The US dollar index rose 0.5% on May 12, directly pressuring ICE cotton futures. The July contract settled at 86.32 cents per pound, down 1.45 cents or 1.65%. Notably, the contract touched its highest level since April 2024 intraday, and the pullback did not alter its overall position near two-year highs.
Macro Pressure vs. Supply Contraction
The US Labor Department reported that the April CPI rose 3.8% year-over-year, the largest increase since May 2023 and slightly above the 3.7% market expectation. Sticky inflation has led the market to price out any Fed rate cut this year, with the probability of a 25-basis-point rate hike in December rising to 36% from 23.6% a day earlier.
A stronger dollar makes dollar-denominated cotton more expensive for overseas buyers, dampening demand in the short term. However, the industrial outlook remains constructive. The USDA's May World Agricultural Supply and Demand Estimates (WASDE) report offered clear bullish signals: global cotton production for 2025/26 is estimated at 122.64 million bales, falling to 116.04 million bales in 2026/27. US production is forecast at 13.9 million bales for the current season and 13.3 million bales for the next. Ending stocks also show a tightening trend, from 77.27 million bales to 71.84 million bales.
The output reduction is largely tied to the ongoing drought in West Texas. The market has already priced in this expectation, and comments from Rogers Varner of Varner Brokerage confirm that speculative funds remain heavily on the buy side.
Cross-Market Linkages Support Prices
Cotton prices did not fall deeply due to macro headwinds, partly thanks to strength in grains and energy. Chicago wheat futures rose for a third consecutive day on worsening US crop conditions and stalled US-Iran ceasefire talks, raising risks of prolonged disruptions to fuel and fertilizer supplies from the Gulf region. International oil prices also closed higher for a third day on supply disruption fears.
For the textile supply chain, this means cost support for raw materials is not solely dependent on cotton fundamentals but also influenced by broader commodity markets. The relative pricing of cotton versus synthetic fibers and feedstock costs should be closely monitored.
Spot Market Reaction
The Cotlook A Index rose 300 points to 97.65 cents per pound on May 12. The spot index has been actively following futures, but whether the rally is sustainable depends on downstream mills' willingness to accept higher prices. Domestic textile markets are facing demand divergence, with high-count yarns maintaining decent margins while regular-grade products face inventory pressure. The spread between imported and domestic cotton will directly influence mills' procurement strategies.