U.S. cotton futures entered a technical adjustment phase this week after a strong rally. On July 9, the ICE December contract settled at 80.63 cents/lb, down just 0.04 cents or 0.05% from the previous session. While the decline appears modest, the context of a prior session's drop and Tuesday's 3.8% surge suggests market sentiment is shifting from aggressive chasing to cautious观望.
Background
The immediate trigger for the pullback was profit-taking. StoneX senior vice president Bailey McHenry noted that speculative capital flowed out after Tuesday's rally, creating selling pressure. However, the technical picture is not entirely bearish – the 40-day moving average provided clear support, with prices bouncing off that level to recover some early losses. This indicates the market is in a balanced range rather than a one-way downtrend.
External markets also weighed. Oil prices fell about 2%, lowering the expected production cost of polyester, a cotton substitute, and dragging on cotton. Meanwhile, a weaker dollar and a strong rally in U.S. chip stocks failed to lift cotton, suggesting the commodity is being priced more by its own supply-demand fundamentals and short-term fund flows than by macro signals.
Industry Impact
In contrast to the futures adjustment, the physical market continues to send positive signals. The USDA's weekly export sales report for the week ended July 2 showed net sales of 66,400 bales for the current crop year, up 36% from the prior week. Sales to China totaled 3,294 bales – a modest number but indicating ongoing Chinese buying. Forward sales for the next crop year were even stronger at 86,971 bales, reflecting solid long-term demand expectations.
Shipment data also warrant attention: 230,056 bales were shipped, up 5% week-on-week and within the normal range despite being 14% below the four-week average. Shipments to China were 1,645 bales. These figures point to a key conclusion: actual downstream demand has not collapsed, and the futures retreat is more of a short-term fund-driven move.
Weather is emerging as a new variable. The U.S. Climate Prediction Center reported that El Niño is expected to strengthen by year-end and persist into early spring 2027, with a 97% probability. For cotton, El Niño typically brings more rainfall to key growing regions like Texas, boosting yields and reducing abandonment rates. If this forecast materializes, the 2026/27 U.S. crop could receive a significant boost, potentially lowering the long-term price ceiling.