When reserve cotton sales closed with a 100% transaction rate, with all 80,200 tons absorbed by textile mills, the signal was unmistakable: the supply gap before the new crop is tighter than expected. The China Cotton Association's July report projects 2026/27 national output at 7.15 million tons, down 3.5% year-on-year, while consumption rises 1.7% to 8.92 million tons—a double squeeze that lifts the price floor.
Supply Gap and Policy Response
Reserve sales launched on July 20, with cumulative transactions reaching 80,200 tons by July 31 at an average price of 17,253 yuan/ton (equivalent to 17,871 yuan/ton for Grade 3128B), with an average premium of 1,638 yuan/ton. Early premiums were higher but narrowed as mills became more rational—indicating limited acceptance of high-priced raw materials and predominantly hand-to-mouth buying.
Regionally, Xinjiang's planted area shrank but yields remained stable, with output expected at 6.857 million tons, down 3.5%. The Yellow River basin outperformed last year, while the Yangtze basin saw a 14.3% drop to 72,000 tons due to excessive rainfall. With reduced area and localized weather disruptions, seed-cotton opening prices are likely to start high.
Narrowing Price Gap and Import Substitution
International cotton prices strengthened in July, with the CotlookA index averaging 88.9 US cents/lb, up 3% month-on-month, while domestic prices peaked then fell, with CCIndex3128B averaging 17,695 yuan/ton, up just 0.8%. The domestic-international gap narrowed to 2,808 yuan/ton, down 221 yuan from June, reducing import appeal. July imports fell 16.6% month-on-month to 92,000 tons, though still up 72.5% year-on-year on a low base.
Australian cotton's share surged to 59.8%, up 31.9 percentage points, reflecting trade flow shifts toward cost-effective origins. The USDA's August report cut global ending stocks by 326,600 tons, lowering the stocks-to-use ratio to 56.7%, which supports international prices and may further compress the gap.
Downstream Transmission Failure and Inventory Divergence
High cotton prices failed to transmit downstream. Domestic 32s pure cotton yarn averaged 23,328 yuan/ton, down just 8 yuan month-on-month but up 13.33% year-on-year. Mills resisted price hikes, squeezing margins. The off-season persisted, with autumn/winter orders not yet scaled and finished goods inventories accumulating. July yarn output fell 5.9% month-on-month to 1.814 million tons, though Xinjiang output rose 17% year-on-year to 321,000 tons, underscoring westward capacity migration.
Inventory trends diverged: commercial stocks plunged 19.4% month-on-month to 2.5 million tons due to reserve sales and accelerated trader selling, while industrial stocks rose 2.3% to 888,000 tons as mills replenished after consuming low-cost inventories. This mismatch—upstream destocking, downstream restocking—shifts risk from prices to inventories.
Export Resilience with Underlying Concerns
July textile and apparel exports reached $28.79 billion, up 7.6% year-on-year but down 1.6% month-on-month. Cotton product exports fell 7.3% month-on-month to $5.99 billion, with declines across US, EU, and Belt and Road markets. Cumulative January-July exports rose 2.4%, but the 2025 season's 11-month figure fell 1% year-on-year, indicating fragile external demand. Southeast Asian competition and trade policy volatility remain key headwinds.