In July 2026, China's cotton market exhibited a striking divergence: domestic prices peaked and then retreated, while international prices strengthened, narrowing the price gap to 2,808 yuan per ton. Meanwhile, reserve cotton sales were fully subscribed, yet textile mills continued to build inventories during the off-season. Behind these seemingly contradictory data lies a reshaping of supply-demand dynamics driven by capacity migration to Xinjiang and reserve adjustments.
Market Data and Industrial Signals
According to the latest monthly report from the China Cotton Association, national yarn output in July reached 1.814 million tons, down 5.9% month-on-month and 2.2% year-on-year. Xinjiang alone produced 321,000 tons, up 17% year-on-year, raising its share of national output to 17.7%, reflecting the ongoing westward shift of spinning capacity. Cotton yarn prices struggled to follow raw fiber gains: the average price of 32-count pure cotton yarn was 23,328 yuan per ton, down 8 yuan from June but up 13.3% year-on-year, indicating squeezed margins for spinners.
Weak downstream demand was mirrored in export data. July textile and apparel exports reached 28.79 billion USD, down 1.6% month-on-month, while cotton product exports fell 7.3% to 5.99 billion USD. Exports to the EU dropped 11.9% month-on-month, and those to Belt and Road countries fell 8.9%, with only the US showing a milder decline of 4.2%. This regional divergence signals that buyers should be cautious about demand volatility in traditional markets.
Reserve Sales and Import Substitution
Reserve cotton sales launched on July 20 were fully subscribed, with cumulative sales reaching 80,200 tons by month-end at an average price of 17,253 yuan per ton, with an average premium of 1,638 yuan. Small and medium mills, lacking import quotas, bid more aggressively for imported reserve cotton, though premiums narrowed later as sentiment cooled. The reserve releases filled the supply gap before new cotton arrives but also substituted for imports.
July cotton imports totaled 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year. Australian cotton dominated, accounting for 59.8% of imports, up 31.9 percentage points from June. The narrowing internal-external spread to 2,808 yuan per ton reduced the attractiveness of foreign cotton. The USDA August report cut global ending stocks by 326,600 tons, lowering the stocks-to-use ratio to 56.7%, reinforcing supply tightness expectations.
New Cotton Output and Regional Shifts
China Cotton Association surveys indicate planted area for 2026/27 fell 3.9% to 43.066 million mu, with projected output of 7.153 million tons, down 3.5%. Xinjiang's output is expected at 6.857 million tons, down 3.5%, representing 95.9% of national production, with yields flat year-on-year. Inland cotton areas continue to shrink; the Yellow River region is expected to see yields up 2.6%, while the Yangtze River region, affected by excessive rainfall, may see output fall 14.3% to 72,000 tons.
In July, high temperatures and drought in Xinjiang fueled fears of lower yields, briefly pushing prices up, but final yield estimates only rose 0.4%, confirming limited actual impact. Nevertheless, market expectations for high opening seed cotton prices have strengthened, supported by global inventory cuts, suggesting upward price momentum in the short term.
Inventory Cycles and Price Transmission
By end-July, commercial cotton inventories stood at 2.5 million tons, down 19.4% month-on-month but up 14.1% year-on-year. Industrial inventories rose 2.3% to 888,000 tons, down 0.8% year-on-year. Rapid commercial destocking alongside slight industrial restocking indicates mills bought on dips during the off-season, but weak orders led to finished goods accumulation. This structure suggests price transmission is blocked at the spinning stage, with profits concentrated upstream.
The China Cotton Price Index (CCIndex 3128B) averaged 17,695 yuan per ton in July, up 15.2% year-on-year but only 0.8% month-on-month, lagging international gains. The CotlookA index averaged 88.9 US cents per pound, up 3% month-on-month, equivalent to 14,887 yuan per ton after 1% tariff, 2,808 yuan lower than domestic prices. The narrowing spread reduces import appeal but also alleviates cost disadvantages for domestic cotton in export competition.
Industry Impact and Strategies
The concentration of capacity in Xinjiang is reshaping the cost structure and competitive landscape of China's cotton textile industry. Xinjiang's yarn output growth stems from raw material proximity and lower energy costs, but inland mills face order diversion. Regular reserve sales provide a price stabilizer, yet mills must monitor release pace for short-term price disruptions.
For buyers, the narrowing spread to around 2,800 yuan reduces the advantage of imported cotton, but the rising share of Australian cotton offers better quality options. It is advisable to lock in some low-cost resources through reserve auctions before new cotton arrives and adjust the domestic-import mix based on order structure.
For textile mills, off-season inventory accumulation and high costs make cash flow management more critical than capacity expansion. Mills should use futures to hedge price risks and strengthen cooperation with Xinjiang producers to gain raw material and energy cost advantages. Given divergent export markets, cautious order taking for the US and EU is prudent, while expanding into RCEP member markets is recommended.