July presented a striking disconnect in China's cotton market: reserve cotton auctions were fully subscribed and commercial inventories fell rapidly, yet cotton yarn prices barely moved and finished goods stocks kept climbing. This upstream-hot, downstream-cold pattern suggests that cotton price gains are not transmitting effectively to end products, squeezing margins across the chain. For buyers, short-term price signals may matter more than underlying supply-demand fundamentals.
Market Supply and Inventory Shifts
According to the latest monthly report from the China Cotton Association, reserve cotton releases began in July, with cumulative sales reaching 80,200 tonnes by July 31, all subscribed at an average price of 17,253 yuan/tonne, with an average premium of 1,638 yuan. Mills bid actively, but premiums narrowed as releases continued, indicating a shift from panic buying to rational restocking. Commercial cotton inventories fell to 2.5 million tonnes, down 19.4% month-on-month but still 14.1% higher year-on-year. Industrial inventories rose slightly to 888,000 tonnes, up 2.3% from June. The decline in commercial stocks alongside an increase in industrial stocks suggests mills are consuming social inventories while replenishing through auctions and spot purchases to bridge the gap before the new crop arrives.
Notably, reserve releases have partially substituted for imports. July cotton imports totaled only 92,000 tonnes, down 16.6% from June but up 72.5% year-on-year. The import mix shifted dramatically: Australian cotton surged to a 59.8% share (up 31.9 percentage points), while Brazil and the US accounted for 18.8% and 6.7%, respectively. This reflects the narrowing domestic-import price spread, which has reduced the attractiveness of foreign cotton, prompting mills to favor reserve cotton and lower-priced Australian supplies.
Price Trends and the Domestic-Import Spread
Domestic cotton prices rallied early in July then pulled back. Initial concerns over heat and drought in Xinjiang fueled rally expectations, lifting the CCIndex 3128B monthly average to 17,695 yuan/tonne, up 15.2% year-on-year and 0.8% month-on-month. However, reserve releases and weak off-season demand triggered a sustained decline from mid-July onward. Internationally, prices strengthened on expectations of a tightening global supply-demand balance and geopolitical tensions in the Middle East that lifted oil prices. The Cotlook A index averaged 88.9 US cents/lb, up 3% month-on-month, translating to a price 2,808 yuan/tonne lower than domestic cotton after a 1% tariff, with the spread narrowing by 221 yuan from June. The narrowing spread erodes the cost advantage of imported cotton, likely dampening future import volumes.
Globally, the USDA August report cut 2026/27 ending stocks by 327,000 tonnes, lowering the stocks-to-use ratio to 56.7%. The China Cotton Association projects 2026/27 domestic output at 7.15 million tonnes, down 3.5%; imports at 1.62 million tonnes, up 1.3%; and consumption at 8.92 million tonnes, up 1.7%. These figures point to a tight balance, but whether domestic consumption can absorb higher cotton prices remains a key swing factor.
Textile Production and Regional Divergence
In the textile sector, July yarn output reached 1.814 million tonnes, down 5.9% month-on-month and 2.2% year-on-year, reflecting the off-season. Yet Xinjiang's yarn production hit 321,000 tonnes, surging 17% year-on-year and falling only 2.6% month-on-month, far outperforming the national average. This underscores the ongoing westward shift of textile capacity, driven by low-cost energy and policy support. For mills in eastern China, competitive pressure now comes not only from Southeast Asia but also from domestic western regions with cost advantages.
Exports of textiles and apparel totaled $28.79 billion in July, up 7.6% year-on-year but down 1.6% month-on-month. Cotton product exports reached $5.99 billion, down 7.3% month-on-month, with declines of 4.2% to the US, 11.9% to the EU, and 8.9% to Belt and Road countries. Off-season order shortfalls and Southeast Asian competition weakened export momentum, though cumulative January-July exports still rose 2.4% to $174.81 billion.
New Crop Output and Opening Price Expectations
Planted area for the new cotton crop stands at 43.066 million mu, down 3.9% year-on-year. Expected yield is 166.1 kg/mu, up 0.4%, resulting in total output of 7.153 million tonnes. Xinjiang's output is projected at 6.857 million tonnes, down 3.5%. In inland regions, the Yellow River valley shows better growth, while the Yangtze valley lags due to excessive rainfall. Despite frequent weather disruptions in July, overall yield expectations are stable, suggesting manageable output declines. The market widely anticipates high seed cotton opening prices, reflecting both tight supply-demand fundamentals and a weather premium. For mills, this implies elevated raw material costs in Q4, making optimal blending of reserve, imported, and new cotton a core cost-control strategy.