Cotton Closes Near Unchanged on Tuesday

Cotton futures slipped, closing within five points of unchanged after USDA’s WASDE cut U.S. exports by 200,000 bales and raised U.S. ending stocks by 200,000 bales to 4.4 million bales, while world ending stocks were lifted by 630,000 bales to 75.11 million. Supporting market detail: cotton ginnings totaled 507,350 RB from Jan. 15–Feb. 1 (marketing-year total 13.202 million RB), Cotlook A fell to 72.55 c/lb, ICE certified stocks rose to 95,158 bales and the Adjusted World Price dropped to 49.78 c/lb; nearby cotton contract closes were March 61.59, May 63.78 and July 65.48. Crude oil was modestly lower at $64.20/bbl and the USD index ticked up to 96.730, all indicating modest bearish pressure on cotton amid slightly larger global stocks.

Analysis

Market structure: USDA’s +200k US and +630k world bale revisions push US ending stocks to 4.4M bales and world to 75.11M, signaling incremental oversupply and weaker near-term pricing power for growers/processors. Front-month cotton (Mar26 61.59c) trading near the Adjusted World Price (49.78c) and falling Cotlook A (72.55c) compresses basis and favors merchants, textile mills, and apparel brands over producers; ICE-certified stocks rising to 95,158 bales supports this. Lower crude (=$64.20) and stronger USD (+0.04 to 96.73) both mechanically pressure commodity prices and increase likelihood of fabric substitution toward synthetics if oil stays below $70 for 6+ weeks.

Risk assessment: Tail risks include abrupt weather-driven supply shocks (La Niña/El Niño shifts) that could cut US production >5% within a season, or a China restocking program reversing exports by >500k bales in 30–90 days. Near-term (days–weeks) volatility will hinge on weekly ginnings and shipping/Seam sales prints; medium-term (months) hinge on planting acreage and energy price trajectory; long-term (quarters+) depends on structural demand from textiles vs polyester. Hidden dependencies: polyester margins (linked to crude) and FX moves (USD strength dampens Chinese buying) are second-order drivers that can amplify a small stock print into a large price swing.

Trade implications: Tactical short exposure to front-month cotton is preferred; implied move is modest but directionally negative—use defined-risk options to limit drawdowns. Relative plays: long US apparel/textile processors (benefit from lower cotton costs) paired with short ICE cotton futures to capture margin expansion. Monitor crude >$75 or a 1.5% DXY decline as triggers to reduce short exposure and flip to long cotton.

Contrarian angles: Consensus assumes persistent cushion of global stocks, but acreage reductions or increased Chinese purchases could be under-priced—if world stocks fall <74M bales after next WASDE, front-month cotton can gap +8–12c quickly. The market may be over-discounting structural demand loss; short positions should be sized to withstand a 10% upside shock and paired with bullish conditional hedges. Historical parallels (2018/19 cotton cycles) show rapid reversals when discretionary mill restocking occurs, so time stop-losses and option wings accordingly.

Key Decisions for Investors

• Establish a defined-risk short in front-month ICE Cotton: Buy Mar–Apr 2026 60c/55c put spread (expiry ~30–60 days) sized to 1% portfolio notional; target profit if Mar cotton falls to 52–56c, stop-loss if front-month closes >66c on a weekly basis.
• Pair trade: Allocate 2% long Hanesbrands (HBI) or PVH over 4 weeks in tranches (25% at current levels, add if Cotlook A <70c) while establishing a 1% notional short in ICE cotton futures to hedge input exposure; target 6–12% relative return capture if cotton weakens 8–12c.
• Macro trigger rule: Reduce short cotton exposure by half if Brent/WTI >$75 for 5 consecutive trading days or DXY falls >1.5% from today’s 96.73, and convert remaining position into a Mar–Jul calendar spread (short front, long deferred) to hedge supply shocks.
• Liquidity/monitoring action: Watch USDA WASDE monthly and China import announcements over next 30 days—if next WASDE lowers world stocks by >300k bales or China tender volumes rise >200k bales, close short positions and reallocate proceeds to long cotton exposure (size up to 1.5% notional).