Interpretation of USDA's August supply and demand report on cotton

The USDA August report upgrades global cotton consumption and trade for both 2025/26 and 2026/27 seasons, driven by improved demand in China and India, and lowers ending stocks continuously, tightening the global supply and demand pattern.

Key takeaways:

1. The USDA August report upgrades global cotton consumption and trade for both 2025/26 and 2026/27 seasons, driven by improved demand in China and India, and lowers ending stocks continuously, tightening the global supply and demand pattern.

2. The report's minor production revision features a typical offsetting structure of higher planted area and lower yield, which triggers market disputes. The acreage upgrade is supported by improved rainfall and replanting progress, while the yield downgrade is consistent with the declining US cotton good-to-excellent ratings.

3. US cotton yield risks are highly regionalized. Persistent drought in Texas, the core producing region, is the major threat to yield performance, while the Delta and other non-Texas regions face limited yield reduction risks. The USDA's yield adjustment is basically reasonable under the scenario of a moderate yield decline in Texas, and subsequent boll-setting conditions will determine the final output level.

1. Core revisions of USDA August cotton supply-demand report

The USDA recently released its August cotton supply-demand report, introducing revisions for both the 2025/26 and 2026/27 seasons. For 2025/26, consumption, imports and exports are raised to varying degrees, driven mainly by demand growth in China and India. As a result, ending stocks are cut by 200,000 tons. For 2026/27, global production, consumption and trades are all projected higher, with an even deeper reduction forecast for ending stocks.

While the numerical adjustments in this month's US cotton balance sheet are relatively modest, there is substantial market debate over its directional signals. US cotton output is lowered by only 20,000 tons this month. Planted area is revised upward by 620,000 acres (+6.3%), offset by a yield cut to 798pound/acre, resulting in a very small net reduction in production.

US farmers favor drought-resistant crops such as soybeans and corn this year due to the spring drought conditions, El Niño-related weather risks and shifting planting returns. Increased rainfall across Texas and other key cotton regions from late May has enabled replanting in some areas, which lends justification to the later?season upward revision to planted areas. The decline in yield largely reflects the steady drop in US cotton good-to-excellent condition ratings recorded over recent weeks, which has prompted lower yield expectations.

Regional yield risk differentiation & scenario verification

Based on current weather conditions, while El Niño has significantly eased drought across most parts of the United States, severe drought persists in Texas, the south-western High Plains and Oklahoma. Northwest Texas, a core-producing region, has seen a steady decline in cotton good-to-excellent ratings due to uneven rainfall distribution. Trend charts covering Texas drought, cotton condition ratings and yields over the past decade show a strong negative correlation between final cotton yields and the growing-season drought index, alongside a moderate positive correlation with statewide crop condition ratings. As of August 7, 2026, Texas' average good-to-excellent rating stood at 35%, near its 10-year average. Should drought persist in the weeks ahead, boll drop could trigger downside risks to yields. Outside Texas, drought pressure remains limited, with timely rainfall replenishment during planting and boll-setting stages. Condition ratings in the Delta region are above 60%, pointing to a low risk of yield reductions there.

Combining conditions in Texas and other major-producing regions, the seasonal climate outlook indicates that drought will continue to ease across western cotton-growing areas from August to October. However, drought is expected to persist in northwest Texas and intensify in its northeastern part, while drought stress will remain low in other key producing zones. Yield losses are therefore projected to be concentrated mainly in Texas, with limited impacts elsewhere.

Texas accounts for roughly 60% of total U.S. cotton acreage, and its 10-year average yield stands at around 715lb/acre. Assuming yields in all other states remain unchanged year-on-year, three scenarios are tested: If Texas yields revert to its 10-year average, the national yield would fall by 5% to 811lb/acre; If Texas yields drop 10% year-on-year, the national yield would decline by 6% to 805lb/acre; If Texas yields fall to its 10-year low, the national yield would slide 14% to 730lb/acre. These calculations suggest that a roughly 10% year-on-year yield decline in Texas, driven by worsening drought and falling crop condition ratings, would bring the national yield broadly in line with the August balance-sheet estimate. The latest USDA adjustment therefore carries a degree of reasonableness. Final yield assessments will hinge on cotton-boll development during the boll-setting period.