Cotton prices in both domestic and international markets experienced a volatile but ultimately weaker trend in June. As of June 29, the ICE cotton futures contract settled at 76.45 cents per pound, down 3.9% from the end of May, while Zhengzhou cotton futures closed at 15,890 yuan per ton, a decline of 1.4%. However, beneath this surface weakness, the fundamental supply-demand picture is undergoing significant structural tightening.
Global Supply-Demand Gap Widens to Five-Year High
The latest USDA forecast for the 2026/27 season projects 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 global production deficit of 1.24 million tons, the largest in five years. This deficit expectation is reshaping the market's valuation logic for cotton prices.
Export progress data from major producers confirms that current-season (2025/26) international spot supplies are already tight. As of May, US cotton export progress reached 83%, Brazil 92%, and Australia 77%, with these three countries collectively accounting for over 70% of global exports. Global end-market consumption shows volatile growth, with US apparel retail sales in May up 5.7% year-on-year and 0.2% month-on-month, indicating demand resilience.
Northern Hemisphere Enters Critical Growth Phase Amid El Niño
The Northern Hemisphere's cotton crop is now entering its critical growth period, with weather conditions from June to September directly impacting final yields. A new moderate-to-strong El Niño event, which began in May 2026, is expected to persist into early 2027, covering the core growth phase for Northern Hemisphere cotton.
Regionally, about 70% of India's cotton area relies on monsoon rainfall, but June-September precipitation is forecast at only 90% of the long-term average, raising the risk of drought-related production losses. In the US, the southwestern region, accounting for about 40% of total production, is expected to face continued drought, while the southeastern and south-central regions, responsible for over half of output, are likely to receive adequate rainfall. Overall, weather risks remain elevated over the next 2-3 months, and any sudden weather disruption could easily trigger speculative market moves, amplifying price volatility.
Macro Headwinds: Oil Prices and Fed Policy Shift Add Variables
The macro environment is also exerting influence. With progress in US-Iran negotiations, Brent crude oil futures have fallen from $115 per barrel in early June to $74 per barrel by June 29, settling near the historical median. Given the long-term correlation between cotton and crude oil prices, the stabilization of oil prices provides a floor for cotton. However, unresolved differences between the US and Iran mean geopolitical tensions could re-escalate, potentially driving oil prices higher again.
The Federal Reserve's June meeting held the benchmark rate steady but signaled a shift toward a tightening stance. The meeting also introduced a monetary policy framework reform, removing forward guidance and downplaying the dot plot. This means future policy will be more data-dependent, potentially leading to frequent shifts in stance and increased volatility in global capital markets. For the cotton market, this translates to a significantly higher risk of price swings driven by speculative capital flows.
Domestic Textile Demand Softens Seasonally, But Fundamentals Hold
Domestic textile consumption has been weakening recently, with typical off-season characteristics emerging. Surveys indicate declining order volumes, falling mill operating rates and production-sales ratios, and rising finished goods inventories. As of early June, national textile mill industrial inventories stood at about 880,000 tons, down 4.0% month-on-month and declining for three consecutive months. The industry operating rate and yarn production-sales ratio were 82% and 94%, respectively, down 6.8 and 8.3 percentage points month-on-month, with both indicators declining for two consecutive months.
However, historical patterns suggest this demand weakness is largely seasonal. Textile production and sales typically begin to recover around August. Therefore, the current off-season sentiment is more of a short-term disturbance than a trend reversal. Domestic commercial cotton inventories stand at 3.75 million tons, up 290,000 tons year-on-year, but structural shortages of high-quality cotton persist. While overall supply is adequate until the new crop arrives, premium-grade cotton remains tight.
Conclusion: Upward Potential Intact, But Volatility Risk Rises Significantly
In summary, the current cotton market maintains a tight balance, with potential speculative catalysts still present. Fundamentally, the expectation of tight global supply has not changed, and new-crop weather risks remain. The seasonal softening in textile demand does not alter the overall supply-demand picture. On the macro front, stable oil prices provide a floor, but the Fed's policy shift and geopolitical uncertainties will amplify price swings.