The U.S. dollar index rose 0.5% on May 12, directly pressuring dollar-denominated cotton futures. ICE July cotton settled at 86.32 cents per pound, down 1.45 cents or 1.65%. However, the contract earlier hit its highest level since April 2024, suggesting the pullback was more a profit-taking and currency shock than a shift in sentiment.
Macro Headwinds: Sticky Inflation Revives Rate Hike Bets
The U.S. Labor Department reported April CPI at 3.8% year-on-year, the largest increase since May 2023 and above the 3.7% consensus estimate. This has reshaped Fed rate expectations. CME's FedWatch tool now assigns zero probability to a 2025 rate cut, while the odds of at least a 25-basis-point hike by December jumped from 23.6% to 36% in one day.
For the textile industry, a stronger dollar makes imported cotton and yarn more expensive for mills in Asia. If rate hike expectations solidify, global financing costs will rise, potentially dampening consumer demand for apparel.
Supply-Demand: USDA Report Sends Bullish Signal
The USDA's May WASDE report is the key fundamental driver. Global cotton production is estimated at 122.64 million bales for 2025/26 and 116.04 million bales for 2026/27—two consecutive years of decline. U.S. production is pegged at 13.9 million bales for 2025/26 and 13.3 million bales for 2026/27.
More critically, global ending stocks are projected to fall from 77.27 million bales in 2025/26 to 71.84 million bales in 2026/27, a 7% drawdown. This points to a tightening market. Varner Brokerage President Rogers Varner called the report "bullish in the long term," adding that the day's dip was insignificant.
He warned of multiple unknowns, chief among them the persistence of drought in West Texas, the core U.S. cotton growing region. Should drought worsen, actual output could fall below official estimates.
Cross-Market Support: Grains and Oil Rise
While cotton futures dipped, Chicago wheat rallied for a third straight day on deteriorating U.S. crop conditions and stalled U.S.-Iran talks. Crude oil also rose for three consecutive sessions on Middle East supply disruption risks.
Higher grain and energy prices have two implications for cotton: they raise input costs, potentially shifting farmer planting decisions toward more profitable crops in 2026/27, and they reinforce inflation, which indirectly supports cotton price floors.
Spot Market: Cotlook A Index Jumps
On May 12, the Cotlook A Index surged 300 points to 97.65 cents per pound, diverging from futures. This suggests robust physical demand, especially from major consumers like India and Pakistan during their restocking window. The widening futures-spot spread often signals a potential rebound in futures.