July's cotton market was unusually driven by two competing narratives: policy-driven price stabilization and weather-induced production cuts. Reserve cotton sales commenced and were fully subscribed, filling the supply gap before the new crop arrives, while high temperatures and drought in Xinjiang fueled output reduction expectations, pushing domestic prices up early in the month. Eventually, domestic prices retreated after an initial surge, with the CCIndex3128B monthly average at 17,695 CNY/ton, up 15.2% year-on-year but only 0.8% month-on-month—a sign that downstream demand could not absorb the rally, and market risks are accumulating.
Supply-Demand Structure: Concurrent Output Decline and Import Surge
The China Cotton Association's latest forecast places 2026/27 national cotton output at 7.153 million tons, down 3.5% year-on-year, with Xinjiang contributing 6.857 million tons, a 3.5% decline. Yield per mu is 166.1 kg, up 0.4%, indicating weather disruptions have not caused a major yield collapse, but the 3.9% reduction in planted area has set the tone for lower output. Imports are projected at 1.62 million tons, up 1.3%, while the 2025/26 import figure was revised upward to 1.6 million tons, a 51.9% surge. This suggests the domestic market is compensating for reduced local output with higher imports, but the narrowing domestic-international price gap to 2,808 CNY/ton is eroding the cost advantage of foreign cotton, potentially slowing import momentum.
Consumption is estimated at 8.92 million tons, up 1.7%, with ending stocks at 6.236 million tons, down 2.5%. The combination of rising supply and demand but falling stocks provides medium-term support for prices. However, the textile sector has not mirrored this strength—July yarn output was 1.814 million tons, down 5.9% month-on-month and 2.2% year-on-year, though Xinjiang's yarn output rose 17% to 321,000 tons, underscoring the accelerating westward shift of capacity. Nationwide, operating rates remain weak, and finished goods inventories are building.
Reserve Sales and Import Substitution Effects
Reserve cotton sales commenced on July 20 and were fully subscribed, with cumulative sales reaching 80,200 tons by July 31 at an average price of 17,253 CNY/ton, equivalent to 17,871 CNY/ton on a 3128B basis, with an average premium of 1,638 CNY/ton. Initial premiums were high but narrowed as mills became more rational with continued releases. This reflects mills' hunger for low-cost raw materials, especially small and medium enterprises lacking import quotas, which turned to imported reserve cotton and drove up premiums. Reserve sales not only smoothed the supply curve but also partially substituted for imports—July cotton imports fell 16.6% month-on-month to 92,000 tons, though still up 72.5% year-on-year.
Import source composition shifted notably: Australian new crop arrivals surged, accounting for 59.8% of imports, up 31.9 percentage points month-on-month; Brazil and the US accounted for 18.8% and 6.7%, respectively. Australia's strong comeback reflects reshaping global trade flows, while US cotton supply is tightening due to lower production expectations. The USDA's August report cut global ending stocks by 326,600 tons, lowering the stocks-to-use ratio to 56.7%, intensifying supply concerns. International prices strengthened, with the CotlookA index averaging 88.9 US cents/lb, up 3% month-on-month, and the price gap after 1% tariff narrowed to 2,808 CNY/ton, down 221 CNY from the previous month—domestic prices are increasingly linked to global trends and cannot weaken independently.
Price Transmission and Inventory Divergence
Domestic cotton prices in July followed a classic "surge-then-retreat" pattern. Early-month heat and drought in Xinjiang fueled output reduction expectations, pushing prices to a temporary peak; mid-to-late month, reserve sales eased supply pressure, and weak off-season demand dragged prices down. However, yarn prices failed to follow suit—domestic 32-count pure cotton yarn averaged 23,328 CNY/ton, down just 8 CNY month-on-month but up 2,743 CNY year-on-year, a 13.33% increase. Raw material gains far outpaced yarn price increases, squeezing mill profits. Downstream processors showed low acceptance of yarn price hikes, leading to inventory accumulation. July textile and apparel exports were 28.79 billion USD, down 1.6% month-on-month, with cotton product exports at 5.99 billion USD, down 7.3%, including an 11.9% drop to the EU, highlighting weak external demand and Southeast Asian order diversion.
Inventory data show commercial cotton stocks at 2.5 million tons by end-July, down 19.4% month-on-month but up 14.1% year-on-year; industrial stocks at 888,000 tons, up 2.3% month-on-month and down 0.8% year-on-year. Rapid commercial destocking alongside slight industrial restocking indicates mills maintained low raw material inventories during the off-season but used reserve auctions to replenish. Traders accelerated sales, increasing market turnover. Overall, destocking is progressing, but downstream demand has not improved fundamentally, and inventory pressure is shifting from commercial to industrial segments.
Price Game Ahead of New Crop Arrival
Looking ahead, as the new crop approaches, market expectations lean toward continued short-term price strength, with seed cotton opening prices likely at elevated levels. However, risks are evident: first, the textile off-season persists, and autumn/winter orders have not yet been placed in scale, potentially curbing restocking demand; second, with the domestic-international price gap narrowing, imported cotton's cost advantage is fading, but if international prices continue to firm, domestic prices will find external support; third, capacity concentration in Xinjiang may intensify cost pressures for inland mills. For buyers, chasing highs is not advisable at this stage; instead, monitor reserve sales schedules and seed cotton opening prices to lock in low-cost supplies in batches.