After a period of consolidation, the international cotton market encountered a fresh catalyst in mid-May: persistent dry weather in U.S. growing regions is reshaping the new-season supply-demand balance, pushing the ICE cotton futures contract above 86 cents per pound, the highest settlement since April 2024.
Weather Risk Dominates Short-Term Sentiment
The drought across the U.S. southern cotton belt, particularly in Texas, is the core driver of this rally. Meteorological data show significantly below-average precipitation since the planting season, with soil moisture levels at a five-year low. While the Delta and Southeast regions saw some recent rainfall, the improvement was marginal and failed to ease overall drought concerns. Market analysts note that Texas, as the largest cotton-producing state, poses a direct threat to potential yields, triggering speculative buying on weather premiums.
Meanwhile, the USDA's weekly crop progress report showed that as of mid-May, U.S. cotton planting was 29% complete, slightly above the five-year average of 28%. This paradoxically deepens market anxiety: acreage is not significantly behind schedule, but if dry conditions persist during emergence and early growth, final output could be at risk.
Supply-Demand Report Points to Tighter Stocks
The USDA's May World Agricultural Supply and Demand Estimates (WASDE) report provided a broader picture. It projects 2025/26 global cotton production at 122.64 million bales, falling to 116.04 million bales in 2026/27. Ending stocks are expected to decline from 77.27 million bales to 71.84 million bales, a drop of about 7%. For the U.S., the new crop is estimated at 13.9 million bales, with the following year at 13.3 million bales, implying a tightening stocks-to-use ratio.
The report's signal is clear: the global cotton market is transitioning from a loose cycle to a tighter balance. Notably, Brazil, the second-largest exporter, saw its production forecast trimmed by consultancy Safras & Mercado to 3.74 million tonnes from a previous 3.76 million tonnes. While the adjustment appears modest, it reinforces the consensus of tightening supply against a backdrop of global contraction.
Substitution Effects and Macro Factors Intertwine
Oil prices remaining above $100/barrel provide indirect support to cotton. Higher oil costs increase the production cost of polyester, cotton's main synthetic substitute, thereby enhancing cotton's relative competitiveness. Textile mills will weigh the price spread between cotton and man-made fibers when formulating raw material blends. If cotton prices rise but synthetic prices also climb, cotton's cost disadvantage is partially offset.
Macroeconomic factors show mixed signals. A stronger U.S. dollar typically pressures dollar-denominated commodities, but cotton has shrugged off this headwind, indicating that supply-demand fundamentals are dominating. Meanwhile, the S&P 500 and Nasdaq hit record closing highs, reflecting improved risk appetite and capital inflows into commodity markets.
Implications for the Supply Chain
For Chinese textile mills, higher ICE cotton futures will directly raise import costs. The domestic-import price spread has already narrowed; if U.S. cotton continues to strengthen, the competitiveness comparison between imported and Xinjiang cotton will shift. Mills should closely monitor weather developments and monthly USDA reports to adjust procurement timing.
At the same time, destocking capacity in downstream grey fabric and finished fabric sectors will be critical. If end-user demand fails to recover, rising raw material costs will squeeze margins in weaving and dyeing stages. The industry should be wary of a 'cost-push price hike' diverging from weak demand.