In July, domestic cotton prices initially surged on heat-driven yield-cut expectations, then retreated as reserve sales and weak off-season demand weighed, leaving the monthly average up 15.2% year-on-year but only 0.8% higher month-on-month—a clear sign of limited upside. Meanwhile, international prices firmed, narrowing the domestic-foreign spread to CNY 2,808 per ton, which reduced the appeal of imports and dampened buying enthusiasm. The divergence reflects shifting supply-demand dynamics: domestic supply is cushioned by reserve releases, while global markets trade on tightening inventories.
Supply-Demand Balance: Output and Stocks Decline
The China Cotton Association projects 2026/27 planted area at 43.066 million mu, down 3.9% year-on-year, with yield up 0.4% to 166.1 kg/mu, bringing total output to 7.153 million tons, a 3.5% decrease. Xinjiang accounts for 6.857 million tons, down similarly, while the Yangtze region suffers a sharper 14.3% drop due to excessive rainfall. Consumption is forecast to rise 1.7% to 8.92 million tons, with imports at 1.62 million tons and ending stocks falling 2.5% to 6.236 million tons. A tight balance is emerging, underpinning price floors.
Notably, Xinjiang yarn output jumped 17% year-on-year to 321,000 tons in July, while national yarn production fell 2.2% annually and 5.9% monthly. Capacity continues clustering in Xinjiang, boosting local cotton demand, but inland mills face intensifying substitution pressure. Buyers must reassess raw material costs and product differentiation.
Reserve Sales and Import Substitution: A Temporary Buffer
Reserve cotton sales began on July 20, with 80,200 tons sold by month-end, all subscribed, at an average price of CNY 17,253 per ton and an average premium of CNY 1,638. Early premiums were high but eased as sentiment cooled, indicating orderly market digestion. The releases filled the pre-new-crop gap and partly replaced imports—July cotton imports fell 16.6% month-on-month but soared 72.5% year-on-year. Australian cotton accounted for 59.8% of imports, with Brazil and the U.S. at 18.8% and 6.7%, reflecting a clear shift in sourcing.
For mills, reserve auctions offer access to cheaper raw materials, especially for small and medium enterprises lacking import quotas. However, narrowing premiums suggest consensus on limited upside, though downside is also constrained. Exporters should note that a tighter domestic-foreign spread may erode cost advantages, while currency fluctuations add uncertainty.
Inventories and Price Transmission: Profit Redistribution
Commercial cotton inventories fell 19.4% month-on-month to 2.5 million tons by end-July, up 14.1% year-on-year, continuing destocking. Industrial stocks rose 2.3% monthly to 888,000 tons, as some mills replenished via auctions, though most kept lean inventories. Cotton yarn prices struggled to follow fiber gains—32s combed yarn averaged CNY 23,328 per ton, virtually flat monthly—while high cotton costs squeezed downstream margins. Finished-goods inventories built up, and July textile and apparel exports fell 1.6% month-on-month to USD 28.79 billion, with cotton product exports down 7.3%, including declines of 11.9% to the EU and 4.2% to the U.S.
The transmission failure stems from insufficient orders—autumn/winter orders have yet to scale, Southeast Asia diverts mid-to-low-end orders, and trade policy volatility adds friction. This means cotton price hikes cannot be passed through easily, compressing mill profits. The USDA August report cut global ending stocks by 326,600 tons, lowering the stocks-to-use ratio to 56.7%, reinforcing tight-supply expectations. Yet before the new crop arrives, prices are likely to fluctuate, with seed-cotton opening prices expected high, further squeezing ginners and mills.