As the northern hemisphere enters the critical growth period for cotton, market signals are far from optimistic. In June, both domestic and international cotton prices weakened, with ICE cotton futures settling at 76.45 cents per pound, down 3.9% from the previous month, while Zhengzhou cotton futures fell 1.4% to 15,890 yuan per ton. This trend reflects a tug-of-war between supply-demand fundamentals and macro sentiment.
Tightening Supply Expectations and Weather Gambling
The expectation of tightening global cotton supply is strengthening. The latest USDA forecast shows global cotton production for 2026/27 at 25.27 million tons, down 1.44 million tons year-on-year; consumption at 26.51 million tons, up 360,000 tons; and a supply deficit of 1.24 million tons, the highest in five years. This means any adverse weather during the new crop's growth could further tip the balance.
In major producing countries, US cotton planting is largely complete, with good-to-excellent ratings slightly better than last year, but the southwestern region (about 40% of US output) still faces drought threats. India's cotton sowing is accelerating, with the Cotton Association of India expecting a 15% increase in area, but June-September monsoon rainfall is only 90% of the long-term average. About 70% of India's cotton fields rely on rainwater, raising drought risks. Brazil's harvest has just begun at 1.7%, slightly behind last year, while Australia's crop is in the final processing stage, with yields and quality expected to exceed previous estimates.
The El Niño event is the biggest weather variable. A new moderate-to-strong El Niño started in May 2026 and is expected to last into early 2027, covering the critical growth period for northern hemisphere cotton. Historical data shows that during the 2015/16 and 2023/24 El Niño events, global cotton yields fell by 9.8% and 1.5%, respectively. Although this event is weaker than the previous two, northern hemisphere cotton yields remain under pressure, and any sudden disturbance could trigger market speculation.
Seasonal Demand Weakness and Rising Inventory Pressure
In contrast to supply-side uncertainty, domestic textile consumption is entering a typical off-season. According to the latest survey by the National Cotton Market Monitoring System, as of early June 2026, industrial cotton inventory at textile mills was about 880,000 tons, down 4.0% month-on-month, declining for three consecutive months. More notably, the industry operating rate and yarn production-sales ratio were 82% and 94%, down 6.8 and 8.3 percentage points month-on-month, respectively, both declining for two consecutive months.
Historical patterns suggest textile production and sales typically pick up around August, so the current demand weakness is seasonal. However, the simultaneous decline in operating rates and production-sales ratios indicates that weakening end-user orders are being transmitted upstream. Textile mills are less willing to purchase raw materials, putting short-term pressure on cotton prices.
It is worth noting that domestic commercial cotton inventory stands at 3.75 million tons, up 290,000 tons year-on-year, sufficient to meet demand before the new crop arrives. However, a structural shortage of high-grade cotton persists. This means that even if total supply is adequate, the scarcity of high-quality cotton may provide a floor for prices in the second half of the year.
Macro Variables: Falling Oil Prices and Fed Policy Shift
At the macro level, two key variables are reshaping the external environment for cotton prices. First, the easing of US-Iran tensions has pushed crude oil prices lower, with ICE Brent falling from $115 per barrel in early June to $74 per barrel by month-end, returning to the historical median range. Cotton and crude oil prices have a long-term correlation; lower oil prices weaken the cost support for cotton, but given that US-Iran differences are not fully resolved, oil prices could rebound.
Second, the Fed kept interest rates unchanged at its June meeting but shifted to a tightening stance, introducing a monetary policy framework reform that removes forward guidance and makes policy more data-dependent. This increases uncertainty about the future interest rate path and raises volatility risks in capital markets, which will inevitably affect cotton prices as a commodity.