April 2024, Zhengzhou cotton only managed a 0.7% weekly gain with notable intraday pullbacks. This weak follow-through reveals two opposing forces: external supply shocks pushing up and domestic reserve sales plus new crop expectations forming a solid ceiling.
Weather Premium: Northern Hemisphere Crop Concerns Persist
US cotton good-to-excellent ratings fell for the fifth consecutive week to 37%, with drought area expanding from 44% to 52%. Texas dryness is expected to persist for another month. More alarmingly, the probability of a very strong El Nino in the northern hemisphere autumn/winter has exceeded 90%, and the Indian meteorological department projects monsoon rainfall could be 15% below normal, the lowest since 2009. These factors, combined with a weaker dollar, pushed international prices higher, with the M index average cost reaching 16,407 yuan/ton, up 4.3% from the previous week.
Brazil's harvest is 70.5% complete, 10.2 percentage points ahead of last year, indicating accelerating southern hemisphere supply. However, India's duty-free import policy led to 96,000 tons imported in June, up 175% year-on-year, surpassing the USDA's full-year estimate. This suggests that even if northern weather risks ease, sustained Indian demand will underpin international prices. For domestic buyers, international prices are likely to remain firm in the short term, but caution is advised against potential pullbacks once weather speculation cools.
Policy and Industry: Limited Upside for Domestic Prices
Domestically, Zhengzhou cotton settled at 17,033 yuan/ton, up only 0.7%, significantly weaker than the international market. Reserve sales continued with 100% of offered volumes being sold, totaling over 240,000 tons, easing the tight supply situation. Meanwhile, Xinjiang cotton has entered the boll-opening stage, with machine-picked fields reaching 40-50% opening, suggesting earlier-than-usual new crop arrivals, further pressuring far-month prices.
Downstream textile markets show divergence: domestic C32S yarn averaged 23,548 yuan/ton, up a mere 0.1%, while imported yarn rose 0.7%, reversing the spread to 46 yuan/ton in favor of imported yarn. Polyester staple fiber rose 85 yuan/ton to 7,849 yuan/ton, highlighting substitution pressure. More critically, profit transmission along the chain remains blocked—textile industry profits growth slowed from 16.6% to 7.9% in January-July, apparel profits remained negative at -17.2%, while chemical fiber profits surged 107.7%. This structural divergence means cotton price increases cannot smoothly pass downstream, keeping spinners' purchasing appetite subdued.
Macro Uncertainties and Peak Season Dynamics
External uncertainties are intensifying. The US is considering an additional 7.5% tariff on Chinese goods, which would push total tariffs on Chinese textile and apparel exports to 20-37.5%, further eroding competitiveness. Meanwhile, Fed Chair Warsh signaled hawkishness, raising rate hike expectations and tightening financial conditions, which pressures commodities. The Shanghai Yarn Expo (August 25-27) surveys indicated slight improvement from last month but far below spring heat, with order divergence and concerns about delayed peak season windows.
In summary, international cotton prices are likely to remain firm in the short term, but domestic prices may trade in a high-level range amid the tug-of-war between output reduction expectations and policy controls. The narrowing price gap has reduced the cost advantage of imported cotton, potentially altering some mills' fiber mix. Market participants should focus on actual peak-season order releases and final Xinjiang production figures rather than merely chasing weather premiums.