China's reserve cotton auction sold all 80,200 tons offered in July at an average price of 17,253 yuan/ton, equivalent to 17,871 yuan/ton for grade 3128B, with an average premium of 1,638 yuan/ton. This reveals a clear signal: textile mills have genuine and urgent demand for raw material replenishment before the new crop arrives, and small and medium-sized spinners lacking import quotas are using the auction as an effective channel to secure foreign cotton.
Supply: Slight Production Decline, Accelerated Inventory Drawdown
According to a China Cotton Association survey, the national planting area for the 2026/27 season is 43.066 million mu, down 3.9% year-on-year. Yield is estimated at 166.1 kg/mu, up 0.4%, with total output projected at 7.153 million tons, down 3.5%. Xinjiang's output is approximately 6.857 million tons, down 3.5%, while the Yellow River and Yangtze River basins are expected to produce about 162,000 tons and 72,000 tons respectively, down 2.4% and 14.3%. The area reduction is the main driver of lower output, while weather disruptions have had limited impact on final production.
On the inventory side, national commercial cotton stocks stood at 2.5 million tons at end-July, down 19.4% month-on-month but up 14.1% year-on-year. Industrial stocks reached 888,000 tons, up 2.3% month-on-month and down 0.8% year-on-year. The rapid drawdown of commercial stocks stems from traders accelerating shipments after the reserve auction and downstream mills consuming social inventories through just-in-time procurement. The slight rebound in industrial stocks indicates some mills are passively restocking after exhausting lower-priced raw materials, though overall levels remain low.
Demand: Clear Off-Season, Export Structure Diverging
July saw the textile industry continue its off-season pattern, with autumn/winter orders not yet placed at scale and finished product inventories accumulating. National Bureau of Statistics data show monthly yarn output at 1.814 million tons, down 2.2% year-on-year and 5.9% month-on-month. Xinjiang's yarn output reached 321,000 tons, up 17% year-on-year but down 2.6% month-on-month. The continued concentration of spinning capacity in Xinjiang contrasts sharply with declining output in inland regions, reinforcing the long-term trend of capacity migration.
Cotton yarn prices have struggled to follow raw material gains, with downstream buyers reluctant to accept higher yarn quotes. Combined with elevated cotton prices, profit margins continue to compress. The average price of domestic 32-count pure cotton yarn was 23,328 yuan/ton in July, down 0.04% month-on-month but up 13.33% year-on-year. The inability to pass through costs means mid-stream players are absorbing the pressure of high-priced raw materials. If downstream orders remain weak, yarn production cuts could deepen.
On exports, customs data show July textile and apparel exports at $28.79 billion, up 7.6% year-on-year but down 1.6% month-on-month. Cotton product exports totaled $5.99 billion, up 4.4% year-on-year but down 7.3% month-on-month. Major markets all declined: exports to the US fell 4.2% month-on-month, the EU dropped 11.9%, and Belt and Road countries decreased 8.9%. Order diversion by Southeast Asian nations in mid-to-low-end segments, combined with trade policy volatility, is squeezing both order volumes and profit margins for exporters.
Prices: Narrowing Spread, Strong New Crop Opening Expectations
Domestic cotton prices surged then retreated in July. Early-month heat and drought in Xinjiang fueled production cut expectations, pushing prices higher. Mid-to-late July saw reserve cotton releases ease supply pressure, while off-season demand remained weak, causing prices to oscillate downward. The China Cotton Price Index (CCIndex3128B) averaged 17,695 yuan/ton in July, up 15.2% year-on-year and 0.8% month-on-month.
International cotton prices trended stronger overall, significantly outperforming domestic. The Cotlook A Index averaged 88.9 cents/lb, up 12.8% year-on-year and 3% month-on-month, equivalent to 14,887 yuan/ton after 1% tariff, 2,808 yuan below domestic prices. The spread narrowed by 221 yuan from the previous month. The USDA's August report cut global cotton ending stocks for 2026/27 by 326,600 tons, pushing the stock-to-use ratio down to 56.7%, intensifying expectations of tighter supply ahead. The narrowing spread means foreign cotton is becoming less cost-effective, and reserve auctions are partially replacing import demand. July cotton imports reached 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year.
With the new crop approaching, expectations of increased demand and reduced output suggest short-term price upside remains, and seed cotton opening prices are likely to be high. However, if downstream peak-season orders fall short, high-priced new cotton may face transmission resistance.