July presented a striking contrast in China's cotton market: domestic prices peaked then fell, while international prices strengthened, narrowing the price gap by 221 yuan in a single month. More notably, despite the off-season and a 5.9% month-on-month drop in national yarn output, Xinjiang's yarn production surged 17% year-on-year, signaling that the westward capacity shift has moved from policy-driven to market-driven momentum.
Supply-Demand Structure: Signals of Tight Balance
The China Cotton Association forecasts 2026/27 output at 7.15 million tons, down 3.5%; imports at 1.62 million tons, up 1.3%; and consumption at 8.92 million tons, up 1.7%. With production shrinking and consumption expanding, the market is shifting toward a tight balance. The USDA August report also cut global ending stocks by 326,600 tons, lowering the stock-to-use ratio to 56.7%, reinforcing supply tightness expectations.
Domestic commercial inventories continued to draw down, ending July at 2.5 million tons, down 19.4% month-on-month but still 14.1% higher year-on-year. Industrial inventories rose 2.3% to 888,000 tons, suggesting mills are cautiously restocking despite the off-season.
Reserve Sales: A Price Anchor and Sentiment Regulator
Reserve cotton sales launched on July 20, with 80,200 tons sold by July 31—all listed lots fully subscribed. The average price was 17,253 yuan/ton, equivalent to 17,871 yuan/ton for Grade 3128B, with an average premium of 1,638 yuan/ton. Early premiums were high, but later moderated as mills became more rational, indicating that reserve sales not only supplemented supply but also cooled overheated sentiment.
For small and medium mills lacking import quotas, reserve cotton became a vital low-cost source. However, sales partially replaced import demand, with July imports falling 16.6% month-on-month to 92,000 tons. Notably, Australian cotton surged to a 59.8% share of imports, while Brazil and the US fell to 18.8% and 6.7%, respectively.
Price Transmission: Upstream Strength vs. Downstream Weakness
Domestic cotton prices exhibited a clear 'surge-then-fall' pattern in July. Early-month heat and drought in Xinjiang fueled production-cut expectations, driving prices up; mid-to-late month reserve sales and weak off-season demand pulled them down. The CCIndex 3128B averaged 17,695 yuan/ton, up 15.2% year-on-year but only 0.8% month-on-month.
Transmission downstream was poor. Domestic 32-count pure cotton yarn averaged 23,328 yuan/ton, down just 8 yuan month-on-month but up 13.33% year-on-year—far less than cotton's rise, squeezing mill margins. Downstream mills resisted price hikes, inventories accumulated, and yarn output fell 5.9% sequentially. This 'hot upstream, cold downstream' dynamic suggests that sustained cotton price gains face risks without a demand recovery.
Export Landscape: Growth Hides Structural Pressures
July textile and apparel exports reached $28.79 billion, up 7.6% year-on-year but down 1.6% month-on-month. Cotton product exports were $5.99 billion, up 4.4% year-on-year but down 7.3% sequentially. Exports to the US and EU fell 4.2% and 11.9%, respectively, while those to Belt and Road countries dropped 8.9%, reflecting weak traditional demand and Southeast Asian competition.
Cumulative exports for January-July rose 2.4% to $174.81 billion, but the 2025 marketing year (11 months) saw a 1% decline, implying growth was price-driven rather than volume-driven. Export-dependent mills should watch trade policy volatility and the long-term shift of orders to Southeast Asia.
Production Shift: Xinjiang Stabilizes, Inland Shrinks
According to the China Cotton Association, planted area fell 3.9% to 43.066 million mu, while expected yield edged up 0.4% to 166.1 kg/mu. Xinjiang output is projected at 6.857 million tons, down 3.5% with stable yields. The Yellow River region saw yields rise 2.6%, but the Yangtze region suffered from heavy rain, with output expected to drop 14.3%.
Xinjiang's 17% yarn output growth underscores deepening capacity migration. This trend reshapes cost structures and logistics networks across the industry. Inland mills must find differentiated advantages to survive competition from Xinjiang's expanding capacity.