79.30 cents per pound—that was the settlement price for ICE December cotton futures on July 16, a single-day drop of 2.76%. On the surface, it looks like a technical correction, but the real driver is U.S. cotton export sales hitting the lowest level of the marketing year. More notably, China—the world's largest cotton consumer—not only recorded negative net sales of U.S. cotton last week but will also launch its national reserve auction next Monday. These two factors combined suggest that short-term cotton prices may have further room to fall.
Export Data: Sales Bottom Out, Shipments Slow Down
The USDA export sales report for the week ending July 9 showed net sales of current-crop U.S. upland cotton at only 34,360 bales—down 48% from the previous week and 63% below the four-week average. This was the lowest weekly total of the marketing year, and net sales to China were negative by 32 bales. Forward sales for the next crop year were equally weak, with zero net sales to China. Shipments also softened: 214,893 bales were exported, down 7% week-over-week and 14% below the four-week average. Shipments to China were just 3,348 bales.
What does this mean? Chinese buyers are not only reducing new orders but also slowing down the pace of taking delivery. With China about to release state reserves, the window for imported cotton purchases is narrowing. For U.S. cotton exporters, this is a clear signal of mounting destocking pressure.
Consumption: U.S. Apparel Retail Sales Drop 9% Month-on-Month
The U.S. Commerce Department's June retail sales data added to the bearish mood. While overall retail sales rose 0.2% month-on-month, apparel store sales fell 9%. This is not an isolated event: gas station revenues declined due to lower gasoline prices, and consumers are spending more on food and fuel, squeezing apparel spending. June retail sales were still up 6.7% year-on-year, but the monthly growth rate was the weakest in five months.
The transmission mechanism in the cotton supply chain is clear: if end-consumers aren't buying clothes, brands order less from mills, which then reduce yarn and fabric production, and eventually demand for raw cotton shrinks. A 9% monthly drop in apparel sales is significant—it suggests U.S. apparel inventories may be building, and a restocking cycle is unlikely to start soon.
China's Reserve Auction: Short-Term Supply Boost, Bearish Sentiment
China will begin auctioning cotton from its national reserves on July 19, the biggest policy variable in the current market. Reserve sales directly increase domestic supply, push down spot prices, and reduce the competitiveness of imported cotton. For U.S. cotton, Chinese buyers typically cut back on imports during reserve auctions and may even cancel some old contracts. Last week's negative net sales to China were an early reaction.
Historical experience shows that international cotton prices often come under pressure during China's reserve auctions. With ICE futures still around 79 cents, the spread between domestic and international prices is not extreme enough to trigger panic buying. If the auction pace is fast and the base price is low, U.S. cotton could face further downside.
Other Market Variables: Strong Dollar and Geopolitical Risks
The U.S. dollar index maintained its uptrend on July 16, recovering from near one-month lows, adding extra pressure on dollar-denominated cotton. Meanwhile, CBOT wheat futures remained elevated due to ongoing hostilities between Russia and Ukraine, but the spillover effect on cotton is limited. ICE cotton stocks edged down to 98,838 bales, but overall supply remains ample and insufficient to change the loose supply-demand balance.