Cotton Futures: Contrarian Opportunities in New Crop Contracts Amid Mixed Signals

The cotton market is caught in a tug-of-war between near-term softness and bullish medium-term fundamentals. While the July 2025 futures contract has slumped to 62 cents per pound—a 10% decline since April—the new crop contracts (December 2025 and March 2026) remain stubbornly resilient, trading near 66-68 cents. This divergence presents a compelling contrarian opportunity for investors to position in longer-dated contracts while avoiding the pitfalls of the nearby market's downward drift.

The Near-Term Weakness: A Logistics Story

The July contract's slump reflects short-term realities rather than fundamental shifts. Current export shipments for the 2024/25 marketing year are down 13% from weekly averages, as highlighted by USDA data. Logistical bottlenecks in the Delta region, where excessive rainfall has delayed harvests, have created temporary oversupply in nearby delivery months. Additionally, the 15% decline in Pima cotton exports—a premium fiber used in high-end textiles—adds downward pressure on the July price.

New Crop Resilience: Weather, Demand, and the Dollar

The real story lies in the 2025/26 marketing year. Three factors are underpinning the strength of December and March contracts:

1. Weather Concerns: The USDA's June WASDE report slashed U.S. cotton production to 14.0 million bales, a 500,000 bale reduction from prior estimates, citing flooding and planting delays in key Delta states. With ending stocks projected to tighten to 4.3 million bales (stocks-to-use ratio of 30.3%), buyers are pricing in supply risks.

2. Export Momentum: New crop sales for 2025/26 have surged, with Upland cotton net sales hitting 65,900 bales in May—driven by Vietnam (11,700 bales), Pakistan (21,500 bales), and Guatemala (11,100 bales). These early commitments signal strong demand from Asian textile hubs, where U.S. cotton's quality and reliability remain preferred. China's absence in MY2025 exports is offset by rising demand from Mexico and Honduras, which now account for 15% and 12% of new crop sales, respectively.

3. Dollar Dynamics: The U.S. Dollar Index's 3% decline year-to-date has made dollar-denominated commodities like cotton more attractive to global buyers. This trend could accelerate if the Fed pauses rate hikes, further supporting export-driven price stability.

AWP: A Farmer's Safety Net

The USDA's Average Price (AWP) program adds a floor to cotton prices. With the AWP for 2025/26 currently at 65 cents per pound, farmers will hold back supplies if prices dip below this level. This creates a natural support zone for the December contract, which is critical for positioning ahead of the 2025/26 harvest.

Investment Strategy: Go Long on Time

• Position in Dec '25 or Mar '26 contracts: These contracts reflect the market's pricing of weather risks and strong export demand. A target of 70-72 cents by late 2025 seems achievable if Delta yields disappoint and Asian buyers continue to ramp up purchases.
• Avoid July '25 exposure: The nearby contract's decline is likely to persist through August as logistical challenges resolve. Short-term traders might consider selling July calls, but avoid holding long positions into delivery months.
• Hedging with Options: Consider buying call options on the December contract with strikes at 68-70 cents to limit downside risk while capturing upside potential.

Risks to the Bullish Thesis

• Unexpected Weather Recovery: A sudden turn to dry conditions in the Delta could boost yields and ease supply concerns.
• Global Demand Shocks: A slowdown in Asian manufacturing (e.g., due to weaker GDP growth in China or India) could reduce import needs.
• AWP Revisions: If the USDA lowers the AWP due to oversupply, it could undermine farmer selling discipline.

Conclusion

Cotton's near-term weakness is a paper cut compared to its medium-term potential. Investors who take a contrarian stance by focusing on 2025/26 contracts stand to benefit from tightening supply, robust export sales, and dollar weakness. While caution is warranted for the July contract, the December and March futures offer a compelling risk-reward trade. As the old crop fades into history, the new crop's resilience will likely shine—provided weather and trade dynamics hold.

Final advice: Position for the harvest season, not the harvest delay.