In June, as northern hemisphere cotton entered its critical growth phase, cotton prices did not strengthen as expected. Instead, they weakened amid a tug-of-war between tight supply-demand fundamentals and macroeconomic disruptions. ICE cotton futures for the front-month contract settled at 76.45 cents/lb at month-end, down 3.9% from end-May. Domestically, Zhengzhou cotton futures closed at 15,890 yuan/ton, down 1.4%. The spread between domestic and imported cotton widened from 3,052 yuan/ton to 3,473 yuan/ton, underscoring the cost advantage of imported cotton.
Supply-Demand Fundamentals: Tight Balance Unchanged, but Expectations Diverge
From a global perspective, the supply-tightening narrative remains intact. As of May 2026, US cotton export commitments for the 2025/26 season had reached 83% of the USDA forecast, while Brazilian and Australian cotton export progress stood at 92% and 77%, respectively, leaving limited spot availability. The USDA's latest projections for 2026/27 show global cotton production at 25.27 million tons, down 1.44 million tons year-on-year, while consumption is expected to rise by 360,000 tons to 26.51 million tons, resulting in a deficit of 1.24 million tons—the largest in five years. This implies that even with current price weakness, the global market's supply safety margin is narrowing.
Domestically, China's commercial cotton stocks stood at 3.75 million tons at end-May, up 290,000 tons year-on-year, suggesting overall supply adequacy. However, a structural shortage of high-quality cotton persists, with premium grades in short supply while lower grades accumulate. The first-ever supply-demand balance sheet for the 2026/27 season, released by the National Cotton Market Monitoring System in June, projects declines in both domestic production and imports, alongside increases in consumption and exports. The inventory-to-consumption ratio is expected to fall further, reinforcing the outlook for tighter supply.
Weather and Macroeconomics: Dual Variables Amplify Price Volatility
Weather risk is a core variable. A new moderate-to-strong El Niño event, which began in May 2026, is expected to persist into early 2027, covering the critical growth period for northern hemisphere cotton. Historical data shows that El Niño events in 2015/16 and 2023/24 reduced global cotton yields by 9.8% and 1.5%, respectively. Although the current event is weaker, India's June-September monsoon rainfall has been only 90% of the long-term average, and about 70% of its cotton area relies on rain-fed irrigation, elevating drought risk. In the US, while the Southeast and Mid-South—which account for over 50% of production—have adequate rainfall, the Southwest, representing about 40%, is expected to remain dry, keeping the weather premium alive.
On the macro front, the Federal Reserve held rates steady at its June meeting but shifted to a tightening bias, unveiling a monetary policy framework reform that removes forward guidance and weakens dot-plot signals. Policy will now rely more on real-time economic data, increasing unpredictability and market volatility. Meanwhile, easing US-Iran tensions pushed Brent crude oil from $115/bbl in early June to $74/bbl by month-end, near its historical average. Cotton and crude oil prices show some long-term correlation, with lower oil weighing on cotton, though geopolitical risks remain, providing a floor for cotton prices.
Downstream: Seasonal Weakness Emerges, Dragging Short-Term Prices
Domestic textile consumption weakened further in June, with clear signs of an off-season. According to a survey by the National Cotton Market Monitoring System in early June, textile 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 the yarn sales ratio dropped to 94%, down 6.8 and 8.3 percentage points respectively, both declining for two straight months. Feedback indicates that order intake has slowed and finished goods inventories are building.
Historically, textile production and sales typically recover around August, so the current weakness is largely seasonal rather than a structural downturn. However, in the near term, weak demand will cap upside price potential, especially as tight supply expectations have yet to fully materialize, leaving sentiment vulnerable to macro and weather shocks.