The cotton market in June offered little cheer for bulls. ICE cotton futures settled at 76.45 cents per pound, while Zhengzhou futures dropped to 15,890 yuan per ton, widening the domestic-international price spread to 3,473 yuan per ton. This decline reflects the combined pressure from easing drought in the US, rising expectations of a Fed rate hike, and weakening textile demand. However, beneath the surface, the supply-demand balance has not fundamentally shifted. With the northern hemisphere entering a critical growth period, potential risks are building.
Supply-Deficit Hits Five-Year High, Tight Supply Remains the Backdrop
The core support for the global cotton market comes from the supply-side contraction. The latest USDA forecast projects 2026/27 global cotton production at 25.27 million tons, down 1.44 million tons year-on-year, while consumption is expected to rise to 26.51 million tons, up 360,000 tons. This implies a supply deficit of 1.24 million tons, the highest in five years.
This deficit is not unfounded. Export data shows that the US, Brazil, and Australia have already shipped over 77% of their annual export quotas, indicating rapidly shrinking available spot supplies. For domestic textile mills reliant on imported cotton, this means procurement costs face greater uncertainty in the coming months.
China's domestic supply-demand structure is also tightening. Commercial inventories stood at 3.75 million tons at end-May, up 290,000 tons year-on-year, but quality structural shortages persist. The latest forecast from the National Cotton Market Monitoring System confirms this trend: 2026/27 domestic production and imports are expected to decline, while consumption and exports are set to rise, further lowering the stock-to-use ratio.
Northern Hemisphere Growth Season Meets El Niño, Weather Speculation Brewing
June to August is the critical growth window for cotton in the northern hemisphere, and this year it coincides with a new El Niño event. Meteorologists report a moderate-to-strong El Niño began in May 2026 and is expected to last into early 2027, covering the key growth period for major producing regions.
Regionally, risks are unevenly distributed. India's June-September monsoon rainfall is only 90% of the long-term average. With about 70% of the country's cotton acreage lacking reliable irrigation, drought-induced production cuts are a growing risk. In the US, the Southeast and South Central regions, accounting for over 50% of output, have adequate rainfall, but the Southwest, representing about 40%, faces persistent drought. Any sudden weather disruption could trigger speculative buying and amplify price volatility.
Historical precedent offers a reference. During the 2015/16 and 2023/24 El Niño events, global cotton yields fell by 9.8% and 1.5%, respectively. While the current El Niño is weaker than the previous two, given the already tight global stock levels, any yield disruption could be magnified by the market.
Domestic Textile Slowdown Emerges, Demand Side Under Near-Term Pressure
Compared to supply-side risks, the demand side presents a more immediate challenge. Since June, domestic textile consumption has weakened, with clear seasonal slowdown characteristics. According to the National Cotton Market Monitoring System survey, mill inventories stood at 880,000 tons at early June, down 4.0% month-on-month and declining for three consecutive months. More notably, operating rates fell to 82% and yarn sales ratios to 94%, both dropping for two consecutive months, with declines of 6.8 and 8.3 percentage points, respectively.
This suggests order books are thin and mills are reluctant to replenish inventories. Historically, textile production and sales typically recover around August. Until then, cotton price upside will be capped by weak demand. For traders and mills, the priority should be inventory turnover and cash flow management rather than chasing rallies.
Macro Variables Add Uncertainty, Oil and Fed Policy Cut Both Ways
Beyond fundamentals, macroeconomic shifts are also at play. As US-Iran talks progress, ICE Brent crude oil prices have fallen from $115/barrel to $74/barrel, near the historical median. Given the long-term correlation between cotton and oil prices, lower oil prices reduce the cost advantage of synthetic fibers, providing some support for cotton.
However, the Fed's policy stance introduces more uncertainty. The June FOMC meeting kept rates unchanged but signaled a hawkish shift, accompanied by a monetary policy framework reform that removes forward guidance and weakens dot-plot signals. Future decisions will rely more on real-time economic data, potentially leading to frequent policy shifts and amplifying volatility in commodity markets, including cotton.
Integrated Outlook and Practical Recommendations
In summary, the cotton market is at a sensitive juncture with multiple conflicting factors. Supply is supported by deficit and weather speculation, demand is constrained by seasonal weakness, and macro factors add uncertainty. Short-term prices are likely to remain range-bound with elevated volatility. Investors should be alert to weather or macro surprises.