The U.S. cotton market is witnessing a classic tug-of-war between bullish fundamentals and bearish positioning. On July 9, the ICE December contract settled at 80.63 cents per pound, down 0.05%, despite intraday strength following the release of a strong weekly export sales report. This marks the second consecutive session of declines, coming just two days after the contract hit its highest level since June 2.
Market sentiment is clearly divided. On one hand, the USDA's weekly export sales report for the week ending July 2 showed net upland cotton sales of 66,400 bales for the current season, a 36% jump from the previous week. Sales to China reached 3,294 bales, signaling renewed interest from the world's top consumer after weeks of subdued buying. Forward sales for the next season also came in at 86,971 bales, underscoring resilient demand. Shipments of 230,056 bales, while 14% below the four-week average, were still 5% higher week-over-week.
On the other hand, speculative money is exiting. StoneX senior analyst Bailey McHenry noted that some speculators took profits after the recent rally, leading to modest capital outflows. This 'sell the fact' behavior is common in agricultural futures when good news is already priced in. However, McHenry pointed out that the technical picture is not bearish: the 40-day moving average provided solid support, and prices bounced from that level to recover some early losses, suggesting that buying interest remains underneath.
Macro and Substitution Pressures
Beyond cotton's own supply-demand dynamics, external markets are adding headwinds. Oil prices fell about 2% on July 9 as investors reassessed the actual supply impact of Middle East tensions. For cotton, lower oil prices mean lower production costs for polyester, weakening cotton's price competitiveness as a textile raw material. Given that the polyester-cotton price spread is already near historical lows, sustained oil weakness could prompt mills to increase synthetic fiber usage, squeezing cotton demand.
The U.S. dollar index weakened, which theoretically supports dollar-denominated cotton, but this factor failed to materialize in the session. More notably, Chicago corn, wheat, and soybean futures fell for a second straight day, reflecting a broader risk-off tone in the agricultural complex. Traders are largely on hold ahead of the USDA's monthly supply-demand report, due early Saturday Beijing time.
The El Niño Wildcard
The U.S. Climate Prediction Center now puts the probability of El Niño strengthening through year-end and persisting into early spring 2027 at 97%. For key cotton-growing regions like Texas, El Niño typically brings more rainfall and humidity, which can boost yields and reduce abandonment rates. If this forecast materializes, the 2026/27 U.S. crop could be revised higher, creating a bearish overhang for forward prices.
However, the weather impact is not one-sided. El Niño can also bring excessive rainfall or pest risks, and with soil moisture already adequate in major growing areas, too much water could delay planting or harvest. For now, the market is pricing El Niño as a neutral risk factor, with traders more focused on the upcoming USDA report.
Implications for the Supply Chain
For Chinese textile mills, the current range-bound trading around 80 cents means manageable import cost volatility but no clear trend. China Customs data shows that the country's cotton imports in the first half of 2026 fell year-on-year, partly due to an inverted domestic-international price spread that discouraged buying. If U.S. cotton continues to trade in the 80-85 cent range, and given the yuan's exchange rate dynamics, imported cotton could become more cost-competitive than Xinjiang cotton, potentially spurring quota-based import demand.
For cotton yarn traders, the key risk to watch is whether U.S. export sales continue to strengthen through July-August while Indian and Brazilian prices remain firm. If so, international cotton prices could break out of the current range. Conversely, if the monthly USDA report raises global production estimates, the 80-cent support could give way, presenting a buying opportunity in the 78-79 cent range.