Cotton futures edged higher on July 15, with the ICE December contract settling at 81.55 cents per pound, up 0.68 cents. The rally was driven by a strong grain market and a weaker US dollar, but the underlying driver is a recalibration of inflation expectations.
Grain Linkages and Cost Shifts
Chicago wheat futures surged over 5%, and European wheat hit a one-year high amid escalating shipping incidents in the Sea of Azov. Cotton competes with grains for acreage, so higher grain prices reduce the relative profitability of cotton planting, prompting forward supply concerns. Meanwhile, crude oil continued to rise after US strikes on Iranian military facilities. Higher oil prices increase the production cost of polyester, cotton's main substitute, indirectly supporting cotton's price competitiveness.
Dollar Weakness and Macro Sentiment
The US June PPI fell 0.3% month-on-month, well below expectations, reinforcing disinflation signals. The dollar index dropped 0.55% to 100.36, its lowest since mid-June. A weaker dollar makes dollar-denominated cotton cheaper for overseas buyers, potentially stimulating trade. However, macro sentiment is split between easing inflation and rising geopolitical risks from US-Iran and Russia-Ukraine tensions.
Weather: The Second Half Matters
Market attention is on weather in major cotton regions. The USDA reported persistent heat in parts of Montana and the Dakotas, though cotton areas are not yet under drought stress. The second half of the growing season will determine final yields. ICE deliverable stocks fell from 121,285 bales to 100,612 bales, indicating some short covering, but absolute stocks remain high.
Spot Market Under Pressure
Cotlook A Index fell 75 points to 89.95 cents/lb, showing cautious buying from mills. The divergence between futures and spot suggests that further futures gains will attract hedging pressure.