From Dr. Jody Campiche, National Cotton Council:
Over the past 8 weeks, cotton prices have risen sharply, reaching the mid-80s in the first week of May, the highest level in two years. The rally reflects a shift in market sentiment along with global supply concerns. The upward movement was largely driven by a reversal in futures market positions. In mid-March, cotton futures speculative positions shifted from a record two-year net short position to a net long position. When speculators hold a net short position, they are betting that prices will fall. In this case, expectations shifted, and the extreme net short position left the market vulnerable to a reversal. This led to a large price jump due to short covering (i.e., short sellers buy back contracts to limit losses). This buying pressure pushed prices higher. With the shift to the net long position, traders have a more bullish sentiment and are expecting prices to continue to increase. Several factors contributed to this shift, including technical buying, tightening supply expectations, rising input costs, and a weakening U.S. dollar. In 2026, the dollar depreciated against several currencies, including the Brazilian Real and the Australian Dollar, improving the global competitiveness of U.S. cotton. Geopolitical tensions have led to substantial increases in input costs, including energy, fuel, transportation, and fertilizer, while also disrupting supply chains. Higher crude oil prices have increased polyester production costs, as polyester is derived from petroleum. Polyester prices in China have increased by 30% since early February, with even larger increases likely in other regions due to logistical disruptions, material shortages, and less integrated production systems. The combination of higher polyester prices and supply disruptions could enhance the competitiveness of cotton, potentially leading manufacturers to adjust their product blends to incorporate more cotton. At the same time, global cotton stocks are tightening as global consumption is projected to exceed production in 2026. Lower anticipated production is primarily due to reduced acreage in Brazil and China, along with severe drought conditions across the U.S. Cotton Belt. Rising fertilizer costs, along with reduced availability, could also shift some acres away from cotton and weigh on yields. The recent price rally appears to be largely driven by speculative interest. Since net long positions are still below historical extremes, this could suggest room for further upward price movement. However, the sustainability of higher cotton prices will ultimately depend on underlying supply-demand fundamentals. The current outlook suggests that stock levels will decline in 2026, driven by lower world production and higher consumption. Additional supply disruptions could provide further price support. On the demand side, inventories are lower, and mills will eventually need to buy more cotton. While U.S. export sales have been slower this year, the pace has increased in recent weeks. Looking ahead, upside demand risks include stronger-than-expected textile and apparel consumption, increased Chinese import demand, supportive trade policy developments, potential passage of the Buying American Cotton Act (BACA), and a gradual shift away from polyester toward more sustainable fibers. However, downside risks remain, as slower global economic growth and continued geopolitical tensions could weigh on consumer demand for textiles and apparel in the near term. Although higher prices do offer some relief after four years of low prices and high production costs, the reality is that current price levels may still be insufficient for grower profitability. Production costs are projected to increase further in 2026, driven by elevated fertilizer and fuel prices resulting from ongoing geopolitical tensions.