The global cotton market is witnessing a tug-of-war between bullish fundamentals and bearish macro and weather factors. On one hand, the latest supply-demand forecasts indicate a global production deficit of 1.24 million tons for the 2026/27 season, the highest in five years, providing firm support for prices. On the other hand, easing drought in major US cotton regions, a hawkish shift by the Federal Reserve, and the onset of the traditional off-season for China's textile industry are capping upward momentum. 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 the Zhengzhou Cotton Futures (ZCE) contract fell 1.4% to 15,890 yuan per ton. The domestic-international price spread widened to 3,473 yuan per ton, reflecting the relative resilience of the Chinese market.
Supply-Demand Fundamentals: Tight Balance Persists, Structural Issues Emerge
From a global perspective, spot market supplies are already tightening. USDA data shows that US cotton export commitments have reached 83% of the 2025/26 season target, while Brazil and Australia have exported 92% and 77% of their respective crops. Available spot inventory is limited. Meanwhile, end-user demand is showing volatile growth, with US apparel retail sales rising 5.7% year-on-year in May. For the upcoming season, global production is forecast to fall by 1.44 million tons to 25.27 million tons, while consumption is expected to increase by 360,000 tons to 26.51 million tons, creating a structural deficit. This implies that even with the new crop, global inventory levels will be difficult to replenish.
The domestic Chinese market presents a more nuanced picture. Commercial cotton stocks stood at 3.75 million tons at the end of May, up 290,000 tons year-on-year, appearing adequate in total volume. However, a structural shortage of high-quality cotton persists. The June forecast from the National Cotton Market Monitoring System indicates a tightening supply-demand balance for the 2025/26 season. For the upcoming 2026/27 season, the forecast points to lower production and imports, coupled with higher consumption and exports, further reducing the stock-to-use ratio. This explains why domestic prices have shown greater resilience compared to international benchmarks, as the market prices in a strong supply-tightening expectation.
Macro and Weather Factors: Intertwined Risks Amplify Volatility
The macro environment is shifting. While the Fed held rates steady at its June meeting, its tone has clearly turned hawkish with the introduction of a new policy framework that removes forward guidance. This shift introduces significant uncertainty, as future policy will be more data-dependent, increasing market volatility. For dollar-denominated cotton prices, the prospect of higher interest rates exerts downward pressure on its financial appeal.
Geopolitical tensions have eased, with progress in US-Iran talks pushing Brent crude oil prices from $115 per barrel in early June to $74 per barrel. This reduces the cost-push pressure on cotton but also weakens its competitiveness as a substitute. Given the unresolved bilateral differences, oil prices could rebound, creating linkage effects.
Weather risks remain elevated. 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 the two previous El Niño events (2015/16 and 2023/24) led to global cotton yield declines of 9.8% and 1.5%, respectively. Currently, India's June-September monsoon rainfall is only 90% of the long-term average, raising drought risks for its largely rain-fed cotton areas. In the US, the southwestern region (accounting for about 40% of production) is expected to face persistent drought, while the southeastern and mid-southern regions have ample moisture. This sets the stage for potential speculative rallies if adverse weather emerges.
Downstream Transmission: Seasonal Weakness in Textile Sector
China's textile sector is experiencing a typical seasonal slowdown. Data from early June shows mill inventories of cotton at approximately 880,000 tons, down 4.0% month-on-month for three consecutive months. More importantly, mill operating rates and yarn sales ratios have fallen to 82% and 94%, respectively, declining for two consecutive months. This clearly indicates weaker order intakes and rising finished goods inventories, confirming the arrival of the off-season.
Historical patterns suggest that textile production and sales typically begin to recover around August. Until then, weak demand will likely suppress any significant upside in cotton prices. For textile mills, the current challenge is a classic margin squeeze: upstream raw material prices remain firm due to supply concerns, while downstream product price increases are difficult to pass on due to weak orders.