July's cotton market was defined by a striking contrast: reserve sales were fully subscribed, yet domestic prices retreated after an initial spike. This dual signal suggests that policy-driven supply and weak demand are simultaneously shaping the market, making one-sided bullish expectations fragile.
Reserve Sales: Filling Gaps and Stabilizing Prices
Reserve cotton sales began on July 20, with 80,200 tons sold by July 31, all at full subscription. The average transaction 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 rational bidding emerged as auctions continued. This process shows that reserve sales not only bridged the pre-harvest supply gap but also curbed irrational price spikes.
Notably, some small and medium mills lacking import quotas turned to imported reserve cotton as an alternative, bidding higher premiums. This highlights institutional constraints in accessing foreign cotton for smaller players, while reserve sales partially alleviate quota pressures.
Output Cuts and Demand Growth: Tight Balance Expectations
The China Cotton Association forecasts 2026/27 output at 7.15 million tons, down 3.5%, with consumption rising 1.7% to 8.92 million tons. Ending stocks are projected at 6.236 million tons, down 2.5%. Globally, the USDA August report lowered ending stocks by 326,600 tons, reducing the stocks-to-use ratio to 56.7%, intensifying supply tightness concerns.
Regionally, Xinjiang output is expected at 6.857 million tons, down 3.5%, with yields stable. Inland areas show mixed performance: the Yellow River region improved, but the Yangtze River region saw a 14.3% output drop due to excessive rainfall. While weather disruptions did not cause widespread losses, structural differences may intensify regional competition for seed cotton.
Downstream Transmission Fails: Mill Profits Squeezed
July remained an off-season for textiles, with autumn/winter orders not yet placed and finished goods inventories building. National yarn output fell 5.9% month-on-month to 1.814 million tons, though Xinjiang output grew 17% year-on-year. The shift of capacity to Xinjiang continues, but overall operating rates declined, reflecting weak demand.
Cotton yarn prices struggled to follow cotton price increases. The average price of 32-count pure cotton yarn was 23,328 yuan/ton, down only 8 yuan from June but up 13.33% year-on-year. With cotton prices high and yarn prices unable to transmit increases, mill margins are being squeezed. This disconnect means price gains remain at the raw material stage, not reaching end-user apparel.
Imports, Exports, and Inventories: Shifting Sourcing Patterns
Cotton imports in July totaled 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year. Australian cotton dominated, accounting for 59.8% of imports, followed by Brazil (18.8%) and the U.S. (6.7%). The domestic-international price gap narrowed to 2,808 yuan/ton, reducing foreign cotton's attractiveness, while reserve sales partially replaced import demand.
Commercial inventories continued to decline, standing at 2.5 million tons at end-July, down 19.4% from June. Industrial inventories rose 2.3% to 888,000 tons, as some mills replenished at lower prices. This restocking suggests preparation for the peak season, despite current off-season weakness.
Price Trends and Risk Signals
The China Cotton Price Index (CCIndex3128B) averaged 17,695 yuan/ton in July, up 15.2% year-on-year but only 0.8% higher than June. Prices spiked early in the month on heat and drought concerns in Xinjiang, then retreated as reserve sales and weak demand weighed. International prices strengthened on tight global supply expectations, with the Cotlook A index averaging 88.9 US cents/lb, up 3% month-on-month.
As the new cotton harvest approaches, seed cotton prices are expected to open high, but downstream acceptance may be limited. If cotton prices stay elevated while yarn prices fail to follow, mills may cut purchases, leading to a weak peak season. Buyers should monitor reserve sales pace and seed cotton price negotiations; traders should leverage the narrowing price gap to source competitively priced foreign cotton.