The global cotton market is entering a critical juncture where multiple bullish and bearish factors intersect. As the northern hemisphere enters the key growth season, cotton prices have not shown the typical seasonal strength. By June 29, the main contract of Zhengzhou Commodity Exchange cotton futures settled at 15,890 yuan/ton, down 1.4% month-on-month. Meanwhile, the international cotton index (M) landed at 14,062 yuan/ton (import cost), a drop of 3.7%. The domestic-import price spread widened to 3,473 yuan/ton. Behind this price action lies a deep tug-of-war between supply-demand fundamentals and macro variables.
Supply-Demand Tightness: Production Deficit Unchanged, Structural Imbalances Emerge
Globally, the 2026/27 season is set to see a production deficit. USDA data projects global cotton output at 25.27 million tons, down 1.44 million tons year-on-year, while consumption rises to 26.51 million tons. The deficit of 1.24 million tons is the highest in five years. Supply constraints come from major producers: US cotton planting has just concluded with slightly better quality than last year; India's planted area is expected to increase by 15%, but monsoon rainfall at 90% of the long-term average poses yield risks; Brazil's harvest is slightly behind schedule, while Australia's processing is in its final stage.
Domestically, structural imbalances persist. As of end-May 2026, commercial inventory stood at 3.75 million tons, up 0.29 million tons year-on-year. While aggregate supply appears adequate, quality-specific shortages remain. According to the National Cotton Market Monitoring System, the 2026/27 season will see lower domestic output and imports, higher consumption and exports, and a further decline in the stock-to-use ratio, tightening the supply-demand balance further. This suggests that while prices are under pressure, the underlying support remains intact.
Macro Turbulence: Falling Oil Prices and Fed Policy Shift Amplify Volatility
Macro factors are adding new uncertainties. Progress in US-Iran negotiations has eased geopolitical tensions, with ICE Brent crude falling from $115/barrel in early June to $74/barrel, now in the historical mid-range. Cotton prices have a long-term correlation with oil, so lower crude reduces cost support. However, unresolved bilateral differences mean regional tensions could reignite, pushing oil and subsequently cotton prices higher.
The Fed's policy shift is another key variable. The June FOMC meeting kept rates unchanged but signaled a tightening bias and introduced a new policy framework that removes forward guidance and dot plots, relying instead on real-time economic data. This increases the likelihood of policy swings based on data changes, amplifying global capital market volatility. For cotton, this macro sentiment can fuel speculative activity and heighten price volatility.
Weather Speculation vs. Seasonal Weakness: Short-Term Noise Meets Long-Term Logic
El Niño is covering the critical growth period for northern hemisphere cotton. The moderate-to-strong event that began in May 2026 is expected to last into early 2027. Historically, El Niño events in 2015/16 and 2023/24 reduced global cotton yields by 9.8% and 1.5%, respectively. Currently, India's June-September monsoon rainfall is only 90% of the long-term average, and about 70% of its cotton area relies on rain-fed irrigation, posing drought risks. In the US, the southwestern region is expected to remain dry, while the southeast and mid-south have sufficient moisture. Overall, weather risks persist over the next 2-3 months, and any sudden disruption could trigger speculative rallies.
However, weak demand is capping upside potential. According to the latest survey by the National Cotton Market Monitoring System, as of early June, mill inventories stood at 880,000 tons, down 4.0% month-on-month and declining for three consecutive months. Mill operating rates fell to 82%, and yarn sales-to-production ratio dropped to 94%, both declining for two consecutive months. This is a typical seasonal lull, with textile production and sales usually recovering around August. Until demand picks up, cotton prices will likely remain range-bound, caught between weather speculation and demand weakness.