Cotton prices experienced a volatile June, ultimately failing to recover early-month losses. ICE cotton futures settled at 76.45 cents per pound, down 3.9% from end-May; Zhengzhou cotton futures weakened in tandem, settling at 15,890 yuan per ton, a decline of 1.4%. The domestic-foreign price spread widened from 3,052 yuan to 3,473 yuan per ton, reflecting deeper losses offshore. These data points reveal a central contradiction: the intensifying tug-of-war between global supply contraction expectations and short-term demand weakness.
Supply Side: Tightness Remains, but Speculative Room Narrows
Global cotton trade data confirms that supply tightness for the current year is a fait accompli. As of May, US cotton export progress reached 83%, Brazilian cotton 92%, and Australian cotton 77%, leaving limited spot resources in the international market. The USDA projects a global cotton deficit of 1.24 million tons for 2026/27, the highest in five years, indicating the supply gap will widen further next season.
However, two factors are weakening the supply-side support. First, easing drought conditions in major US cotton-producing regions have significantly cooled market enthusiasm for weather speculation. Second, progress in US-Iran negotiations has pushed ICE Brent crude oil from $115 per barrel in early June to $74 on June 29, entering its historical median range. Given the correlation between cotton and crude oil prices, the oil price decline directly undermines the cost-support logic for cotton.
Demand Side: Clear Off-Season Signals, Weak Downstream Confidence
Domestic textile consumption accelerated its decline in June. Data from the National Cotton Market Monitoring System shows that as of early June, national textile mill industrial inventory stood at approximately 880,000 tons, down 4% month-on-month, declining for three consecutive months. More concerning, the industry operating rate fell to 82% and the yarn production-sales ratio to 94%, down 6.8 and 8.3 percentage points respectively, with both indicators declining for two consecutive months.
This is not coincidental. June-July is the traditional textile off-season, characterized by falling orders and rising finished goods inventories. However, this year is different due to rising expectations of a Fed rate hike. The reform of the monetary policy framework makes the policy path more dependent on real-time data, increasing volatility in global capital markets. For export-oriented textile enterprises, the pressure from exchange rate fluctuations and end-consumer demand uncertainty may make the off-season effect more prolonged than in previous years.
Weather Risk: The Double-Edged Sword of El Niño
The Northern Hemisphere cotton crop has entered its critical growth phase, making weather the biggest variable in the current market. The new El Niño event that began in May 2026 is expected to last until early 2027. While its intensity is weaker than the 2015/16 and 2023/24 events, its broad coverage and long duration mean its impact on yields cannot be ignored.
Risk distribution varies by region. Indian monsoon rainfall from June to September is only 90% of the long-term average, and with approximately 70% of cotton fields relying on rain-fed irrigation, the risk of drought-induced production losses is significant. The US Southwestern cotton region (accounting for about 40% of production) is expected to face continued drought, while the Southeastern and South-Central regions have relatively adequate rainfall. Overall, Northern Hemisphere cotton yields are under pressure over the next 2-3 months. Any sudden weather disturbance could easily trigger speculative capital inflows, amplifying market volatility.
Market Outlook: High Volatility as the New Normal in a Tight Balance
The core logic of the current cotton market is a game between "supply tightness" and "demand weakness." The former provides a floor for prices, while the latter caps upside potential. In the short term, off-season demand drag may keep prices weak and volatile, but the production deficit and weather risks limit downside potential.
Market participants should focus on two key time points: first, the July-August critical growth period for Northern Hemisphere cotton, where weather changes could trigger phase-specific rallies; second, the traditional August window for textile production and sales recovery. If demand recovery falls short of expectations, inventory pressure could cascade further up the supply chain.