Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Cotton Is Surging Past Crude Oil This July
Transcript
- Lucas: Crude oil has been rebounding this week — WTI up four-point-one percent in five days, Brent up five percent. But the real mover in the energy-adjacent space is something you wouldn't put in your gas tank: cotton. Luna: Cotton just hit eighty-point-four-nine cents, up eight-point-eight percent in the same five-day window. That's almost double Brent's rally. Lucas: Right. And the question is: is this just catch-up after cotton got crushed in June, or is there something structural going on? Because the macro backdrop is still pretty soft — core PCE is still running above two percent, the ten-year breakeven inflation rate actually ticked down to two-point-two-three percent. Luna: So demand isn't exactly booming. What's driving cotton specifically? Lucas: Part of it is supply. The USDA's June acreage report showed U-S cotton plantings down about three percent from last year. Texas — which grows nearly forty percent of U-S cotton — had a dry spring, and the crop condition ratings are below the five-year average. That's pricing in a tighter harvest. Luna: But we've seen supply scares before that fizzled. The difference this time seems to be demand holding up better than people expected. Lucas: Exactly. Textile demand out of South and Southeast Asia has been surprisingly resilient. Vietnam and Bangladesh are importing at levels we haven't seen since early 2023. And here's the thing: a lot of that cotton is coming from the U-S, because India's own crop this year is smaller — they shifted acreage to soybeans and pulses after last year's low prices. Luna: So the U-S is filling the gap, but with a smaller crop. Lucas: That's the squeeze. Now, the other factor that's quietly helping cotton is natural gas. Look at what happened to N-G this week — it dropped eight percent in five days, down to two-ninety-eight. For cotton farmers in the U-S South, natural gas is a big input cost for running irrigation pumps and gins. Cheaper gas means lower production costs, which can support margins even if prices soften. Luna: That's an interesting cross-commodity story. Normally you think of oil and cotton as unrelated, but energy costs ripple through. Lucas: They really do. And there's a geopolitical angle too — the U-S just announced it will continue technical talks with Iran. That's keeping a lid on any big risk premium in crude, but for cotton, which is less sensitive to Middle East tensions, it's mostly a non-event. The focus is squarely on physical supply and demand. Luna: Let's talk about the demand side more. Who's buying all this cotton? Lucas: The big story is China. Chinese cotton imports in the first half of 2026 are running about twelve percent ahead of last year, even though their own economy is still sluggish. A lot of that is restocking by textile mills after they ran down inventories in 2025. They're also spinning higher-quality yarn for export markets, and that requires longer-staple U-S cotton. Luna: So it's not just volume, it's quality mix. That helps explain why prices are moving even if total demand isn't exploding. Lucas: Precisely. And one more number that caught my eye: cotton open interest on i c e has climbed about twelve percent in the last two weeks. That tells me new money is coming into the market, not just short-covering. Some of that is speculative — hedge funds looking for a commodity that's not correlated to oil or gold — but some is commercial hedging by mills who want to lock in prices now. Luna: It's also worth noting that cotton is still well below its 2022 peak of around one-fifty cents. So there's room to run if the weather stays dry. Lucas: Right, we're not talking about a bubble yet. But the rally does raise an interesting question for farmers: do you sell now or hold out? I spoke to a producer in Lubbock, Texas last week, and he said he's already forward-sold about forty percent of his expected crop at around seventy-eight cents. He's happy with that, but he's watching the market every day wondering if he left money on the table. Luna: That's the eternal farmer's dilemma. But if the rally continues, we could see more acreage switch back to cotton next year. Which would eventually pressure prices. Lucas: Exactly. And that's the cycle. Look, one of the things I love about covering commodities is that you get these moments where a quiet market suddenly becomes the center of attention. Cotton right now is that market. It's not as flashy as gold or as volatile as crude, but the fundamentals are lining up in a way that feels durable. Luna: Durable but not invincible. A big rain in Texas or a sudden drop in Chinese demand could reverse this quickly. Lucas: Absolutely. And that's why we'll keep watching. But for today, cotton is the commodity that's quietly crushing it. Luna: Speaking of keeping it going — a quick honest thing. A lot of you have asked how we make this show without ads. The answer is simple: a small group of listeners chips in monthly at buy me a coffee dot com slash fexingo. Lucas: Yeah, and it really does make a difference. No corporate sponsors, no annoying mid-rolls. Just the economics, straight up, because a handful of people decide it's worth supporting. So if you've gotten something out of these episodes, that's the place to help keep it ad-free. Luna: Alright, back to the numbers. Lucas, you mentioned open interest climbing — is there any sign of speculative froth, or is this mostly commercial? Lucas: Right now it's a mix. The C-F-T-C's commitments of traders report shows managed money is net long about eighteen thousand contracts, which is actually below the five-year average. So there's room for more speculative buying without it being overdone. Commercial hedgers are net short, but that's normal — they're selling futures to lock in prices. The ratio is healthy. Luna: Good. So no alarm bells yet. Lucas: None. And I think that's the key takeaway: cotton is rallying on real fundamentals — tighter supply, steady demand, supportive energy costs — not on hype. That doesn't mean it can't correct, but it means the floor is higher than it was three months ago. Luna: So if you're a trader, you watch the weather in Texas and the import numbers out of China. If you're a listener, you now know why cotton is suddenly the most interesting commodity on the board. Lucas: And we'll be back next week to see if the rally holds or fades. For Fexingo Business, I'm Lucas. Luna: And I'm Luna. Take care.