July's cotton price movement traced a telling curve: early-month heat and drought in Xinjiang ignited production-cut expectations, driving prices up sharply; mid-month reserve sales and weak off-season demand pulled them back. The China Cotton Price Index averaged 17,695 yuan per ton, up 15.2% year-on-year but only 0.8% month-on-month—unable to rise further or fall deeply, the market awaits new crop opening prices for direction.
Supply-Demand Structure: From Double Growth to Tight Balance
The China Cotton Association's latest forecast puts 2026/27 national output at 7.15 million tons, down 3.5% year-on-year, with consumption at 8.92 million tons, up 1.7%. Output contraction against demand expansion is shifting the market from last year's 'double growth' to a 'tight balance.' The underlying logic is a 3.9% reduction in planted area to 43.066 million mu, while yield is expected to edge up 0.4% to 166.1 kg/mu. Weather disruptions did not cause substantial output losses, but area shrinkage will keep pressure on supply in the new season.
For buyers, this means seed cotton opening prices are likely higher than last year. The association explicitly noted that with demand rising and output falling, short-term prices still have upward momentum. However, upside is not unlimited—July yarn prices struggled to follow cotton gains. The average price of 32-count pure cotton yarn was 23,328 yuan per ton, down only 8 yuan month-on-month but up 13.33% year-on-year, indicating downstream resistance to further yarn price hikes.
Industrial Transmission: Xinjiang Concentration and Inventory Divergence
Behind the output data, regional structural changes deserve more attention. Xinjiang is expected to produce 6.857 million tons, down 3.5%, but yields are flat year-on-year. In inland areas, the Yellow River basin saw yields up 2.6%, while the Yangtze basin suffered from excessive rainfall, with output expected to fall 14.3%. Meanwhile, national yarn output in July was 1.814 million tons, down 5.9% month-on-month, but Xinjiang's yarn output rose 17% to 321,000 tons—capacity concentration in Xinjiang remains robust even in the off-season, reflecting raw material proximity advantages and intensifying competition for inland small and medium mills.
Inventory data show a divergence: commercial stocks fell sharply while industrial stocks rose. By end-July, commercial cotton inventory stood at 2.5 million tons, down 19.4% month-on-month but still up 14.1% year-on-year. Industrial inventory was 888,000 tons, up 2.3% month-on-month but down 0.8% year-on-year. Rapid commercial destocking was driven by reserve sales and accelerated trader selling, while mills replenished modestly after consuming low-cost raw materials. This divergence indicates upstream active destocking but no real downstream demand recovery, with finished goods inventories still building.
External Variables: Narrowing Price Gap and Import Shift
International cotton strength continued to narrow the domestic-international price gap. The Cotlook A index averaged 88.9 US cents per pound in July, translating to a landed price 2,808 yuan lower than domestic cotton after a 1% tariff, with the gap narrowing by 221 yuan from the previous month. The narrowing gap directly dampened import enthusiasm—July cotton imports fell 16.6% month-on-month to 92,000 tons, though still up 72.5% year-on-year. Import source structure shifted notably: Australian new crop arrivals surged, lifting Australia's share to 59.8%, up 31.9 percentage points month-on-month; Brazil and the US accounted for 18.8% and 6.7%, respectively.
This structural shift has direct implications for mills' cotton procurement strategies. Australia's soaring share means ample high-grade cotton supply, while the US share is declining due to production cuts, potentially strengthening premiums for high-grade US cotton. Meanwhile, the USDA August report cut global ending stocks by 326,600 tons, lowering the stocks-to-use ratio to 56.7%, intensifying global supply tightness expectations and providing underlying support for international prices. This also implies the domestic-international gap may continue to narrow, further eroding imported cotton's cost advantage.
Policy Tools: Market Signals from Reserve Sales
Reserve cotton sales began on July 20. By July 31, a cumulative 80,200 tons had been transacted, with all listed lots fully sold. The average transaction price was 17,253 yuan per ton, equivalent to 17,871 yuan for Grade 3128B, with an average premium of 1,638 yuan. Early premiums were high but narrowed as continued releases calmed buyer sentiment. Notably, some small and medium mills with insufficient import quotas used imported reserve cotton as a channel to access foreign cotton, paying higher average premiums—highlighting quota constraints as a persistent reality.
Reserve sales not only fill the supply gap before new crop arrival but also signal policy commitment to stable supply. However, the small spread between reserve transaction prices and spot prices suggests mills' limited willingness to absorb high-priced raw materials. Market participants should closely monitor any adjustment in sales pace and the correlation between new crop opening prices and reserve transaction prices.