On May 12, 2025, ICE cotton futures retreated, with the July contract settling at 86.32 cents per pound, down 1.45 cents or 1.65%. Despite the daily decline, the contract touched its highest level since April 2024 during the session, indicating that the overall bullish trend remains intact.
Strong Dollar and Inflation Expectations Converge
The direct trigger for the decline was a significant strengthening of the US dollar index, which rose 0.5% against a basket of currencies, making dollar-denominated cotton more expensive for non-US buyers and dampening some international demand. Deeper pressure came from higher-than-expected US inflation data—the April Consumer Price Index (CPI) rose 3.8% year-on-year, the largest increase since May 2023 and above the 3.7% forecast. This data has essentially eliminated market expectations for a Fed rate cut this year, with the probability of a 25-basis-point rate hike at the December meeting rising to 36% from 23.6% the previous day. The shift in rate expectations further supported the dollar, systematically suppressing commodity prices.
Notably, short-term financial factors have not shaken the industry's assessment of the cotton supply-demand fundamentals. The market is more focused on the medium-to-long-term trends revealed by the latest USDA monthly supply-demand report.
USDA Report: Inventory Contraction Anchors Long-Term Bullishness
The USDA's May report provided global cotton supply-demand estimates for the 2025/26 and 2026/27 marketing years. Data shows 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 approximately 5.4%. Ending stocks are projected to shrink sharply from 77.27 million bales to 71.84 million bales, a 7% drop.
US production also shows a contraction trend: 13.9 million bales estimated for 2025/26 and 13.3 million bales for 2026/27. This reduction is primarily driven by market expectations of persistent drought in West Texas, the major US cotton-producing region, which directly impacts yields and planted acreage.
Industry analysts point out that the report's 'bullish' signal comes not from a single year's data but from two consecutive years of tightening. The decline in the stocks-to-use ratio suggests that over the next 18 to 24 months, global cotton supply-demand will shift from relatively loose to tight, providing structural support for forward prices.
Geopolitical Risks and Energy Market Transmission
Beyond cotton's own fundamentals, external macro and geopolitical factors are also transmitting through cost and sentiment channels. Significant disagreements between the US and Iran over ending the Middle East conflict and an uncertain ceasefire outlook have pushed international oil prices higher for three consecutive sessions. Rising energy costs not only increase cotton planting and transportation costs but also indirectly affect cotton acreage competition through linkages with grain markets like wheat.
Additionally, strength in grain markets provides some spillover support for cotton. Chicago wheat futures rose for a third straight day due to unexpected deterioration in US crop conditions, further reinforcing risk appetite in the agricultural complex. Speculative net long positions in cotton futures remain high, indicating strong market tolerance for pullbacks.
Industry Impact and Practical Recommendations
For textile enterprises, the current market is in a game between 'short-term financial disruption' and 'medium-term supply tightness.' The increased import costs from a strong dollar represent a temporary pressure, but if regional drought materializes, cotton prices could resume their upward trajectory in the second half of 2025.