Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Cotton Is Outperforming Gold This July 2026
Transcript
- Lucas: Cotton is up over seven and a half percent in the last five trading days. That's a bigger move than gold, silver, copper, corn, or wheat. And it's not a blip — it's been building for weeks. Luna: Cotton? Really? I mean, everyone's been watching gold hit four thousand one hundred eighty-seven dollars an ounce, but cotton's the one that's actually outperforming? Lucas: Exactly. And the gap is wider than most people realize. Gold's up about four percent over the same five-day window. Cotton's at seven point seven percent. Silver's the only thing close, at eight percent, but silver had a much bigger pullback earlier in the year. Cotton has just been steadily grinding higher. Luna: So what's driving it? I know the Texas crop has been under pressure from drought, but that's been the story for months. Lucas: The drought is the biggest factor, but it's not the only one. Let's start with supply. The USDA's June acreage report showed that U.S. cotton plantings are down about eight percent from last year. That's a bigger drop than the market expected. And the crop condition ratings in Texas — which produces about forty percent of U.S. cotton — are the worst they've been since 2011, when we had that historic drought. Luna: So less cotton is going to come out of the ground. But demand is also picking up, right? Lucas: That's the other side. China's textile sector has been running hot. Their export numbers for apparel have been surprisingly strong despite the trade tensions. And they're restocking after running down inventories last year. So you've got a classic supply-demand mismatch. The International Cotton Advisory Committee just lowered its global production forecast and raised its consumption forecast for the 2026-27 season. Luna: I also wonder if the weaker dollar is amplifying the move. A lot of commodities are priced in dollars, so when the dollar falls, they look cheaper to foreign buyers. Lucas: Absolutely. The dollar index has been sliding since June, and that's a tailwind for all commodities. But cotton is getting an extra boost because it's one of the most dollar-sensitive commodities. About seventy-five percent of U.S. cotton is exported. So a one percent drop in the dollar can translate into a bigger percentage gain in cotton futures, because foreign buyers are bidding up the price. Luna: That makes sense. So is this a hedge against inflation, like gold is supposed to be? Lucas: It's a different kind of hedge. Gold is the traditional inflation hedge because it's a store of value. Cotton is more of a consumption hedge — its price reflects real industrial demand. When inflation is driven by strong economic activity, cotton tends to do well. Right now we have this weird mix: inflation is still sticky, but the economy is cooling. And yet cotton is rallying because the supply shock is overriding the demand concerns. Luna: So the story is really about supply. How much more upside could there be? Lucas: That depends on the weather over the next few weeks. The critical period for the Texas crop is July and August, when the bolls are developing. If we get a heat wave or more dryness, you could see cotton spike toward eighty-five cents. The USDA will release its next supply-demand report on July 11th, and traders are expecting another cut to yield estimates. If that happens, the rally could accelerate. Luna: But what if the weather cooperates? Could we see a sharp reversal? Lucas: Definitely. Commodities are volatile by nature. If we get a big rain event or improved crop ratings, you could see a ten cent drop in a week. That's why you have to be careful. But for now, the momentum is clearly bullish. Luna: You know, this reminds me of the coffee rally we saw earlier this year. It was also supply-driven, and it eventually fizzled when demand softened. Lucas: Good comparison. Coffee spiked on frost damage in Brazil, then crashed when it turned out the damage wasn't as bad as feared. Cotton could follow a similar pattern if the Texas crop gets a reprieve. But the difference is that U.S. cotton acreage is already down, so even a normal yield would leave supplies tighter than last year. Luna: So maybe the rally has more legs than some people think. What about the other soft commodities? Are they seeing similar moves? Lucas: Wheat is up five and a half percent in five days, corn is up almost ten percent. But those have their own stories — wheat has the war premium, corn has the ethanol mandate and tight stocks. Cotton is the one that's been a bit under the radar because it doesn't get the same headlines as grains or metals. Luna: So if an investor wanted to play this, beyond just buying futures, what are the options? Lucas: You could look at the ETF that tracks cotton, symbol b a l, which is the iPath Bloomberg Cotton Subindex Total Return ETN. But be careful with ETNs — they have credit risk from the issuer. Another option is to look at companies that are leveraged to cotton prices, like some of the large agribusinesses or textile producers. But that's a more indirect play. Luna: It's interesting that cotton is outperforming gold even as gold hits all-time highs. Usually in a risk-off environment, gold is the star. But here we have cotton — a cyclical commodity — beating it. Lucas: That tells you the market isn't purely in risk-off mode. There's still demand for physical goods. And it also tells you that supply constraints can overwhelm macro sentiment. If the cotton crop fails, it doesn't matter if the economy is slowing — the price is going up. Luna: Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. We keep this show ad-free, and listener support is what makes that possible. Lucas: Yeah, and it really does make a difference. A lot of people think a dollar or two doesn't matter, but it adds up and lets us spend the time to dig into stories like this one. So if you find value in it, that's the spot. Luna: Alright, back to cotton. One thing I want to get into is the role of speculators. The CFTC data shows that hedge funds have been piling into cotton longs. Lucas: That's right. The latest Commitment of Traders report showed that speculative net longs in cotton futures and options hit a six-month high. That adds momentum, but it also creates risk. If the weather improves, those same funds could unwind positions quickly, amplifying a sell-off. Luna: So it's a crowded trade at this point. Is there a contrarian angle here? Lucas: The contrarian would say that sentiment is too bullish and that the market is pricing in a worst-case scenario for the crop. If the USDA report on July 11th doesn't show further deterioration, you could see a sharp correction. But the trend is your friend until it isn't. Luna: Let's talk about the other side of the coin: who is getting hurt by these prices? I imagine textile mills in places like Bangladesh or Vietnam are feeling the pinch. Lucas: Absolutely. Those countries import most of their cotton, and higher prices squeeze their margins. Some mills might reduce operating rates or pass costs on to apparel brands. That could eventually show up in higher clothing prices for consumers, but with a lag of several months. So this cotton rally could be a factor in the next CPI report, though it's a small component. Luna: So the ripple effects are real. And it's not just about farmers. Lucas: No, it's a global supply chain story. From the Texas panhandle to the garment factories in Dhaka, everyone is watching the weather in Lubbock. That's what makes commodities so fascinating — a lack of rain in one region can affect prices and livelihoods halfway around the world. Luna: And it's a reminder that even in a world focused on tech stocks and AI, the old economy still matters. Lucas: Cotton is over five thousand years old as a traded commodity, and it's still making headlines. The more things change, the more they stay the same. Luna: So where do we think cotton is heading in the next month? Any bold predictions? Lucas: I'd say if the Texas drought persists, we could test the 2022 highs around ninety cents. If we get rain, we could drop back to the low seventies. The range is wide, but the direction is clear for now. I'd keep an eye on the weather maps and the USDA report. Luna: Great advice. And if listeners want to follow along, we'll be tracking it on the show.