On May 12, ICE cotton futures edged lower by 1.45 cents to 86.32 cents per pound, down 1.65%, pressured by a strengthening dollar. Yet the market remained near its highest level since April 2024, reflecting intense tug-of-war between near-term currency headwinds and medium-term supply tightening expectations.
Macro Headwinds: Sticky Inflation Revives Rate Hike Bets
The US Labor Department reported April CPI rose 3.8% year-on-year, the largest gain since May 2023 and above the 3.7% consensus estimate. Sticky inflation has virtually erased market expectations for a Fed rate cut this year. The CME FedWatch tool now shows a 36% probability of at least a 25-basis-point hike at the December meeting, up from 23.6% a day earlier.
The dollar index climbed 0.5%, making dollar-denominated cotton more expensive for buyers using other currencies. This directly pressures import demand from major consumers like China and Vietnam in the short term.
Supply-Demand Fundamentals: USDA Report Sends Bullish Signals
The USDA's May World Agricultural Supply and Demand Estimates provided medium-term support. Global cotton production for 2025/26 is estimated at 122.64 million bales, falling to 116.04 million bales in 2026/27, a decline of about 5.4%. Ending stocks are projected to shrink from 77.27 million bales to 71.84 million bales, significantly lowering the stocks-to-use ratio.
US production is also trending lower: 13.9 million bales in 2025/26 and 13.3 million bales in 2026/27. The decline is largely attributed to persistent drought risks in West Texas. Speculative money continues to add long positions, pricing in an extended drought scenario.
Geopolitical and Cross-Market Ripples
Uncertainty over Iran continues to roil commodity markets. Stalled US-Iran ceasefire talks raise the risk of prolonged supply disruptions in the Persian Gulf, pushing oil prices higher for a third consecutive session. Meanwhile, deteriorating US wheat crop conditions have driven Chicago wheat futures higher.
Rising energy and grain prices indirectly support cotton. Higher oil prices lift the cost of synthetic fiber alternatives, while strong grain markets may prompt US farmers to reconsider acreage allocation during spring planting, reinforcing cotton acreage reduction expectations.
Industry Impact: Risk and Opportunity in a Rangebound Market
Current cotton prices are near two-year highs, but the fundamental picture lacks a clear directional driver. Macro factors—a strong dollar and rising rate hike expectations—weigh on prices, while industry factors—declining global stocks and drought in key producing regions—provide a floor. This setup suggests a wide-range consolidation rather than a sustained trend.
Downstream textile mills face ongoing raw material cost pressure. The Cotlook A Index has surged to 97.65 cents per pound, up 300 points in a single day, indicating tight physical supply. Mills should prepare for potential sharp rallies if drought conditions materialize.