July's Chinese cotton market presented a striking contrast: domestic prices peaked and fell, yet reserve cotton auctions saw full turnover; national yarn output dropped 5.9% month-on-month, while Xinjiang posted a 17% year-on-year increase. Behind these numbers lies a structural shift in the cotton industry—from overall surplus to tight balance, and from coastal clustering to Xinjiang's restructuring.
Background
According to the latest monthly report from the China Cotton Association, the 2026/27 national cotton planting area is 43.066 million mu, down 3.9% year-on-year, with expected total output of 7.153 million tons, a 3.5% decrease. Xinjiang's output is 6.857 million tons, also down 3.5%, while the Yangtze River basin saw a sharp 14.3% decline. Area reduction coupled with slightly higher yields has led to a consensus on supply gaps ahead of the new crop. Meanwhile, imports for 2025/26 are projected at 1.6 million tons, up 51.9% year-on-year, indicating rising reliance on international sources.
Reserve cotton auctions began on July 20, with 80,200 tons sold by month-end, all listed lots transacted at an average price of 17,253 yuan/ton (equivalent to 17,871 yuan/ton for Grade 3128B). Small and medium spinners, lacking import quotas, used imported reserve cotton as an effective channel to access foreign cotton, with an average premium of 1,638 yuan/ton. This activity underscores reserve cotton's role as a core source of low-cost raw materials when the domestic-foreign price gap narrows.
Industry Impact
Price trends showed a clear 'weak domestic, strong international' pattern. The domestic CCIndex 3128B averaged 17,695 yuan/ton, up only 0.8% month-on-month, but fell steadily after mid-July. In contrast, the Cotlook A index averaged 88.9 US cents/pound, up 3% month-on-month, and after a 1% tariff, was 2,808 yuan/ton cheaper than domestic cotton, with the gap narrowing by 221 yuan. International strength is supported by a shift to a tight global balance—USDA's August report cut global ending stocks by 326,600 tons, lowering the stock-to-use ratio to 56.7%. This means foreign cotton's cost advantage is fading, raising procurement costs for mills.
The core contradiction lies in poor downstream transmission. July yarn output was 1.814 million tons, down 5.9% month-on-month, yet yarn prices struggled to follow cotton gains. The average price of 32-count pure cotton yarn was 23,328 yuan/ton, down only 8 yuan from June but up 13.33% year-on-year. Finished goods inventories are building, while raw material prices remain high, squeezing mill margins. The off-season is evident, with autumn/winter orders not yet placed on a large scale, and downstream resistance to yarn price hikes means the 'high cotton, weak yarn' scissors gap will not easily close.
Xinjiang's capacity restructuring is noteworthy. In July, Xinjiang's yarn output reached 321,000 tons, up 17% year-on-year, far outpacing the national average. This confirms the ongoing westward shift of textile capacity, driven by raw material proximity and power cost advantages, enhancing Xinjiang's substitution effect on inland markets. For buyers, this means increased competitive pressure on inland mills and a potential westward shift in yarn pricing power.
Export pressures persist. July textile and apparel exports were $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, with EU-bound shipments down 11.9%. Southeast Asian diversion of low-to-mid-end orders is diluting traditional peak-season gains, and exporters must guard against demand softening and currency fluctuations.