In July, domestic cotton prices traced a 'surge-then-pullback' curve, but the real story lies beneath the price action: reserve sales fully cleared, the internal-external price gap narrowed to RMB 2,808 per ton, and Xinjiang's yarn output defied the downturn with 17% year-on-year growth. These signals converge on one conclusion: China's cotton market is shifting from 'dual supply-demand growth' to a 'tight balance,' while the westward migration of spinning capacity is reshaping cost and pricing dynamics across the industry chain.
Data Signals Behind the Numbers
The China Cotton Association's July report projects 2026/27 national cotton output at 7.153 million tons, down 3.5% year-on-year, with consumption at 8.92 million tons, up 1.7%, and imports at 1.62 million tons, up 1.3%. The combination of lower output and higher consumption implies ending stocks will fall to 6.236 million tons, down 2.5%. Accelerated inventory destocking underpins cotton prices.
Regional divergence is more telling: Xinjiang's output is expected at 6.857 million tons, down 3.5%, but yields are flat year-on-year. Inland areas present a mixed picture: the Yellow River region sees yields up 2.6%, while the Yangtze region suffers a 14.3% drop due to excessive rainfall. This divergence means future supply marginal changes will hinge more on Xinjiang's weather and policy than on inland dynamics.
Reserve Sales vs. Import Substitution
Reserve sales launched on July 20, with 80,200 tons sold by month-end, all cleared at an average price of RMB 17,253 per ton, with an average premium of RMB 1,638. The heat of bidding reflects strong demand for quality cotton, but premiums narrowed as sales continued, indicating a shift from panic buying to rational bidding. Notably, imported reserve cotton became a channel for small and medium mills to access foreign cotton, highlighting persistent quota shortages.
On imports, July saw 92,000 tons imported, down 16.6% month-on-month but up 72.5% year-on-year. Australian cotton arrivals surged, accounting for 59.8% of imports, while Brazilian and US shares were 18.8% and 6.7%, respectively. This shift suggests Australian cotton is substituting for US cotton on cost-effectiveness. With the internal-external price gap narrowing to RMB 2,808 (after 1% tariff), foreign cotton's appeal is fading, and import volumes may decline in the short term.
Downstream Pass-Through Challenges and Capacity Migration
High cotton prices are not translating into higher yarn prices. July's average price for domestic 32-count pure cotton yarn was RMB 23,328 per ton, down only RMB 8 month-on-month but up 13.33% year-on-year. Margins are squeezed from both ends: upstream cotton remains firm, downstream mills resist price hikes, and finished goods inventories are piling up. National Bureau of Statistics data show July yarn output at 1.814 million tons, down 5.9% month-on-month, but Xinjiang's output rose 17% year-on-year to 321,000 tons, falling only 2.6% month-on-month. Cost advantages from capacity migration are giving Xinjiang mills greater resilience during the off-season.
On exports, July textile and apparel exports reached USD 28.79 billion, up 7.6% year-on-year but down 1.6% month-on-month; cotton product exports were USD 5.99 billion, up 4.4% year-on-year but down 7.3% month-on-month. Exports to the EU fell 11.9% month-on-month, and to Belt and Road countries by 8.9%, reflecting Southeast Asian diversion and trade policy volatility. The mismatch between domestic and external demand cycles means mills must manage inventory and order cycles more prudently.
Price Outlook and Operational Advice
The USDA August report cut global ending stocks by 326,600 tons, pushing the stocks-to-use ratio down to 56.7%, intensifying supply tightness expectations. With the new crop approaching, market consensus points to higher seed cotton opening prices due to demand growth and output decline. However, limited downstream acceptance may cap cotton price upside.