Cotton futures retreated from over two-year highs, but the market outlook remains far from bearish. On May 12, the ICE July contract settled at 86.32 cents per pound, down 1.45 cents or 1.65% from the previous session. During the day, the contract touched its highest level since April 2024, reflecting intense bullish-bearish competition at current levels.
Dollar Strength Creates Short-Term Headwind
The immediate catalyst for the pullback came from the currency market. The U.S. dollar index rose 0.5%, putting clear pressure on dollar-denominated cotton, making it more expensive for buyers using other currencies. The dollar's strength was not isolated; it followed the release of April U.S. CPI data showing a 3.8% year-on-year increase, the largest since May 2023 and above the 3.7% consensus estimate. This sticky inflation has effectively eliminated market expectations for a Fed rate cut this year and even raised the probability of a rate hike—the CME FedWatch tool shows the market's expectation of at least a 25-basis-point hike at the December meeting rose to 36% from 23.6% the previous day.
Geopolitical factors also provided safe-haven buying for the dollar. Doubts about the stability of the Iran conflict ceasefire agreement heightened concerns about the Middle East, further boosting the greenback. For the textile industry, a persistently strong dollar means imported cotton costs will remain elevated in the near term, especially for buyers settling in non-dollar currencies.
USDA Report Sends Medium-to-Long-Term Bullish Signals
Despite the short-term price pressure, market interpretation of the latest USDA monthly supply-demand report is broadly optimistic. The report estimates global cotton production at 122.64 million bales for 2025/26 and 116.04 million bales for 2026/27, a decline of about 5.4% year-on-year. For the U.S., production is estimated at 13.9 million bales for 2025/26 and 13.3 million bales for 2026/27. The trend of declining production is clear.
More notably, ending stocks are shrinking. Global cotton ending stocks are projected to fall from 77.27 million bales in 2025/26 to 71.84 million bales in 2026/27, a destocking of roughly 7%. This steady decline in inventories points to a tightening supply-demand balance, providing fundamental support for medium-to-long-term cotton prices. Industry veterans note that the core data in the report is bullish on a long-term basis, and the current small decline is more of a technical adjustment, with speculative money still actively positioned on the buy side.
However, risks remain. Drought conditions in West Texas persist, and if the situation worsens, it will directly impact U.S. cotton yields. This variable is not yet fully priced into the market and could be a key trigger for future price volatility.
Cross-Market Ripple Effects
The cotton market does not operate in isolation. The rise in grain and energy markets on the same day provided a supportive tone for the broader commodity complex. Chicago wheat futures rose for a third consecutive session, driven by deteriorating U.S. crop conditions and stalled U.S.-Iran talks, raising risks of prolonged disruptions to Gulf fuel and fertilizer supplies. Oil prices also rose for a third straight session on supply disruption fears.
For the textile supply chain, higher energy prices mean increased costs for synthetic fiber raw materials, which could indirectly improve cotton's price competitiveness as a natural fiber. However, they also raise cotton planting and transportation costs. Uncertainty over fertilizer supplies could further affect planting intentions and yield potential for the new crop year. These cross-market changes are creating overlapping impacts on cotton supply-demand expectations through cost transmission and substitution effects.