Domestic cotton prices peaked and then retreated in July, with the China Cotton Price Index (CCIndex 3128B) averaging 17,695 yuan per ton, up 15.2% year-on-year but only 0.8% higher month-on-month. Notably, reserve cotton sales were fully subscribed, totaling 80,200 tons at an average price of 17,253 yuan per ton, equivalent to 17,871 yuan per ton for Grade 3128B, with an average premium of 1,638 yuan. These figures reveal a market caught between a clear short-term supply gap and insufficient downstream demand for high-priced cotton.
Supply-Demand Squeeze Shapes Price Battle
The China Cotton Association projects 2026/27 national cotton output at 7.15 million tons, down 3.5% year-on-year, with Xinjiang contributing 6.857 million tons, a similar decline. Average yield is expected at 166.1 kg/mu, up a marginal 0.4%. This seemingly moderate reduction is complicated by a 3.9% drop in planted area to 43.066 million mu. July weather disruptions, including high temperatures in Xinjiang causing boll shedding, varied regionally, leaving yields flat year-on-year.
Consumption is also contracting. For 2026/27, consumption is forecast at 8.92 million tons, up just 1.7%, while imports of 1.62 million tons grow only 1.3%. More critically, ending stocks are projected at 6.236 million tons, down 2.5%, bringing the stock-to-use ratio to 56.7%, a multi-year low. This suggests that even with a modest output decline, global supply-demand is shifting from surplus to a tight balance, underpinning long-term prices.
Textile Off-Season Hinders Price Pass-Through
July textile mill activity weakened. National Bureau of Statistics data show yarn output of 1.814 million tons, down 5.9% month-on-month and 2.2% year-on-year. Xinjiang produced 321,000 tons, up 17% year-on-year, reflecting continued capacity migration westward. Finished goods inventories accumulated, and cotton yarn prices lagged: domestic 32s pure cotton yarn averaged 23,328 yuan per ton, down 8 yuan month-on-month but up 13.33% year-on-year—raw material gains failed to pass through, squeezing mill margins.
Exports also softened. July textile and apparel exports reached $28.79 billion, down 1.6% month-on-month, with cotton product exports at $5.99 billion, down 7.3% sequentially. Exports to the US and EU fell 4.2% and 11.9%, respectively. Southeast Asian competition and trade policy volatility aggravated off-season order shortages. January-July cumulative exports grew just 2.4% to $174.81 billion, a clear slowdown. This divergence forced mills to adopt just-in-time purchasing, accelerating commercial stock depletion.
Balancing Reserve Sales and Import Substitution
By July 31, cumulative reserve sales reached 80,200 tons, fully subscribed, indicating strong mill participation. Some small and medium mills lacking import quotas turned to imported reserve cotton, driving higher average premiums. However, as releases continued, premiums narrowed, reflecting more rational sentiment. This mechanism effectively filled the pre-harvest supply gap and curbed excessive price increases.
Imports fell 16.6% month-on-month to 92,000 tons in July, though up 72.5% year-on-year. Australian cotton arrivals surged, accounting for 59.8% of imports, followed by Brazil at 18.8% and the US at 6.7%. The domestic-international price gap narrowed to 2,808 yuan per ton, down 221 yuan from June, reducing foreign cotton's appeal. Yet cumulative 2025/26 season imports through July reached 1.506 million tons, up 53.8% year-on-year, sufficiently supplementing supply.
Commercial Stock Drawdown Coexists with Mill Restocking
By end-July, national commercial cotton stocks stood at 2.5 million tons, down 19.4% month-on-month but up 14.1% year-on-year. Reserve sales and accelerated trader selling drove the drawdown, while industrial stocks rose 2.3% to 888,000 tons. Mills, having consumed lower-priced raw materials, replenished cautiously via reserve auctions and spot purchases, signaling wary optimism about future supply.
Notably, inventory structure diverges: commercial stocks remain high but are depleting faster, while industrial stocks are recovering from lows. This suggests downstream operating rates haven't collapsed; rather, purchasing pace has slowed. Should this persist, a restocking wave before the new crop could emerge, supporting prices.
New Crop Opening Prices Expected Higher, But Upside Limited
Given expectations of rising demand and falling output, the market broadly anticipates short-term price strength, with seed cotton opening prices likely high. However, thin mill margins and finished goods inventory buildup constrain downstream pass-through. If reserve releases continue and global markets face no major disruptions, domestic prices will likely consolidate at high levels rather than rally unilaterally.
For buyers, monitoring reserve release pace and the domestic-international price gap is crucial to adjust procurement strategies flexibly. For exporters, vigilance against Southeast Asian competition and trade policy shifts is essential, while leveraging exchange rate and price gap windows to lock in costs.