China's domestic cotton market is experiencing a rare temperature divergence with its international counterpart. While ICE cotton futures have firmly held above 80 cents per pound, domestic spot prices have edged lower. As of July 13, the standard 3128B grade cotton was quoted at 17,707 yuan per ton, down 0.12% from the start of the month. This divergence reflects a tug-of-war between supply-side production fears and demand-side seasonal weakness, trapping prices in a narrow range.
The Production Fear: A 'Hard Floor' from Heatwaves
Xinjiang's cotton crop has entered the critical flowering and boll-setting stage. However, since July, many areas in northern and southern Xinjiang have experienced sustained temperatures above 35°C, directly causing pollen loss and leading to flower and boll drop. Industry data shows that as of July 6, the region's cotton flowering rate reached 69.3%, but growth progress lagged 7.8 percentage points behind last year. The risk of heat stress is particularly high in southern Xinjiang. If extreme weather persists, boll counts and final yields face significant downward risk.
This means a production cut for the new season is highly probable. This expectation provides strong support for prices from below, serving as the only major bullish factor against the seasonal bearishness. However, this support is more psychological than transactional, as the impact will only materialize when the new crop hits the market.
Frozen Demand: Seasonal Weakness in Full Swing
In stark contrast to supply concerns, the downstream textile sector is deep in its traditional off-season. Monitoring data shows that as of July 9, mill operating rates in major production areas stood at 73.1%, down 0.81 percentage points from the previous week. More alarmingly, finished yarn inventory cycles at mills have reached 30 days, up 1.69% month-on-month, indicating growing sales pressure.
Mills have shifted to a hand-to-mouth buying strategy, with little appetite for large-scale stockpiling. Insufficient orders are constraining raw material demand, and rising yarn inventories are in turn suppressing any rebound in cotton prices. In the short term, weak demand is the dominant bearish factor, with no clear sign of improvement.
The Reserve Cotton Overhang: A Sword of Damocles
Another major supply-side variable is the potential release of state cotton reserves. The market has been circulating rumors of a plan to release over 3 million tons from state reserves. Although no official document has been issued, this bearish expectation has become a major drag on Zhengzhou Cotton Futures. Analysts suggest that the market has already priced in some of this negative sentiment, limiting further downside. However, once the policy is confirmed, it could still cause short-term market jitters.
Overseas Strength: Weather Disruptions and a Tight Balance Sheet
In contrast to the domestic weakness, ICE cotton futures have been on an upward trajectory. As of July 10, the ICE cotton front-month contract settled at 81.54 cents per pound, up 4.8% from the start of July. Overseas weather disruptions continue to support bullish sentiment. The USDA's July WASDE report was neutral-to-tight: global 2026/27 production was raised by 265,700 tons, while consumption increased by only 41,400 tons. However, beginning stocks were revised down by 198,100 tons, offsetting the production increase, leaving global ending stocks only marginally higher by 19,600 tons. This maintains a tight global balance sheet, providing medium-term support for international prices.
The divergence between domestic and international cotton prices reflects two different pricing logics: one constrained by seasonal demand and policy expectations, the other focused on weather and the global balance sheet. This gap is unlikely to narrow quickly and may even widen further.