July's cotton market presented a rare combination: domestic output expectations were lowered, reserve cotton sales were fully subscribed, yet downstream yarn prices failed to follow gains and finished goods inventories kept building. Behind these figures lies a direct price confrontation between shrinking supply and weak demand—prices spiked then fell, the domestic-international spread narrowed to RMB 2,808 per ton, and the market is searching for a new equilibrium.
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; expected yield is 166.1 kg/mu, up 0.4%; total output is projected at 7.153 million tons, a decrease of 3.5%. Xinjiang's output is expected at 6.857 million tons, also down 3.5%, raising its national share to 95.8%, further consolidating the industry's westward shift. Among inland regions, the Yellow River basin's yield is expected to rise 2.6% to 77.7 kg/mu, while the Yangtze basin, affected by excessive rainfall, is projected to see output drop 14.3% to 72,000 tons, highlighting regional divergence.
Another key supply-side variable is reserve cotton sales. From the July 20 launch to month-end, cumulative transactions reached 80,200 tons, all fully subscribed, at an average price of RMB 17,253/ton, equivalent to 17,871/ton for grade 3128B, with an average premium of RMB 1,638/ton. Early bidding was aggressive, but later attitudes turned rational and premiums narrowed, indicating the market's growing capacity to absorb policy releases.
Industry Impact
The parallel output cut and reserve releases mean short-term supply gaps are smoothed by policy tools, but medium-term tight-balance expectations remain unchanged. The USDA August report lowered global ending stocks by 326,600 tons, with the stocks-to-use ratio falling to 56.7%, reinforcing supply tightness. International prices strengthened, with the CotlookA index averaging 88.9 US cents/lb, up 3% month-on-month, while the domestic CCIndex 3128B averaged RMB 17,695/ton, up only 0.8%, narrowing the spread by RMB 221 to RMB 2,808/ton.
For textile mills, poor cost pass-through is the biggest pain point. July's average price for domestic 32-count pure cotton yarn was RMB 23,328/ton, nearly flat month-on-month but up 13.33% year-on-year; downstream acceptance was low, squeezing margins. National Bureau of Statistics data show national yarn output of 1.814 million tons in July, down 5.9% month-on-month, while Xinjiang's yarn output rose 17% to 321,000 tons, indicating capacity migration is reshaping supply—inland small and medium mills face more direct competitive pressure.
Export channels also remain under pressure. July textile and apparel exports were US$28.79 billion, down 1.6% month-on-month; cotton product exports fell 7.3% to US$5.99 billion, with declines of 11.9% to the EU and 4.2% to the US, and 8.9% to Belt and Road countries. Southeast Asian diversion and trade policy volatility persist, and the shift of low-end orders has not stopped; recovery in cotton product exports still depends on product upgrading and market diversification.
Practical Recommendations
For Buyers - Monitor reserve release pace: continued supply may cap domestic price upside; consider phased purchasing rather than chasing highs. - Leverage the narrowed spread window: foreign cotton is less cost-effective, but if the spread widens above RMB 3,000/ton, consider using import quotas. - Lock in seed cotton expectations: market consensus points to high opening prices; sign basis contracts with ginners in advance to avoid procurement risks.
For Foreign Trade Companies - Diversify export markets: with declines in Europe and the US, increase efforts in RCEP and Middle East markets to hedge against single-market volatility. - Optimize product mix: high-count yarns and differentiated blends command better premiums, easing raw material cost pressure. - Track exchange rates and policy changes: given frequent trade policy shifts, use hedging tools and monitor reserve releases' indirect impact on export costs.
In summary, July data confirm a turning point from loose to tight balance in the cotton market, but weak downstream demand limits price gains. In coming months, Xinjiang yield outcomes, reserve release pace, and global inventory changes will be the three variables determining price direction, prompting all chain participants to rebuild inventory and order strategies amid volatility.