ICE cotton futures for December fell for a second straight session, settling at 80.63 cents per pound, down just 0.05%. The move was widely attributed to profit-taking after a 3.8% rally earlier in the week, but the interplay between fund flows, substitute costs, and fundamental data tells a more nuanced story.
Short-Term Correction: Profit-Taking and Oil Pressure
Tuesday's strong rebound triggered profit-taking by speculative capital. A senior vice president at StoneX noted modest capital outflows as some speculators locked in gains. This technical selling was particularly evident in the absence of fresh bullish catalysts.
A more direct headwind came from crude oil, which fell about 2% on the day. Lower oil prices reduce the production cost of polyester, cotton's main synthetic substitute. When man-made fibers become cheaper, cotton's procurement appeal weakens—a transmission mechanism that played out clearly in recent sessions.
However, the market is not uniformly bearish. Technically, the 40-day moving average provided solid support, with prices bouncing off that level to recover some early losses. This suggests strong buying interest near the 80-cent mark, limiting further downside in the near term.
Strong Export Data: Chinese Purchases and Shipment Pace
Amid the price pullback, the USDA's weekly export sales report offered a bright spot. For the week ending July 2, net sales of upland cotton for the current marketing year reached 66,400 bales, up 36% from the previous week. Sales to China accounted for 3,294 bales. More notably, forward sales for the next marketing year totaled 86,971 bales, indicating strong overseas demand for future supply.
Shipment data was also solid. U.S. upland cotton exports totaled 230,056 bales, up 5% from the prior week. Although 14% below the four-week average, the absolute volume remains seasonally healthy. Shipments to China amounted to 1,645 bales. For domestic textile mills, this implies a steady flow of U.S. cotton arrivals over the next one to two months, helping to stabilize raw material costs.
Weather Variable: El Niño Strengthening and Its Impact on U.S. Cotton
The U.S. Climate Prediction Center reported that El Niño is expected to strengthen by year-end, with a 97% probability of persisting into early spring 2027. Historically, El Niño brings increased rainfall and humidity to key U.S. cotton-growing regions, particularly Texas.
This has significant implications for the new crop production outlook. In recent seasons, Texas has suffered from recurrent drought, leading to high abandonment rates. If El Niño delivers timely rains, yields could improve and abandonment rates could fall sharply. However, excessive rainfall could also trigger pest outbreaks or delay harvest, so the market will need to monitor actual weather developments closely.
Macro and Grain Market Linkages
Chicago Board of Trade corn, wheat, and soybean futures also fell for a second consecutive session, as weather-driven rallies faded from one-month highs. This reflects a broader tug-of-war in the agricultural complex between weather speculation and profit-taking. Cotton, as part of this complex, cannot fully decouple from the macro mood.
Traders are now awaiting the USDA's monthly World Agricultural Supply and Demand Estimates (WASDE) report, due Saturday at midnight Beijing time. This report will provide the first survey-based estimates of new-crop U.S. cotton planted acreage and yield, making it a key input for supply-demand balance sheets. A bearish surprise could break the current equilibrium near 80 cents.