The cotton market is undergoing a notable correction. On June 23, ICE cotton futures for the most-active December contract settled at 78.73 cents per pound, hitting a one-week low of 77.41 cents during the session—a drop of over 10% from the May peak of 88 cents. This decline reflects a confluence of macroeconomic and industry-specific pressures.
Macro dual pressure: stronger dollar and falling oil prices The US dollar index surged to a one-year high on June 23, fueled by growing expectations that the Federal Reserve may restart its rate-hiking cycle. A stronger dollar directly reduces the appeal of dollar-denominated cotton to overseas buyers, putting downward pressure on futures. Meanwhile, crude oil fell more than 1% on the day, driven by progress in US-Iran nuclear talks that eased concerns over oil transport through the Strait of Hormuz. Lower oil prices reduce the production cost of polyester, a key substitute for cotton, further undermining cotton's competitive edge.
Keith Brown, chief cotton broker at Keith Brown and Co., noted that the dollar hitting a one-year high is the primary factor dragging cotton prices lower. The new Fed chair's policy stance is being interpreted as hawkish, and rate hikes, if realized, would tighten liquidity and exert systemic pressure on commodities.
Speculative capital exits, farmers accelerate sales The retreat from the 88-cent peak is also a story of shifting capital flows. Brown indicated that speculative funds that drove prices above 88 cents are now exiting, with net selling persisting for the past three to four weeks. This profit-taking amid rising macro risks is a key driver of the correction.
Another notable signal is the accelerated selling by cotton farmers. Many farmers had delayed hedging when prices were above 80 cents, believing the level was safe. Now that futures have fallen below 80 cents, they are rushing to sell physical cotton, adding to supply pressure. This 'sell into weakness' behavior can create a negative feedback loop between spot and futures markets.
US cotton planting nears completion, quality improves On the supply side, the fundamentals offer no support. The USDA's weekly crop progress report for the week ending June 21 showed US cotton planting at 92%, slightly ahead of last year's 91% and close to the five-year average of 94%. More importantly, the good-to-excellent rating rose to 53% from 50% the prior week, and above last year's 47%. This suggests that, under relatively favorable weather conditions, new-crop production expectations remain high, capping distant contracts.
The improved quality rating also reduces room for weather premium trading. With planting nearly complete, market attention will shift to the critical growth period, particularly rainfall in Texas. If drought persists, quality ratings could decline, potentially providing a rebound catalyst.
Industry impact: downstream buying window may open For Chinese textile mills, the drop from 88 cents to 78 cents means significantly lower import costs. At current exchange rates, a 1-cent move translates to roughly 150-200 RMB per ton in cost changes. The 78-cent level is approaching the psychological buying zone for some mills, and traders and large weaving firms may begin phased price-limit purchases.
However, macro uncertainty remains high. The dollar's trajectory, Fed policy path, and Middle East geopolitical developments could all cause market sentiment to swing. If speculative capital continues to exit, prices could test 75 cents.