In June, as the northern hemisphere cotton entered its critical growth period, the market did not see the expected strong rally. Instead, domestic and international cotton prices experienced weak fluctuations amid a tight supply-demand balance and macroeconomic risks. ICE cotton futures fell 3.9% month-on-month, while Zhengzhou cotton futures dropped 1.4%, and the domestic-international price spread widened to 3,473 yuan per ton. This performance reflects the combined effects of fading weather speculation in supply, seasonal weakness in demand, and shifting macro policy expectations.
Global Supply-Demand: Tight but Short-Term Speculation Room Narrows
The global supply-demand balance remains tight. As of May, 2025/26 US cotton export progress reached 83%, Brazil 92%, and Australia 77%, indicating limited spot supply. The USDA projects a 1.24 million ton production deficit for 2026/27, the highest in five years. However, market attention has shifted to new season production.
US cotton planting is complete with slightly better quality than last year. India's planting is accelerating, with the Cotton Association of India expecting a 15% area increase. Brazil's harvest has started but is slower than last year. Australia's processing is in the final stage, with yield and quality expected to exceed earlier forecasts. These figures suggest stable supply overall, but the key variable remains weather risk in the northern hemisphere.
Weather Risk: El Niño Weaker but Speculative Volatility Possible
A moderate-to-strong El Niño began in May 2026 and is expected to last into early 2027, covering the critical growth period. Historical data shows that the 2015/16 and 2023/24 El Niño events reduced global cotton yields by 9.8% and 1.5%, respectively. While the current event is weaker, risks remain.
In India, June-September monsoon rainfall is only 90% of the long-term average, raising drought risk for rain-fed cotton fields. In the US, drought conditions have eased in the southeast and south-central regions but persist in the southwest, which accounts for about 40% of production. This means weather risk remains for the next 2-3 months, and any sudden disruption could trigger speculative volatility.
Demand: Seasonal Weakness, Recovery Expected by August
Domestic textile consumption continues to weaken. As of early June, textile mill inventories stood at 880,000 tons, down 4.0% month-on-month for three consecutive months. Operating rates and yarn sales-to-production ratios fell to 82% and 94%, respectively, both declining for two straight months.
Historical patterns suggest this weakness is seasonal, with textile production and sales typically recovering around August. Thus, while short-term prices may be pressured, medium-term prospects remain positive if the seasonal recovery materializes alongside the tight supply-demand balance.
Macro Risks: Fed Policy Shift and Oil Price Decline Amplify Volatility
Two macro factors deserve attention. First, easing US-Iran tensions have pushed Brent crude oil prices from $115 per barrel in early June to $74 per barrel, providing a floor for cotton prices due to their correlation.
Second, the Fed's June meeting maintained interest rates but signaled a tightening bias and introduced a monetary policy framework reform that removes forward guidance and weakens dot plot signals. This means policy will become more data-dependent, increasing the risk of frequent shifts and amplifying volatility in capital markets and cotton prices.