July painted a rare picture of a weak domestic cotton market against a stronger international one: domestic prices peaked and then fell, while international prices trended upward, narrowing the price gap to RMB 2,808 per ton. More notably, the first month of reserve cotton auctions saw full turnover, while Xinjiang's yarn output surged 17% year-on-year. This data combination signals a deeper shift: domestic cotton supply-demand is moving from loose to tight balance, but profit distribution conflicts along the chain are intensifying.
Supply-Demand: Output Downgrade Meets Demand Resilience
The latest forecast from the China Cotton Association puts 2026/27 national cotton output at 7.153 million tons, down 3.5% year-on-year, mainly due to a 3.9% reduction in planted area to 43.066 million mu, while yields are expected to edge up 0.4% to 166.1 kg/mu. Regionally, Xinjiang output is projected at 6.857 million tons, down 3.5%; the Yellow River basin sees a 2.6% yield increase, but the Yangtze basin, hit by excessive rainfall, is expected to see output fall 14.3% to 72,000 tons.
Demand, however, shows surprising resilience. Consumption for 2026/27 is forecast at 8.92 million tons, up 1.7%, while imports are only expected to rise 1.3% to 1.62 million tons. This implies further inventory drawdown—ending stocks are projected at 6.236 million tons, down 2.5%. The falling stock-to-use ratio provides fundamental support for higher cotton prices.
Meanwhile, 2025/26 imports have been revised up to 1.6 million tons, a 51.9% surge, reflecting demand recovery driven by textile capacity agglomeration in Xinjiang. This "westward shift" is reshaping domestic cotton logistics: Xinjiang mills consume more local cotton, while inland mills rely more on reserve releases and imports.
Market Dynamics: Reserve Auctions and Failed Price Transmission
The reserve cotton auctions starting July 20 provided a window into market sentiment. By July 31, 80,200 tons had been sold, with all listed lots transacted, at an average price of RMB 17,253/ton and an average premium of RMB 1,638/ton. Early bidding was aggressive, then rationalized—showing mills are both hungry for and wary of high-priced raw material. Some small and medium mills, lacking import quotas, saw imported reserve cotton as a viable channel to access foreign cotton, driving up competition.
However, cotton price gains have not transmitted smoothly downstream. In July, average domestic 32-count pure cotton yarn was RMB 23,328/ton, nearly flat month-on-month but up 13.33% year-on-year—far below cotton's 15.2% increase (CCIndex3128B monthly average RMB 17,695/ton). Lagging yarn prices, coupled with rising finished goods inventories, are squeezing mill margins. National Bureau data shows July yarn output of 1.814 million tons, down 5.9% month-on-month, but Xinjiang yarn output surged 17% to 321,000 tons—confirming structural differences from capacity relocation.
This "hot upstream, cold downstream" pattern suggests price gains are driven more by supply-side expectations than demand. If new crop supply disappoints, prices could spike again, but downstream acceptance will cap gains.
International Trade and Inventories: Import Appeal Fades, Commercial Stocks Draw Down
Stronger international prices are altering import dynamics. July CotlookA averaged 88.9 US cents/lb, up 3% month-on-month, translating to RMB 2,808/ton lower than domestic prices after 1% tariff, with the gap narrowing by RMB 221. This reduced import appeal, and combined with reserve releases substituting for some import demand, July cotton imports fell 16.6% month-on-month to 92,000 tons, though still up 72.5% year-on-year. Australian new crop arrivals surged, lifting its share to 59.8%, while Brazil and the US fell to 18.8% and 6.7%, respectively.
USDA's August report reinforced global supply tightening: 2026/27 ending stocks cut by 326,600 tons, with stock-to-use ratio dropping to 56.7%. This suggests strong support for international prices, and the domestic-international gap may continue to narrow or even invert, eroding the cost advantage of imported cotton.
Domestically, commercial cotton stocks fell to 2.5 million tons by end-July, down 19.4% month-on-month but still up 14.1% year-on-year; industrial stocks rose 2.3% month-on-month to 888,000 tons. Accelerated commercial destocking reflects both reserve releases and traders speeding up sales amid firm downstream offtake. As new crop approaches, the market enters the final "between crops" phase, and supply gaps may keep prices elevated.