July's cotton market presented a mix of policy-driven and expectation-driven dynamics: reserve cotton releases were fully subscribed, yet domestic prices fell after an initial spike; new crop output reduction was confirmed, but downstream purchasing remained need-based. According to the latest monthly report from the China Cotton Association, the 2026/27 national cotton output is estimated at 7.153 million tons, down 3.5% year-on-year, while consumption is expected to grow 1.7% to 8.92 million tons. The narrowing supply-demand gap sets the stage for upward price pressure, but profit distribution along the supply chain is becoming increasingly uneven.
Supply-Demand Rebalancing: Output Cut and Reserve Releases
The output reduction is not surprising. In July, high temperatures and drought in Xinjiang initially fueled expectations of a larger decline, but final yield is expected to be flat year-on-year. However, a 3.9% reduction in planted area to 43.066 million mu directly led to lower total output. Regional divergence is notable: the Yellow River basin saw yields rise 2.6%, while the Yangtze River basin experienced excessive rainfall, with output expected to drop 14.3% year-on-year. Such regional differences create opportunities for cross-regional cotton transfers and hedging strategies.
Meanwhile, reserve cotton releases began on July 20 and quickly became a market focus. By July 31, a cumulative 80,200 tons were transacted, with an average price of 17,253 yuan per ton and an average premium of 1,638 yuan. This reflects spinners' strong demand for lower-cost supplies—under high cotton prices, reserve cotton became a key tool for cost locking. However, releases also suppressed domestic price gains. The CCIndex 3128B monthly average was 17,695 yuan per ton, up only 0.8% month-on-month, but 15.2% higher year-on-year, indicating a significantly raised price plateau.
Narrowing Price Gap: Shifting Import Dynamics
The Cotlook A index averaged 88.9 US cents per pound in July, up 3% month-on-month. After applying a 1% tariff, the import price was 2,808 yuan per ton lower than domestic cotton, with the gap narrowing by 221 yuan from the previous month. This trend is reshaping import patterns: July imports fell 16.6% month-on-month to 92,000 tons, with Australian cotton's share surging to 59.8%, while Brazilian and US shares dropped to 18.8% and 6.7%, respectively. This structural shift indicates that Australian cotton is capturing market share from traditional US cotton, and for domestic spinners, the cost-effectiveness window for imported cotton is closing.
More profound is the shift in global supply-demand expectations. The USDA August report lowered global ending stocks by 326,600 tons, reducing the stocks-to-use ratio to 56.7%, reinforcing supply tightening expectations. For China, this means import costs will gradually rise. With domestic output declining and consumption growing, the gap may increasingly rely on reserve releases and imports, strengthening the linkage between domestic and international prices and increasing the risk of unilateral operations.
Supply Chain Transmission: Yarn Price Stagnation and Inventory Pressure
High cotton prices have not transmitted smoothly downstream. In July, the average price of domestic 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—significantly less than the 15.2% increase in cotton prices. Low acceptance of yarn price hikes by downstream mills squeezed spinning profits. National Bureau of Statistics data show July yarn output fell 5.9% month-on-month to 1.814 million tons, while Xinjiang's output rose 17% year-on-year, reinforcing the westward capacity shift.
Accumulating finished goods inventories have become the industry's biggest concern. In the off-season, orders have not materialized on a large scale. Textile and apparel exports fell 1.6% month-on-month, with cotton product exports down 7.3%, and exports to the EU plunging 11.9%. Weak exports and sluggish domestic demand have led spinners to maintain low raw material inventories. July cotton industrial inventory was 888,000 tons, up only 2.3% month-on-month, indicating cautious restocking. This upstream-downstream standoff implies that if demand does not improve before the new crop arrives, price increases will be cost-push rather than demand-pull, potentially exacerbating profit distribution imbalances.
Outlook and Strategic Recommendations
In the short term, cotton prices retain upward support: output reduction expectations, nearing the end of reserve releases, and declining global stocks are all positive factors. However, the pace of increases depends on downstream acceptance. If yarn prices fail to follow, cotton prices may spike and then retreat again. Seed cotton purchase prices are expected to remain high, posing acquisition risks for ginners and cost pressure for spinners.