The US dollar index climbing to a one-year high directly raises the cost for non-dollar buyers to import US cotton, while consecutive declines in international crude oil reduce polyester production costs, accelerating the substitution of man-made fibers for cotton. The main ICE cotton futures contract for December settled this week at 78.73 cents per pound, hitting an intraday low of 77.41 cents—a new low since June 16. The nearby July contract fell even deeper, dropping 1.25 cents to 73.96 cents per pound.
Macro Financial and Energy Double Blow
The core driver of this round of cotton price declines comes from a resonance in macro financial markets. A stronger dollar means overseas buyers must pay more in their local currency to purchase the same amount of US cotton, significantly weakening export competitiveness. The market widely expects the Fed to maintain high interest rates for longer, compounded by better-than-expected US economic data and safe-haven demand from geopolitical tensions, pushing the dollar index higher. At the same time, international crude oil has fallen for two consecutive sessions, rapidly cooling inflation-trade sentiment and stripping cotton of its inflation-buying support. Energy price volatility could shift inflation expectations at any time, keeping traders cautious on the sidelines.
Reinforced Bumper Harvest Expectations
Good news from the supply side further dampens bullish sentiment. The USDA's weekly crop progress report shows continued improvement in US cotton conditions. The key producing region of Texas received effective rainfall, significantly improving soil moisture, with overall crop growth better than last year. As of June 21, the US cotton boll-setting rate rose to 92%, up 6 percentage points week-over-week, above last year's level and just shy of the five-year average. The boll-opening rate also climbed to 53%, also up week-over-week and far above last year's 47%. Strong crop conditions reinforce market expectations of a bumper harvest, adding further downward pressure to already stressed cotton prices.
Speculative Funds Continue to Exit
Looking back at the market, after cotton prices broke through 88 cents per pound on May 13, a large amount of speculative funds began concentrated selling, laying the groundwork for subsequent price declines. Since that rally ended in May, speculative funds have maintained net selling, continuously amplifying the downtrend. Many traders have already closed most of their forward pre-sale orders. The industry generally believes that the 80-cent-per-pound level is where buying value emerges; once prices stabilize in that range, downstream potential demand will gradually be released.
Substitution Effect Accelerates Industry Shakeout
Lower oil prices directly reduce polyester production costs, strengthening the substitution of man-made fibers for cotton. With the current price gap between cotton and man-made fibers widening, downstream spinning mills are more inclined to adjust their raw material mix, increasing polyester usage and reducing cotton purchases. This substitution effect not only compresses cotton's market share but also has profound implications for the entire textile industry's raw material structure. For US cotton farmers and traders relying on exports, this means they must make more difficult trade-offs between price and competitiveness.