After a sharp 3.8% rally last week, ICE cotton futures fell for a second consecutive session on July 9, with the December contract closing just 0.04 cents lower at 80.63 cents per pound. The decline was driven by profit-taking, but underlying fundamentals—strong export data, El Niño weather forecasts, and falling crude oil prices—paint a more nuanced picture. The market is at a critical juncture where short-term technical corrections meet longer-term supply-demand dynamics.
Fund Flows and Price Support
A senior vice president at StoneX noted that the session saw minor capital outflows as speculators locked in profits following the recent rally. Importantly, the 40-day moving average provided solid support, with prices bouncing off that level to recover some early losses. This suggests the market is not turning bearish but rather undergoing a healthy technical correction.
For textile mills, this price zone may represent a favorable procurement window. If the December contract stabilizes near 80 cents, import costs for Chinese mills will remain manageable, allowing them to lock in raw material costs.
Export Data and Demand Resilience
The USDA's weekly export sales report for the week ending July 2 showed net sales of 66,400 bales for the current marketing year, up 36% from the previous week. Sales to China totaled 3,294 bales, modest but indicating continued buying interest. For the next marketing year, net sales reached 86,971 bales, reflecting resilience in forward orders.
Shipments totaled 230,056 bales, up 5% from the prior week but 14% below the four-week average. The slower pace may be due to some order delays amid recent price volatility, but overall volumes remain within a normal range.
El Niño and Weather Premium
The U.S. Climate Prediction Center reported a 97% probability that El Niño will strengthen by year-end and persist into early spring 2027. For key growing regions like Texas, El Niño typically brings increased rainfall and humidity, which can boost yields and lower abandonment rates.
This weather outlook is injecting a weather premium into the market. If El Niño materializes as forecast, 2026/27 U.S. cotton production could exceed earlier estimates, potentially pressuring forward prices. In the near term, however, weather uncertainty will continue to support market sentiment.
Macro Headwinds and Substitution Competition
Falling oil prices added to the pressure on cotton. On July 9, crude oil dropped about 2%, reducing the production cost of polyester—cotton's main synthetic substitute—and making it more competitive.
Oil markets are currently assessing the impact of Middle East tensions on Strait of Hormuz transit. If oil remains weak, the substitution effect will become more pronounced, a factor that mills must incorporate into their procurement strategies.