A stronger dollar and higher-than-expected inflation are putting short-term pressure on cotton prices, which have been trading at elevated levels. On May 12, the ICE cotton futures contract for July fell 1.65% to settle at 86.32 cents per pound, though it earlier hit its highest since April 2024. This price movement reflects a tug-of-war between macroeconomic headwinds and a bullish supply-demand outlook.
Macro Pressure: Dollar Strength and Rate Hike Expectations
The US Labor Department reported that April CPI rose 3.8% year-on-year, the largest increase since May 2023 and above the 3.7% forecast. Persistent inflation has sharply shifted expectations for Federal Reserve policy. According to the CME FedWatch Tool, markets have largely priced out any rate cut this year, while the probability of at least a 25-basis-point hike by December rose from 23.6% a day earlier to 36%.
Following the inflation data, the US dollar index rose 0.5% against a basket of currencies, hitting recent highs. For dollar-denominated cotton, a stronger dollar makes it more expensive for holders of other currencies, dampening international buying interest. The decline in ICE cotton futures on May 12 was an immediate response to this macro pressure.
Uncertainty over the Iran conflict ceasefire also supported the dollar as a safe-haven asset. Heightened geopolitical risk tends to drive capital into dollar-denominated assets, further strengthening the greenback and indirectly weighing on commodity prices.
Supply-Demand Fundamentals: A Bullish WASDE Report
Despite short-term macro headwinds, the cotton market's supply-demand fundamentals remain constructive. The USDA's May World Agricultural Supply and Demand Estimates (WASDE) report painted a bullish picture for the 2025/26 and 2026/27 marketing years.
The report estimated global cotton production at 122.64 million bales for 2025/26, falling to 116.04 million bales for 2026/27. For the US, production was estimated at 13.9 million bales for 2025/26 and 13.3 million bales for 2026/27. Global ending stocks were seen declining from 77.27 million bales in 2025/26 to 71.84 million bales in 2026/27.
The combination of lower production and declining stocks points to a tightening global supply outlook over the next two seasons. This long-term bullish signal explains why cotton prices have remained near two-year highs despite dollar strength. Market analysts note that speculative money continues to buy heavily, betting on a tighter supply-demand balance.
Ongoing drought conditions in West Texas have already been priced in by the market. As one of the world's largest cotton exporters, weather in the US growing region will directly impact global supply.
Related Markets and Chain Transmission
Cotton prices do not operate in isolation. Gains in the grain and energy markets provided additional support. Chicago wheat futures rose for a third consecutive session on worsening US crop conditions and stalled US-Iran talks, raising the risk of prolonged disruptions to fuel and fertilizer supplies from the Gulf region. Oil prices also rose for a third straight day on supply disruption fears.
Higher energy costs will raise the cost of cotton planting, transportation, and processing, indirectly supporting the price floor. Meanwhile, strength in grain markets could influence farmers' planting decisions for the new season, as they weigh relative returns between cotton and competing crops.
On the spot market, the Cotlook A Index rose 300 points to 97.65 cents per pound on May 12, indicating that downstream buying interest remains intact despite the futures pullback. However, elevated prices are testing the cost tolerance of textile mills.