Soaring ICE cotton futures

ICE cotton futures rallied sharply during the May Day holiday, with the July contract surging to a nearly two-year high of 84.8cent/lb on May 5. Frenzied drought speculation continued to draw bullish capital inflows into the market.

A weak La Niña during the U.S. winter has prolonged drought conditions across key U.S. cotton-producing regions for two consecutive quarters. As spring planting gets underway, persistent drought plus a long period of undervalued cotton-to-grain price ratio have paved the way for fund bullish positioning. The CFTC managed-money net long ratio rebounded rapidly from -22% in early March to 11% by late April, marking an unexpectedly fast and forceful shift in market sentiment from bearish to bullish.

Fundamentally, drought conditions in U.S. cotton areas persist without further deterioration, and are expected to gradually ease from May to July. The drought for major U.S. cotton producing regions has stayed above the highest historical level since the first quarter, standing as the core driver for weather speculation. That said, drought pressure in Texas remains relatively limited for now, with dryness mainly concentrated in the West, Southeast and the Delta regions.

Despite expectations that the developing El Niño will ease drought conditions in the longer run, dryness persists across the western and southeastern U.S. cotton belts in May, while drought in the Delta region may ease moderately. Planting progress has exceeded half in the western; Texas is still in the early planting stage, and the Southeast is also in early stage. May marks the critical seedling emergence period, and ongoing drought may cause poor or delayed germination, undermining yield potential.

According to the latest USDA weekly report released on May 1st, drought continued in the Southeast. Despite intermittent rainfall, topsoil moisture in the Carolinas and Virginia remained abnormally to very short, requiring sustained rainfall to replenish subsoil moisture. Cotton planting progress in the region stood at 12%. In the South Central belt, soil moisture has improved in previously severe drought zones, though only scattered rainfall has occurred in some areas. Drought conditions ranged from moderate to severe in Arkansas, Tennessee and Missouri, with planting progress at roughly 17% to 25%. Severely drought-stricken areas in the Southern Delta still need additional rainfall to improve soil moisture. Drought was extreme to severe in Louisiana and Mississippi, where cotton planting progress stood at 15% and 30% respectively. Planting advanced smoothly in the Southwest. Cotton plants in the Upper Coastal Plain of South Texas have developed 2 to 7 true leaves, while crops in the Lower Rio Grande Valley were at the 2-leaf to third-week squaring stage. Parts of West Texas have been planted with seedlings emerging, though large-scale planting has not yet begun; most growers are waiting for the May cold spell to pass before full planting. Field activities remain limited in Kansas and Oklahoma, with widespread planting expected to start in mid-May. Planting was generally early in the West. Early-sown areas in Arizona have completed planting, with cotton plants growing normally at 2-3 to 7-8 true leaves. Planting is also proceeding smoothly in New Mexico. In the mid-southern Pima cotton region of California, planting was nearing completion, and emerged crops were in good condition. Some fields have faced hampered germination due to low temperature and high humidity, with certain plots requiring replanting. Warmer and sunny weather is needed to facilitate seedling establishment. The Southwest remained the earliest planted region nationwide, with overall progress ranging from 67% to 80%.

Based on the weekly report, extreme drought is expanding in the Southeast with severe topsoil moisture shortages. Excessive rainfall and waterlogging in the South Central region have halted cotton planting. Drought in South Texas has forced some cotton fields to be abandoned. In the West, water shortages have led to field abandonment in Safford, while low temperature and waterlogging in California's Sacramento Valley require replanting. Only Yuma and the central San Joaquin Valley have seen relatively smooth planting and seedling emergence. Overall, drought has adversely affected cotton sowing and become a key speculative trigger for the market recently. Looking ahead, influenced by the El Niño pattern from May to July, drought conditions in the south-central and southeastern U.S. are likely to ease in summer, while dryness in the West may persist. Therefore, market speculation over drought should be treated with caution. May to July is the critical period for U.S. cotton planting, squaring and boll setting. Especially during the May sowing and emergence stage, drought directly damages germination rates and necessitates replanting. By contrast, cotton shows stronger tolerance to drought during the subsequent boll formation and boll opening stages. In the short term, close attention should be paid to rainfall in major producing areas, as well as seedling emergence and replanting progress in severely drought-stricken regions, which will exert the most direct impact on market speculative sentiment and price movements.

The open interest of the ICE July and December contracts in early May in recent years is shown in the table below.

Amid persistent bull-bear game during the planting season, the ICE July cotton contract stood notably 60% above the five-year average in early May. Meanwhile, bears have increased registered warehouse receipts to 180,000 lots. Given the critical seedling emergence stage of U.S. cotton, a potential mild bull squeeze may emerge from late May to early June. As a result, the upside limit of cotton prices is hard to judge in the short term, and cautious participation is advised. In the medium term, it is expected that if drought lingers in May without effective rainfall relief, lowering the emergence rate and raising the abandonment ratio in Texas, cotton prices will likely hold firmly above 85cent/lb and move toward 90-100cent/lb. Conversely, if beneficial rainfall arrives in major producing areas during the planting period to substantially ease drought and improve the emergence rate of replanted cotton, bullish weather speculation will fade, pulling cotton prices back to around 80cent/lb and keeping them range-bound between 70 and 80cent/lb.

In the medium to long term, the probability of El Niño will rise in the second half of the year. The formation of El Niño in the Northern Hemisphere during summer and autumn may bring a positive outlook to North America, a negative impact to India, a bearish bias to Australia, and a neutral-to-mildly positive pattern to Brazil. From the perspective of weather speculation, if the U.S. cotton drought is confirmed in May, the abandonment rate will move higher, and rainfall in the second half of the year will have a limited impact on final yields. Meanwhile, reduced monsoon precipitation is likely to lower output in India and Pakistan. Weather conditions in Australia and Brazil will mainly affect next-season planting. Overall, 2026/27 global cotton supply is set to stay tight, providing upward momentum to cotton prices. Therefore, spot traders should closely monitor weather developments in the second half of the year. Cotton prices will remain in an upside-biased trend with limited downside risk, and strategic restocking on dips will be the core operation strategy.