Improved weather overseas quietens cotton price volatility

While weather concerns for U.S. cotton have temporarily eased recently, the medium-to-long-term supply risks remain, and weak downstream demand during the textile off-season continues to cap upside potential. The overall cotton market is caught between lingering supply concerns and soft demand, and cotton prices are likely to maintain a weak, rangebound trend in the near term.

Recent weather conditions in U.S. cotton-producing regions have improved, temporarily alleviating market concerns over yield losses during the seedling stage. As of June 2, the area of U.S. cotton affected by drought fell to 87%, an improvement from the previous 94%. Effective rainfall in Texas, the key producing region, has helped improve soil moisture levels.

In terms of planting progress, as of May 31, the national U.S. cotton planting completion rate stood at 66%, up slightly by 2 percentage points year-on-year, indicating a generally steady pace. However, planting progress in the core producing region of Texas was only 56%. Over the medium to long term, the probability of an El Niño occurrence from June to August remains as high as 82%, coinciding with cotton's critical yield period of squaring and flowering. Future weather conditions will have a significant impact on cotton yield and quality, so weather-related risk premiums remain.

U.S. cotton export shipments for the 2025/26 season have progressed steadily, continuing to provide support to U.S. cotton prices. As of mid-May, cumulative net sales for the season exceeded 80% of the annual target, with a steady pace of shipments. Weekly export sales rebounded moderately in late May, driven by stable hand-to-mouth replenishment demand from major textile-buying countries such as Vietnam, Turkey, Pakistan, and Bangladesh. This has effectively offset bearish impacts from macroeconomic factors and favorable weather, limiting the downside room for U.S. cotton.

On the macro front, the U.S. non-farm payrolls rose by 172,000 in May, significantly exceeding market expectations of 85,000. The labor market's unexpected resilience has eased concerns about a U.S. economic recession.

On the exchange rate front, the RMB central parity rate against the U.S. dollar has remained stable around 6.7, with relatively mild fluctuations. This has kept ZCE (Zhengzhou Commodity Exchange) cotton futures price and domestic cotton spot prices significantly stronger than the overseas market, while the domestic-international price spread continues to narrow.

Domestically, China's cotton market fundamentals have been stable, with expectations of tight supply supporting cotton prices. Currently, the most-traded ZCE cotton futures contract closed the day session at Yuan 15,765/tonne as of June 9, experiencing a slight near-term pullback. Spot prices remain firm, with cotton enterprises showing a clear willingness to maintain basis prices. The prices of 3128B grade standard cotton nationwide averaged Yuan 17,419/tonne on the same day, with spot prices relatively resistant to declines. 

Inventory pressure has remained moderate. Imported cotton stocks at ports totaled 612,500 tonnes in the session ending June 5, a slight increase of 0.46% from the previous session. The limited increase indicates that the supply pressure from imported cotton is not significant, and the impact on domestic spot prices has been relatively weak. Coupled with China's prudent cotton market regulation policies, the scope for sharp price swings is limited.

As for demand side, June is a traditional off-season for textiles. Spring and summer clothes orders are winding down, while new autumn and winter clothes orders have not yet become apparent. Overall end-user demand is lackluster, with enterprises mainly making hand-to-mouth purchases and drawing down inventories.

In terms of operating rates, as of June 4, the comprehensive operating rates of domestic spinning mills averaged 75.4%, up slightly by 1.21 percentage points from the previous week. Regional divergence has been evident. The spinning mills in Xinjiang, benefiting from ample raw material and policy advantages, maintained high operating rates of 90%. In inland areas, small and medium-sized factories, facing insufficient orders and profit pressure, have operating rates concentrated in the 60%-70% range, with some small enterprises still flexibly reducing or halting production.

Pressure on orders and profit margins has continued to mount. Fabric inventories are now accumulating, end-user restocking remains cautious, and the market has yet to see any large, concentrated orders. Cotton enterprises are highly prudent in their raw material procurement, with hand-to-mouth purchasing becoming the norm.

Overall, China's cotton prices are expected to trade rangebound in the following 1-2 months. The key support range for ZCE cotton futures price is Yuan 15,500-15,800/tonne, with limited downside correction and a lack of upward drivers.

In the medium to long term, attention should be paid to summer weather disruptions to U.S. cotton growth, as well as the arrival of downstream autumn/winter clothes orders. It is expected that the cotton market will continue its range-bound, stable trend until demand recovers or weather risks materialize.