In July, domestic cotton prices experienced a sharp rally followed by a pullback. The monthly average stood at 17,695 yuan per ton, up 15.2% year-on-year but only 0.8% higher month-on-month. Behind this seemingly stable average lay a tug-of-war between early-month drought-driven production cut fears in Xinjiang and mid-month sentiment cooling after reserve sales. Such volatility underscores a core contradiction: supply-side narratives alone cannot sustain prices without downstream demand support.
Policy and Weather Dynamics
Reserve cotton sales became a pivotal factor in July. From the July 20 launch through month-end, 80,200 tons were sold, with all listed lots transacted. The average price was 17,253 yuan per ton, with an average premium of 1,638 yuan. Notably, premiums narrowed as releases continued, indicating that the policy tool is effectively calming market panic and shifting buyers toward need-based procurement. Concurrently, weather disruptions persisted. Early-July heatwaves in Xinjiang fueled production-cut expectations, but the China Cotton Association survey indicates planted area fell 3.9% to 43.066 million mu, with yield expected at 166.1 kg/mu (up 0.4%), putting total output at 7.153 million tons, down merely 3.5%. Xinjiang's output is forecast at 6.857 million tons (-3.5%), with yields broadly flat. This suggests weather noise did not materially alter output expectations; the early rally was largely sentiment-driven.
Downstream Transmission Failure and Inventory Buildup
High cotton prices met with weak downstream acceptance. In July, the average price of domestic 32-count pure cotton yarn was 23,328 yuan per ton, down just 8 yuan month-on-month but up 2,743 yuan year-on-year (13.33%). Yarn prices struggled to follow cotton's rise, and downstream mills resisted hikes, compressing margins. This disconnect is visible in inventory data: commercial cotton stocks fell 19.4% month-on-month to 2.5 million tons, but industrial stocks rose 2.3% to 888,000 tons. Spinners maintained low raw material inventories during the off-season, yet replenished modestly after consuming lower-priced stocks, while finished goods accumulated. National Bureau of Statistics data show July yarn output at 1.814 million tons, down 2.2% year-on-year and 5.9% month-on-month. Xinjiang's output reached 321,000 tons, up 17%, reflecting continued capacity migration to the region.
Narrowing Price Gap and Import Mix Shift
International cotton prices trended higher, narrowing the domestic-import spread. The Cotlook A index averaged 88.9 US cents per pound, translating to a price 2,808 yuan per ton lower than domestic after a 1% tariff, with the gap narrowing by 221 yuan from June. Reduced foreign cotton competitiveness, coupled with reserve sales substituting for imports, led to July imports of 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year. Import origins saw a significant shift: Australian new crop arrivals surged, accounting for 59.8% of imports (up 31.9 percentage points), while Brazil and the US held 18.8% and 6.7% shares, respectively. This structural change reflects diversification amid trade policy volatility. The USDA August report lowered global ending stocks by 326,600 tons, bringing the stocks-to-use ratio to 56.7%, intensifying supply tightness expectations—yet weak domestic demand may curb import momentum.
Future Price Outlook and Risks
In the near term, cotton prices retain support: before new crop arrivals, reserve release pace will dictate supply; the global supply-demand balance is tightening, with external strength pulling domestic prices; and seed cotton purchase prices are expected to be high. However, risks persist—textile finished goods inventories are building, and exports fell month-on-month (July textile and apparel exports at $28.79 billion, down 1.6% from June). If demand remains sluggish, upside potential is limited. Market participants should closely monitor reserve sale volumes and premium trends, as well as Xinjiang weather impacts on new crop progress.