Domestic cotton prices in July experienced a surge followed by a pullback, yet market expectations for future prices have not been revised downward accordingly. The latest monthly report from the China Cotton Association shows that all reserve cotton offers were fully traded, with textile enterprises actively bidding, while the supply gap before the new crop arrives and expectations of reduced production continue to underpin cotton prices.
Supply-Demand Landscape: Tight Balance Lifts Price Center
The China Cotton Association projects 2026/27 national cotton output at 7.15 million tons, down 3.5% year-on-year, while consumption is expected at 8.92 million tons, up 1.7%. The output decline is notably larger than the consumption increase, with ending stocks falling to 6.236 million tons, down 2.5%. This implies a shift from the previous pattern of simultaneous supply and demand growth to a tight balance, providing upward momentum for the price center.
On the import side, 2026/27 imports are projected at 1.62 million tons, up only 1.3%, a sharp slowdown compared to the 51.9% growth in 2025/26. Behind this is the strengthening of international cotton prices and the narrowing internal-external price gap, reducing the attractiveness of foreign cotton. In July, the Cotlook A index average, after 1% tariff, was 2,808 yuan lower than domestic prices, with the gap narrowing by 221 yuan from the previous month, weakening import appeal.
Reserve Sales: Short-Term Gap Filling, Not Trend Reversal
The reserve cotton sales launched on July 20 saw all listed lots fully traded, with cumulative transactions reaching 80,200 tons by July 31 at an average price of 17,253 yuan/ton, with an average premium of 1,638 yuan/ton. The bidding heat indicates strong just-in-time restocking demand from textile enterprises, but the narrowing premium as sales continued suggests a more rational mindset.
The core role of reserve sales is to fill the resource gap before the new crop arrives, not to suppress prices. Given clear production reduction expectations, the sales volume is limited relative to annual consumption, primarily smoothing supply timing. For textile mills, this means raw material costs will not see a significant decline during the procurement window, and just-in-time purchases still face elevated price levels.
Downstream Transmission Stalls: Spinning Profits Under Pressure
High cotton prices have not transmitted smoothly downstream. In July, the average price of domestic 32s pure cotton yarn was 23,328 yuan/ton, down slightly by 8 yuan month-on-month but up 13.33% year-on-year, notably less than the 15.2% year-on-year increase in cotton prices. Yarn prices are struggling to follow, with limited acceptance from downstream, compressing spinning profit margins.
Inventory accumulation has become common. July national yarn output was 1.814 million tons, down 2.2% year-on-year and 5.9% month-on-month, but finished product inventories continued to rise, indicating insufficient demand support. Notably, Xinjiang yarn output grew 17% year-on-year, reinforcing the westward capacity shift, intensifying competitive pressure on inland small and medium mills.
Export Divergence: Policy and Diversion Effects
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 were $5.99 billion, down 7.3% month-on-month, with declines of 4.2%, 11.9%, and 8.9% to the US, EU, and Belt and Road countries, respectively. Off-season orders and Southeast Asian diversion are limiting short-term recovery.
However, cumulative exports from January to July still grew 2.4%, indicating overall resilience. The weakness in cotton product exports reflects structural challenges—low-to-mid-end orders shifting to Southeast Asia, while high-end markets demand better traceability and sustainability, requiring exporters to enhance product value rather than compete solely on price.
Weather and Policy: Anchors for New Crop Opening Prices
In July, high temperatures and drought in Xinjiang initially sparked production cut speculation, driving prices up sharply. Although final yield is expected to be flat year-on-year, weather uncertainty remains a market sensitivity point. The China Cotton Association estimates national yield at 166.1 kg/mu, up 0.4%, with total output at 7.153 million tons, including 6.857 million tons from Xinjiang, down 3.5%.
Ahead of the new crop, market expectations are for high seed cotton opening prices. This is driven by rigid demand from capacity agglomeration in Xinjiang and limited supply growth potential due to area reduction and weather risks. For ginners and traders, high opening prices imply greater procurement risks, necessitating careful cost control.
Inventory Structure Shift: Commercial Drawdown, Industrial Replenishment
By end-July, national commercial cotton inventories were 2.5 million tons, down 19.4% month-on-month but up 14.1% year-on-year, accelerating destocking. Reserve sales and faster trader selling drove social inventory digestion. Meanwhile, industrial cotton inventories were 888,000 tons, up 2.3% month-on-month, indicating some mills began modest replenishment after consuming low-price stocks.
This divergent inventory trend reflects differing views on future prices across the chain. Traders lean toward locking in profits during the reserve sales window, while mills maintain low raw material inventories driven by just-in-time needs, adopting cautious procurement strategies.