ICE cotton futures for December delivery settled at 78.30 cents per pound on July 6, up 1.18 cents or 1.53%. The rally was primarily supply-driven, fueled by adverse weather in key US growing regions and a sharp rise in CBOT grain markets.
Weather Premium Returns
The US South is experiencing extreme heat due to a 'heat dome' that has trapped hot air over the Midwest and East, raising humidity and threatening cotton at its squaring and boll-setting stages. USDA's weekly report shows the cotton condition good-to-excellent rating fell to 46% as of July 5, down from 48% the previous week and well below 52% a year ago. While squaring at 49% and setting at 14% are near five-year averages, the declining condition rating points to potential yield losses.
India's monsoon is also a concern. June was the fifth driest since 1901, and July rainfall is forecast below average. A weak monsoon would reduce planting area and early growth, tightening global supply.
Grain Market Spillover
CBOT soybeans and corn both surged over 3% on Monday, driven by similar weather concerns in the US Midwest. This provided a tailwind for cotton as speculative money rotated within the agricultural complex. However, the fundamental drivers differ—grains reflect feed and biofuel demand, while cotton's textile demand shows no concurrent improvement. The changing price ratio between cotton and grains could influence future acreage allocation, a factor buyers should monitor.
Oil and Macro Neutral
Oil prices were stable near pre-Iran-tension levels, capped by Saudi price cuts, OPEC+ production increases, and resumed Strait of Hormuz exports. Stable oil prices mean polyester staple fiber costs remain steady, reducing the relative price advantage shift between cotton and synthetics. The US dollar edged higher, while equity markets rallied on AI stocks. Macro factors offered no clear direction for cotton.
Spot Market Awaits Direction
The Cotlook A Index stood at 85.80 cents/lb on July 6, unchanged from the previous day. The divergence between futures and spot indicates that futures have priced in a weather premium, but actual physical demand remains cautious. Historically, July-August is the critical growing period for US cotton, and weather speculation peaks during this window. If rains fail to alleviate drought and condition ratings fall further, ICE cotton could test 80 cents. Conversely, improved weather would quickly unwind the premium.