In July, domestic cotton prices experienced a rise and fall, with reserve sales fully subscribed after launch. Behind the seemingly hot bidding lies the reality of low raw material inventories and rising finished goods stocks among textile mills. National yarn output fell 5.9% month-on-month to 1.814 million tons, while commercial cotton inventories dropped sharply by 19.4% to 2.5 million tons. This divergence reflects differing views on future market direction across the supply chain.
Supply-Demand Structure: Tight Balance and Regional Divergence
The China Cotton Association forecasts 2026/27 national cotton output at 7.15 million tons, down 3.5% year-on-year, with imports at 1.62 million tons and consumption at 8.92 million tons, ending stocks at 6.236 million tons. The combination of lower production and higher consumption points to a tight balance in the new season. Regionally, Xinjiang's output is expected at 6.857 million tons, down 3.5%, but yields remain flat. The Yellow River basin is expected to see a 2.6% yield increase, while the Yangtze basin, due to excessive rainfall, is forecast to drop 14.3% in total output. Regional yield divergence suggests a further contraction in high-grade cotton supply from inland areas, increasing reliance on Xinjiang cotton for fine-count spinners.
Notably, spinning capacity continues to concentrate in Xinjiang, where July yarn output surged 17% year-on-year, far exceeding the national average. This trend implies that Xinjiang is no longer just a raw material base but is becoming a core supplier of yarn. For inland small and medium mills, this means facing low-cost competition from Xinjiang in conventional counts, intensifying pressure for product upgrades.
Price Transmission: Strong Upstream vs. Weak Downstream
In July, domestic cotton prices rose marginally by 0.8% month-on-month, but cotton yarn prices barely moved—32s pure cotton yarn averaged only 8 yuan/ton lower, with gains far lagging cotton. This pattern of rising cotton but stagnant yarn directly compresses spinning margins. Customs data shows textile and apparel exports in July reached $28.79 billion, down 1.6% month-on-month, with cotton product exports plummeting 7.3%, and exports to the EU and US dropping 11.9% and 4.2%, respectively. Weak overseas orders, coupled with Southeast Asian competition, means downstream mills have low acceptance of yarn price hikes.
Meanwhile, the domestic-international cotton price gap narrowed to 2,808 yuan/ton, 221 yuan less than the previous month. International prices strengthened on expectations of tighter global supply, with the CotlookA index averaging 88.9 US cents/lb, up 3% month-on-month. This suggests that while imported cotton's cost advantage is eroding, it also caps domestic price upside—if domestic prices rise too much, mills will shift to imports or reserve cotton.
Reserve Sales and Market Expectations
Reserve cotton sales began on July 20, with cumulative transactions reaching 80,200 tons by month-end at an average price of 17,253 yuan/ton, with an average premium of 1,638 yuan. Full subscription and decent premiums indicate rigid demand for quality cotton. However, premiums have gradually narrowed as sales continued, showing more rational sentiment. Reserve sales effectively filled the supply gap before new cotton arrival and partially replaced imports, leading to a 16.6% month-on-month drop in July cotton imports to 92,000 tons.
For textile mills, reserve cotton offers clear cost advantages, but bidding requires quotas. Some small mills lack quotas and must rely on imported reserve cotton, raising their actual procurement costs. The USDA August report lowered global ending stocks by 326,600 tons, with stocks-to-use ratio falling to 56.7%, intensifying supply tightness expectations. New cotton opening prices are expected to be relatively high, but if downstream demand remains weak, high costs may not be passed through, accumulating market risks.