Early Warnings Do Little to Protect the Mills That Hold Physical Cotton

The USDA's August cotton outlook projects world production for 2026/27 at 117.6 million bales, about 4% (4.3 million bales) below the previous season, against consumption of 122.9 million bales. Output therefore falls roughly 5.3 million bales short of expected mill use. Mill use is forecast to rise in the largest consuming countries: China's to 42.0 million bales, the highest since 2010/11, India's to 26.5 million and Pakistan's to 10.2 million, a 5% rebound.

The outlook cites hot, dry conditions across much of the US Southwest and makes no mention of El Niño. On those numbers, the shortfall exists before any El Niño damage is counted.

NOAA's warnings were public from April and grew more specific with each monthly discussion. The agency issued an El Niño Watch on 9 April, with a 61% chance of El Niño emerging between May and July and a one-in-four chance of an event reaching +2.0°C. By 9 July an El Niño Advisory was in effect, with an 81% chance of a very strong event in October to December. On 13 August, while still giving better than 90% odds of a very strong event, NOAA put the chance of a historic event at 69%. Any mill buying cotton from the spring onwards did so with the forecast in view.

Cotton futures climbed through the northern summer and reached 89.30 cents per pound on 20 August, a 28-month high, after gaining 10.97% in four weeks and 35.58% over twelve months. The peak came six days after the USDA outlook set out the production shortfall. Market commentary in early September credited the rally to concerns over tighter supply and placed El Niño among the weather risks ahead. On that account, the August high reflected the deficit more than the forecast.

The two pressures cannot be cleanly separated, because the forecast hardened while the supply concerns grew, and the commentary available does not tie the rally to El Niño directly. For a buyer, the August price nonetheless bundled two risks of different standing. One rests on a projected shortfall that may hold whatever happens in the Pacific. The other rests on traders' week-to-week reading of crop reports, export data and weather news, which can reverse within days. A spinner contracting cotton at August's levels took on both.

Crop losses in the final quarter would therefore fall on a balance sheet with no slack left in it. The projected shortfall would widen, and traders would have fresh crop reports to price.

Cotton gave back almost all of its four-week August rally within seven weeks of the high. Prices slipped below 87 cents per pound by 3 September as traders took profits, were trading below 85 cents by 11 September, and had dropped below 80 cents by 29 September, pressured by rising new-crop supplies. On 6 October cotton stood at 81.20 cents, about 9% below the high. No crop loss has yet been attributed to El Niño, so the swing so far has come from prices alone.

Traders and spinners met that reversal on different terms. A futures position can be closed within a trading session, whereas a cotton contract held by a spinner runs until the fibre has been spun and the yarn sold, often months later. The spinner's margin is the gap between the price paid for fibre and the price obtainable for yarn, and the two prices are set on different dates. A reversal between those dates widens the gap.

The 2010/11 cycle showed how far that gap can open. When the market turned, yarn that Bangladeshi spinners had sold at $7 a kilogram fell to less than half that price, slumping almost daily for the better part of three months. Many spinners cut operating capacity to 40% or below. Yarn stocks reached 250,000 tonnes, and the mills had more than 200,000 tonnes of cotton still under contract for delivery, much of it bought at peak prices.

The buyers of that yarn had alternatives, and the losses stayed with the spinners. Local weavers and knitters bought cheaper yarn from China and India, while the European Union's relaxed rules of origin for least developed countries (in force from January 2011) drew a surge in fabric imports. Expensive fibre met a home market turning to imported yarn and fabric, and the stockpile grew.

If the 2026 reversal extends into El Niño's peak season, Bangladeshi spinners would meet it holding the unsold stock their association reported in December. A former director of the association put the rise in yarn imports from India at 137% year on year in April to October 2025, to $950 million. The cheaper supply that undercut local mills in 2011 was already in place.

Contract books are private, and the 2011 losses came to light only after yarn prices had collapsed and stocks had piled up. A weather forecast says nothing about what yarn will fetch on delivery, which is the price that fixes a spinner's loss. However early the warning, that loss falls on whichever mills bought near the August high.