During a critical window in the U.S. cotton growing season, a less-than-optimistic weekly report is recalibrating market expectations. The latest USDA Crop Progress report shows that as of the week ending July 5, U.S. cotton quality ratings dropped to 46%, down 2 percentage points from the previous week and a significant 6 percentage points lower year-on-year. This data suggests that the supply quality and quantity of new U.S. cotton, which accounts for nearly 40% of global cotton exports, face dual uncertainties.
Rising Production Cut Expectations, But Pricing May Be Partially Priced In
The decline in quality ratings is not an isolated signal. The squaring rate stood at 49%, flat year-on-year but below the five-year average; the boll-setting rate was 14%, slightly below the 13% recorded last year. These growth indicators collectively point to one conclusion: the potential yield of U.S. cotton is weakening, posing a downside risk to total new-season production.
The market reacted swiftly. The main Zhengzhou Cotton Futures contract (2609) closed at 16,265 yuan/ton on July 6, up 80 yuan/ton from the previous trading day, with open interest rising to 581,300 lots. However, the price increase was relatively restrained, and the rise in open interest suggests intensifying divergence between bulls and bears. PriceSeek's long-short rating of 1 indicates that current prices have partially factored in the production cut expectations. Further upside will require stronger evidence of production cuts or support from the demand side.
Supply-Demand Game: Production Cut Logic vs. Weak Demand
From the supply side, the expectation of a U.S. cotton production cut does provide a floor for cotton prices. But the industry needs to ask: how large is the production cut? If final production is only slightly below last year, current prices may be overreacting. The USDA's subsequent monthly supply-demand reports will be key verification points.
From the demand side, the recovery of global textile and apparel consumption remains slow. China, the largest cotton consumer, sees yarn mills generally adopting a hand-to-mouth purchasing strategy, maintaining low raw material inventories. Without a significant improvement in end-user orders, even if U.S. cotton production cuts materialize, they are unlikely to drive a sustained upward trend in cotton prices.
The core contradiction for the textile industry chain is whether the upward cost expectation can be smoothly passed downstream. Cotton spinning companies' profit margins have been squeezed to multi-year lows. If cotton prices continue to rise due to supply speculation while grey fabric and garment prices cannot keep pace, it will lead to a further decline in industry operating rates, in turn suppressing actual cotton demand.
Regional and Seasonal Factors Overlap, Procurement Window May Narrow
Currently, the Northern Hemisphere is in the critical growth period for cotton. Besides the U.S., weather conditions in major producing areas such as India and China's Xinjiang also deserve attention. Any abnormal high temperatures or droughts in any producing area could amplify market concerns about a global cotton production decline.
Looking at the time window, July and August are the most sensitive boll-opening and fiber-maturation stages for U.S. cotton. If the decline in quality ratings continues to worsen, market sentiment may escalate from 'expected production cut' to 'confirmed production cut,' at which point price volatility will significantly increase. For textile enterprises with actual cotton needs, the current period may be an opportune time to lock in some forward raw material costs.