ICE cotton futures staged a decisive rally in July, with the December 2026 contract settling at 81.29 ¢/lb on July 8, a gain of 3.82% that marked the highest level since April. The rally was driven by a convergence of factors: adverse weather conditions in key US growing regions, renewed optimism about Chinese import demand, and a constructive USDA July WASDE report that tightened the supply picture.
The nearby July contract, which reflects old-crop availability, has traded in a 73-77 ¢/lb range, reflecting the tight certified stock situation. USDA's Weekly Cotton Market Review showed US spot base-quality prices averaging 72.98 ¢/lb for the week ending July 9, up 347 basis points week-on-week. The backwardation in the forward curve - December at a premium to nearby - signals that the market expects supply to remain constrained into the 2026/27 marketing year.
H2: USDA July WASDE: production raised, but demand growth provides support
The USDA's July WASDE report raised 2026/27 US cotton production by 0.4 million bales to 13.7 million, reflecting higher planted and harvested area from the June Acreage report. Beginning stocks, domestic use, imports, and exports were left unchanged. The net effect was a modest increase in US ending stocks to approximately 4.1 million bales. This is not a burdensome number but it is not tight either.
The global picture was more interesting. USDA raised 2026/27 world production by approximately 1.2 million bales to 117.3 million, with larger crops in Brazil, the US, Turkey, and Central Asia. Mill use was nudged up to approximately 122.0 million bales, reflecting steady global textile demand. World ending stocks inched up to 71.2 million bales, implying a stocks-to-use ratio of 58.4% - historically moderate but not alarming.
The net WASDE message for cotton was neutral to slightly bearish: production is adequate, stocks are comfortable, but demand is growing at a pace that prevents a surplus build-up. The real action is not in the balance sheet but in the details: US weather, Chinese demand, and Brazilian competition.
H2: US weather: the Southwest drought is the swing factor
US cotton production is concentrated in Texas (approximately 40% of US output) and the Southwest, where drought conditions have persisted through the 2026 growing season. While early-season planting conditions were adequate, the crop entered the critical squaring and boll-setting period in July with below-normal soil moisture in the Texas High Plains and Oklahoma. The condition rating for US cotton has been variable: early July conditions were adequate but deteriorated through mid-month as temperatures spiked above 100°F in the southern Plains.
The December contract has priced in some weather risk premium, but if the Southwest drought intensifies through August, production estimates will be revised down from the WASDE baseline. A significant reduction of 500,000-1,000,000 bales would quickly shift the US balance from comfortable to tight and could push December above 85 ¢/lb.
H2: China: the demand wild card
Chinese cotton import demand is the most important variable for global cotton prices in the second half of 2026. USDA long-term projections indicate China's 2026/27 domestic cotton production at 32 million bales, the lowest in three years, as government policy continues to shift support away from cotton toward grain self-sufficiency. With domestic production falling and textile demand steady, China is expected to import a record 7.0 million bales in 2026/27, up 25% from the prior year.
China's WTO tariff-rate quota (TRQ) for cotton is 894,000 metric tons, but in-quota imports have historically been supplemented by sliding-duty imports that effectively expand access. The key procurement risk is whether the Chinese government will maintain this open import policy through the 2026/27 marketing year. Any protectionist shift - whether through tariff increases, quota restrictions, or prioritizing Xinjiang cotton in state-owned enterprise procurement - would have a significant negative impact on global cotton prices.
H2: Competitive dynamics: Brazil challenges US export dominance
Brazil has emerged as the second-largest cotton exporter globally and is challenging the US for market share in Asia. The 2026/27 Brazilian cotton crop is projected at 16.5 million bales, surpassing US production for the first time. Brazilian cotton has a freight advantage into Asian markets (particularly China and Vietnam) compared to US Gulf origin, and Brazilian output is expected to place downward pressure on US export premiums.
The competitive dynamic means that even if Chinese demand materializes, US cotton producers may not capture the full benefit. Brazilian cotton will capture a growing share of Asian import demand, capping the upside for ICE cotton prices relative to the Cotlook A Index.
Bull case: Severe US Southwest drought reduces output by 1M+ bales + strong Chinese import demand pushes December above 88 ¢/lb. Probability: 20%. Bear case: Normal US weather + Chinese policy restrictions + record Brazilian crop push December to 72-75 ¢/lb. Probability: 35%. Base case: ICE December in a 76-84 ¢/lb range, with the weather premium ebbing and flowing through August. Probability: 45%.
Cotton buyers should take a cautious approach to forward coverage at current levels. The December contract at 81 ¢/lb already embeds a weather risk premium and Chinese demand optimism, both of which could easily reverse. For Q4 2026 coverage, layer in hedges gradually: start with 30% at 78-80 ¢/lb, add 20% on any dip below 76 ¢/lb, and use calls at 86 ¢/lb rather than outright futures to capture upside if the Southwest drought worsens. The competitive threat from Brazilian cotton is real and increases bargaining power with US suppliers: consider requesting Brazilian-origin FOB quotes alongside US Gulf offers to ensure competitive pricing. The primary risk to watch is Chinese trade policy - any signal from Beijing about cotton import restrictions would be a decisive sell signal. On the physical side, the tight US certified stock situation means that buyers needing specific quality grades (particularly high-grade SJV Pima or Arizona cotton) should secure coverage earlier than the broader market average, as quality premiums tend to expand when overall stocks are tight.