The cotton market is undergoing a macro-driven correction. On June 23, ICE cotton futures for the most-active December contract settled down 0.68 cents at 78.73 cents per pound, touching an intraday low of 77.41 cents, the weakest in a week. The nearby July contract fell more sharply, losing 1.25 cents to 73.96 cents. The decline is not fundamentally driven but results from two key macro variables shifting simultaneously: a stronger dollar and lower oil prices.
Macro Double Whammy: Strong Dollar and Falling Oil
The US dollar index rose to its highest in over a year on Tuesday, fueled by growing expectations of a Fed rate hike and a selloff in tech stocks. For cotton trade, a stronger dollar makes dollar-denominated cotton more expensive for holders of other currencies, directly curbing overseas buying interest. Meanwhile, international oil prices fell over 1% amid signs of progress in US-Iran peace talks. Lower oil reduces the production cost of polyester fiber, a major substitute for cotton in textile raw materials. As polyester becomes more cost-competitive, mills may increase synthetic fiber purchases at the expense of cotton.
The combination of these two forces creates a 'double blow' for cotton prices. Georgia-based cotton broker Keith Brown noted that the dollar's rise to a one-year high is the main drag on prices, and the new Fed chair may start a rate-hiking cycle, further pressuring commodities. Speculative money, which pushed cotton above 88 cents on May 13, is now exiting rapidly, with net selling persisting for the past 3-4 weeks, signaling a clear retreat of bullish positions.
Supply Side: US Planting Nears Completion, Conditions Improve
On the fundamental side, the latest USDA crop progress report shows that as of the week ending June 21, US cotton planting stood at 92%, slightly below the five-year average of 94% but above last year's 91%. Planting is essentially complete with no major weather disruptions. More notably, the good-to-excellent condition rating improved to 53% from 50% the prior week, and up from 47% a year ago. This suggests a better yield outlook for the new crop, adding supply-side pressure.
For buyers, improving conditions typically mean higher deliverable grades and more ample deliverable supplies, which further weakens bullish sentiment in a down-trending market. Farmers who had delayed hedging when prices were above 80 cents are now actively selling, adding to spot market pressure.
Chain Transmission: Currency Risk and Substitution Effect
For major cotton importers like China, Vietnam, and Bangladesh, the strong dollar amplifies currency risk. Import costs in local currencies rise passively, and if domestic cotton prices fail to keep pace, the spread between domestic and international prices could narrow or even invert, potentially curbing import orders. On the other hand, lower oil weighs on polyester staple fiber and filament yarn prices, making synthetic fibers more cost-attractive. This substitution effect poses a medium-term bearish factor for cotton consumption.