In July, domestic cotton prices traced a peak-and-fall curve, as reserve releases and Xinjiang heat-drought expectations pulled in opposite directions, ultimately closing at an average spot price of 17,695 yuan/ton, up 0.8% month-on-month but soaring 15.2% year-on-year. This divergence reveals a market at a critical juncture of supply-demand rebalancing: on one hand, bullish sentiment supported by output reduction expectations; on the other, the reality of weak off-season demand and rising finished goods inventories. For textile mills, the squeeze between high raw material costs and sluggish yarn price pass-through is unlikely to ease soon.
Supply-Demand Pattern: Output and Inventory Adjustments Under Tight Balance
The latest survey by the China Cotton Association pins the 2026/27 national output forecast at 7.153 million tons, down 3.5% year-on-year, with Xinjiang contributing 6.857 million tons, a similar decline. Yields are expected to edge up 0.4% nationally to 166.1 kg/mu, with Xinjiang flat, while the Yellow River basin shows better growth and the Yangtze basin sees limited gains due to excessive rainfall. Planted area is down 3.9% to 43.066 million mu, confirming supply-side contraction.
Demand shows resilient growth, with annual consumption forecast at 8.92 million tons, up 1.7%, and imports at 1.62 million tons, up 1.3%. Ending stocks fall to 6.236 million tons, down 2.5%, improving the stock-to-use ratio. Notably, 2025/26 imports are revised up to 1.6 million tons, a 51.9% surge, reflecting demand recovery driven by textile capacity agglomeration in Xinjiang and strategic purchasing under temporary foreign price advantages.
Market Dynamics: Reserve Releases and Narrowing Price Gap Transmission
Reserve releases began on July 20, with all listed lots fully traded, totaling 80,200 tons at an average price of 17,253 yuan/ton, with an average premium of 1,638 yuan. Small and medium mills, lacking import quotas, bid actively for imported reserve cotton, pushing premiums higher, but as releases continued, sentiment rationalized and premiums narrowed. This mechanism effectively filled the resource gap before new cotton arrives and calmed price spikes triggered by early heat-drought concerns.
The domestic-international price gap narrowed to 2,808 yuan/ton, down 221 yuan from the previous month, reducing foreign cotton's attractiveness and curbing import appetite. July imports fell 16.6% month-on-month to 92,000 tons, with Australian cotton's share jumping to 59.8%. International prices strengthened on tight global supply expectations, with the CotlookA index averaging 88.9 US cents/lb, up 3% month-on-month. The USDA August report cut global ending stocks by 326,600 tons, lowering the stock-to-use ratio to 56.7%, reinforcing supply tightening expectations.
Industry Impact: Off-Season Pressure and New Cotton Pricing Game
July continued the off-season pattern, with yarn output at 1.814 million tons, down 5.9% month-on-month, though Xinjiang grew 17% year-on-year, highlighting structural shifts from capacity relocation. Finished goods inventories accumulated, and yarn prices struggled to follow cotton gains; 32s combed cotton yarn averaged 23,328 yuan/ton, nearly flat month-on-month but up 13.33% year-on-year, with limited downstream acceptance. Exports of textiles and apparel reached $28.79 billion in July, down 1.6% month-on-month, with declines across US, EU, and Belt-and-Road markets, pressured by Southeast Asian diversion and trade policy volatility.
Commercial cotton inventories accelerated destocking, falling 19.4% month-on-month to 2.5 million tons by end-July; industrial inventories rose slightly to 888,000 tons, indicating mills replenished through reserve auctions after depleting low-cost stocks. As new cotton approaches market, expectations of high seed cotton opening prices persist, but weak downstream pass-through means cost pressures may squeeze end-users. For buyers, narrowed price gaps reduce foreign cotton appeal, making reserves a key supplement; for mills, balancing off-season inventory buildup against raw material costs is crucial.