The tug-of-war in the cotton market is intensifying. On May 12, the ICE cotton futures July contract retreated after hitting its highest level since April 2024, settling at 86.32 cents/lb, down 1.45 cents or 1.65%. The direct trigger was a stronger dollar—the dollar index rose 0.5% against a basket of currencies, making dollar-denominated cotton more expensive for non-U.S. buyers.
Strong Dollar and Macro Risk Resonance
This dollar rebound is not an isolated event. The U.S. Labor Department reported that April CPI rose 3.8% year-on-year, the largest increase since May 2023, above the 3.7% forecast and compared to March's 3.3% rise. Persistent inflation has shifted market expectations for Fed policy. According to the CME FedWatch tool, the market has largely ruled out any rate cuts this year, while the probability of at least a 25-basis-point hike at the December meeting rose to 36% from 23.6% a day earlier.
For the textile industry, this means dual pressure: first, a strong dollar will suppress short-term price performance of dollar-denominated raw materials, increasing uncertainty for import cotton procurement; second, a tighter rate environment may curb consumer credit, affecting downstream demand for apparel. Additionally, slow progress in U.S.-Iran ceasefire talks supports the dollar as a safe haven, indirectly pressuring cotton prices.
USDA Supply-Demand Report: Production and Inventories Decline, Bullish Long-Term
Despite short-term price pressure, the USDA's May World Agricultural Supply and Demand Estimates provided a bullish anchor for the long term. The report estimated global cotton production at 122.64 million bales for 2025/26, falling to 116.04 million bales for 2026/27, a decline of about 5.4%. For the U.S., production was estimated at 13.9 million bales for 2025/26 and 13.3 million bales for 2026/27.
More notably, global ending stocks are expected to drop from 77.27 million bales in 2025/26 to 71.84 million bales in 2026/27, a 7% decline. This signals a tightening global cotton supply over the next year. For mills relying on imported cotton, this means the cost base may shift upward.
However, uncertainties remain. Drought conditions in West Texas have been partially priced in, but the extent and actual crop losses are still unclear. As market participants note, speculative funds are heavily on the buy side, but multiple unknowns persist, including weather, trade policy, and macroeconomic trends.
Correlated Market Transmission: Grain and Energy Linkages
Cotton is not moving in isolation. On the same day, Chicago wheat futures rose for a third consecutive session due to unexpected deterioration in U.S. crop conditions and stalled U.S.-Iran talks, raising risks of prolonged disruptions in Gulf fuel and fertilizer supplies. Oil prices also rose for a third day, driven by the same supply disruption fears.
This linkage has practical implications for textiles: rising crude oil prices will push up production costs for synthetic fibers such as polyester and nylon, altering the relative price ratio between cotton and synthetics. If cotton remains high due to strong fundamentals and synthetics also strengthen due to oil prices, textile mills will face broad-based raw material cost pressure.
Spot Price Follow-Through: Cotlook A Index Jumps 300 Points
Futures volatility has transmitted to spot markets. On May 12, the Cotlook A Index stood at 97.65 cents/lb, up 300 points in a single day. The spot gain outpaced futures, indicating that the actual trade-level supply-demand tightness remains unchanged despite the strong dollar. For mills, this means immediate procurement costs have risen significantly, and forward contract pricing will adjust accordingly.