When the reserve cotton rotation launched on July 20 and every listed lot was snapped up by spinning mills, the market read more than an 80,200-tonne supply injection. It signalled that the pre-harvest resource gap is tighter than expected. The average transaction price of 17,253 yuan/tonne, equivalent to 17,871 yuan/tonne for grade 3128B, with an average premium of 1,638 yuan/tonne, reflects a stark reality: small and medium mills lacking import quotas must pay higher premiums to secure foreign cotton through auctions.
Supply Side: Output Cuts and Destocking in Parallel
The China Cotton Association's latest survey puts 2026/27 planting area at 43.066 million mu, down 3.9% year-on-year. Expected yield is 166.1 kg/mu, up 0.4%, with total output of 7.153 million tonnes, down 3.5%. Xinjiang, the core producing region, saw area reductions but faster crop development, with output projected at 6.857 million tonnes, down 3.5%. The Yellow River basin outperformed last year, while the Yangtze basin suffered from excessive rainfall, yielding approximately 162,000 and 72,000 tonnes respectively.
Why does a modest output decline trigger market anxiety? The answer lies in simultaneous destocking. By end-July, national commercial cotton inventory stood at 2.5 million tonnes, down 19.4% month-on-month, while industrial inventory rose 2.3% to 888,000 tonnes. Traders accelerated shipments, downstream players maintained just-in-time procurement, and the reserve rotation filled the supply vacuum before new cotton arrives. This means available resources will remain tight until the new crop lands, and seed cotton opening prices are likely to stay elevated.
Imports confirm this narrative. July cotton imports reached 92,000 tonnes, down 16.6% month-on-month but up 72.5% year-on-year. Australian new cotton arrivals surged, lifting Australia's share to 59.8%, up 31.9 percentage points month-on-month, while Brazil and the US accounted for 18.8% and 6.7% respectively. Cumulative imports for January-July hit 1.026 million tonnes, doubling year-on-year. The USDA's August report cut global ending stocks for 2026/27 by 326,600 tonnes, pushing the stock-to-use ratio down to 56.7%, reinforcing expectations of tighter global supply.
Demand Side: Xinjiang Capacity Concentration and Export Divergence
Domestic textile production continues to reflect the off-season. National Bureau of Statistics data show July yarn output at 1.814 million tonnes, down 2.2% year-on-year and 5.9% month-on-month. Xinjiang's yarn output reached 321,000 tonnes, up 17% year-on-year and down only 2.6% month-on-month. This divergence underscores an accelerating migration of spinning capacity to Xinjiang, reshaping the regional distribution of cotton demand. Local processing capacity is strengthening, while mills in inland provinces face longer procurement radii and rising costs.
Cotton yarn prices struggle to follow raw material gains. The average price of domestic 32-count pure cotton yarn in July was 23,328 yuan/tonne, down 8 yuan/tonne month-on-month but up 2,743 yuan/tonne year-on-year. Downstream buyers resist price hikes, and with cotton prices elevated, spinning margins remain compressed. Finished goods inventory accumulation is evident, autumn/winter orders have yet to materialise at scale, and overall production and sales rhythms have slowed.
On the export front, July textile and apparel exports totalled US$28.79 billion, up 7.6% year-on-year but down 1.6% month-on-month. Cotton product exports reached US$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%. Southeast Asian nations continue diverting mid-to-low-end orders, and with international trade policy volatility, exporters are adopting cautious order-taking strategies.
On pricing, domestic cotton peaked and retreated in July. The CCIndex3128B monthly average was 17,695 yuan/tonne, up 15.2% year-on-year and 0.8% month-on-month. International cotton strengthened, with the Cotlook A Index averaging 88.9 US cents/lb, up 12.8% year-on-year and 3% month-on-month. Converted at 1% tariff, this equals 14,887 yuan/tonne, 2,808 yuan below domestic prices, narrowing the spread by 221 yuan from the previous month. The narrowing spread reduces the cost advantage of imported cotton, and reserve rotation partially substitutes import demand, an effect likely to intensify after August.