Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Cotton Prices Are Falling Despite Tight Global Inventories
Transcript
- Lucas: Cotton down another 3.8% this week. We're looking at 73.75 cents a pound as of Friday's close. That's the lowest since late 2024, and it's happening while global inventories are supposed to be tight. Luna: Tight inventories, yet prices falling. That's the kind of signal that usually means demand is crumbling faster than anyone expected. Lucas: Exactly. And that's the story here. The USDA's May supply-demand report actually cut US ending stocks for 2026-27 — down to 3.1 million bales from 3.7 million in April. You'd think that would be supportive. But the market barely budged. Luna: Because the demand side was the real headline. USDA slashed its export forecast for American cotton by 200,000 bales. And that was before this latest leg down. Lucas: Right. China is the giant here — they buy roughly a third of all US cotton exports. But their textile production has been slowing since late 2025. Their own cotton imports dropped 11% year-over-year in the first quarter. Luna: Part of that is just the broader China slowdown. But there's a substitution story too, right? Polyester and other synthetics are getting cheaper relative to cotton. Lucas: Absolutely. Polyester prices have fallen about 7% this year, thanks to overcapacity in Chinese PTA plants. That makes it cheaper for mills to blend more synthetic fiber into their fabrics. And once a mill adjusts its blend ratio, it doesn't easily switch back. Luna: So cotton is losing market share in its own traditional stronghold — apparel. That's a structural headwind, not just a cyclical one. Lucas: And it's being amplified by a strong US dollar. The dollar index has been hovering near 105. That makes dollar-denominated cotton more expensive for buyers using rupees, yuan, or Turkish lira. Bangladesh and Vietnam, two big importers, have seen their purchasing power eroded. Luna: Turkey is a fascinating case. They're a major cotton buyer, but their currency has been under pressure all year. Their central bank has been hiking, but the lira keeps weakening. So Turkish mills are buying just-in-time, not building inventory. Lucas: That's showing up in the US export sales data. Weekly net sales for the week ending May 28th were just 98,000 running bales. That's down 38% from the prior four-week average. And cancellations by unknown destinations — likely China — were elevated. Luna: What about India? They're the world's second-largest producer. Their exports have been surprisingly strong this year. Lucas: India exported about 2.8 million bales in the 2025-26 season, up sharply from the year before. Their domestic consumption has been weak, so they're dumping surplus onto the global market. That's adding to the overall supply glut, even as US and Brazilian stocks tighten. Luna: So you've got multiple demand centers weakening at once — China, Turkey, Bangladesh — plus extra supply from India. That's a recipe for a bear market. Lucas: And the speculators are piling on. The CFTC's Commitment of Traders report shows managed money is now net short cotton by about 25,000 contracts. That's the largest short position since August 2024. They're betting on more downside. Luna: Is there any bullish case left? I mean, global inventories are still below the five-year average. At some point, low prices should incentivize buying. Lucas: There's always a value argument. At 73 cents, cotton is below the cost of production for many US growers. The USDA estimates the average breakeven for the Delta region is around 78 cents. Farmers will start cutting acreage next year if prices stay here. Luna: But that's a 2027 story. For the next few months, the macro headwinds dominate. Lucas: Right. The market needs to see either a serious pickup in Chinese demand — maybe a stimulus package that boosts textile exports — or a major weather event in Texas or India. The US cotton belt is 35% in moderate drought right now, but so far the crop condition ratings are decent. Luna: One thing we haven't mentioned: the logistics side. Are there any bottlenecks or storage issues affecting prices? Lucas: Good question. There's actually a bit of a storage squeeze at ice licensed warehouses. Certificated stocks have been rising sharply — they're over 200,000 bales now, up from near zero in March. That's bearish because it means physical cotton is flowing into delivery, not being taken up by mills. Luna: So merchants are parking cotton in warehouses, waiting for a buyer. That's a sign of weak demand. Lucas: Precisely. And the futures curve reflects it. The July contract is trading at a discount to December, which is normal for this time of year, but the spread has widened to nearly 2 cents. That contango encourages storage, which adds to the visible supply. Luna: It's interesting how a soft commodity like cotton can sometimes behave more like an industrial metal — driven by macro and dollar moves — rather than just its own supply-demand math. Lucas: It really is. And that's why we like covering these markets. They sit at the intersection of real-world fundamentals and financial flows. Speaking of which, we do this show ad-free, and if you've found it useful, you can support the work at buy me a coffee dot com slash fexingo. It's a simple way to keep this kind of conversation going without commercial breaks. Luna: Yeah, we believe in letting the ideas stand on their own. No sponsors, no product pitches — just the analysis we'd want to hear ourselves. Lucas: So back to cotton. The key level to watch now is 70 cents. If we break below that, you could see a wave of stop-loss selling from the specs. But if the USDA's June report — due next week — shows any further tightening in supply, we might get a dead-cat bounce. Luna: Either way, it's a market worth monitoring closely. The fundamentals are shifting, and the next move could be sharp. Lucas: Absolutely. That's all for this episode of The Commodities Economy. We'll be back soon.