On May 12, ICE cotton futures for July delivery settled at 86.32 cents per pound, down 1.45 cents or 1.65% from the previous day. However, the contract touched its highest level since April 2024 during the session, signaling intense tug-of-war between bulls and bears. For textile industry professionals, this high-level volatility reflects a collision between short-term macro headwinds and medium-to-long-term supply-demand bullishness.
Dollar Strength and Inflation Expectations: Short-Term Pressure, Not a Trend Reversal
The U.S. dollar index rose 0.5% on the day, directly pressuring dollar-denominated cotton. The dollar's strength came as the U.S. April CPI rose 3.8% year-on-year, exceeding the 3.7% consensus and marking the largest gain since May 2023. Persistent inflation has essentially eliminated market expectations for a Fed rate cut this year. According to CME's FedWatch tool, the probability of at least a 25-basis-point rate hike by December rose from 23.6% the previous day to 36%.
This suggests that a strong dollar environment is likely to persist in the near term, continuing to cap cotton prices. However, this pressure is more likely to manifest as pullbacks within an uptrend rather than a full reversal, as the core driver of cotton prices has shifted from macro liquidity to fundamental supply-demand dynamics.
USDA Supply-Demand Report: Clear Medium-to-Long-Term Bullish Signal
The USDA's May World Agricultural Supply and Demand Estimates provided a more durable price anchor. Global cotton production for 2025/26 is estimated at 122.64 million bales, while 2026/27 output is projected at 116.04 million bales, a decline of about 5.4%. For the U.S., 2025/26 production is estimated at 13.9 million bales, falling to 13.3 million bales in 2026/27. Global ending stocks are expected to shrink from 77.27 million bales to 71.84 million bales.
The dual decline in production and inventories confirms a tightening global supply scenario over the next two seasons. This is the core logic behind continued speculative buying, as noted by Varner Brokerage President Rogers Varner, who observed that speculators are heavily positioned on the buy side and still accumulating.
West Texas Drought: The Biggest Unknown
Despite the clear medium-term bullish direction, risks remain. Varner cautioned that there are "multiple unknowns," the most critical being the persistence of drought in West Texas. As the primary U.S. cotton-growing region, weather conditions there directly determine whether production estimates are realized.
The market has partially priced in continued drought, but if actual rainfall proves better than expected, the "drought premium" embedded in current prices could be at risk. Conversely, worsening drought could push prices even higher.
Cross-Market Conduits: Energy and Grain Price Linkages
It is noteworthy that both grain and energy markets rose on May 12. Chicago wheat futures rallied for a third consecutive day, driven by unexpected deterioration in U.S. crop conditions and stalled US-Iran peace talks. International oil prices also rose for a third straight session, as wide differences between the U.S. and Iran over ending the Middle East war raised concerns about prolonged supply disruptions.
This linkage means cotton does not operate in isolation. Geopolitical risks pushing energy prices higher indirectly increase cotton planting and transportation costs, while rising grain prices could influence acreage allocation decisions, further squeezing cotton planting intentions.
Industry Impact: Spinners Need More Flexible Procurement Strategies
For Chinese textile mills, the current high-level volatility makes timing of purchases more critical. On one hand, the medium-term supply tightening does not support a sharp price decline. On the other hand, short-term dollar strength and macro uncertainty may create buying windows.
In major textile clusters such as Keqiao and Shengze, yarn and grey fabric prices have already shown signs of following cotton higher, but end-user order acceptance is still being tested. Downstream weaving mills are seeing profit margins compressed, with some choosing to reduce raw material inventories to hedge against price volatility.