Domestic cotton prices showed a narrow range-bound and slightly weak trend in early July, with 3128B grade standard cotton spot price at 17,707 yuan/ton, down 0.12% from the beginning of the month. Meanwhile, ICE cotton futures held above the 80 cents/lb mark, rising 4.8%. This divergence is not coincidental, reflecting a tug-of-war between Xinjiang heat-induced output cut expectations and state reserve release rumors, compounded by rigid constraints from the downstream textile off-season. The market is rebalancing between bullish and bearish forces.
Xinjiang Heat Disrupts Supply
Xinjiang cotton has entered the critical flowering and boll-setting window, determining annual yields. Since July, sustained temperatures above 35°C in southern and northern Xinjiang have caused pollen inactivation, leading to widespread flower, bud, and young boll shedding. As of July 6, the flowering rate reached 69.3% across Xinjiang, but growth progress slowed 7.8 percentage points year-on-year, with significant regional divergence. Southern Xinjiang faces higher heat stress risk; if extreme heat persists, boll counts and final yields face notable downside risks. Market concerns over output cuts are rising, providing strong support for domestic cotton prices and preventing deep declines.
Reserve Release Expectations Cap Upside
Offsetting production cut expectations is the bearish sentiment from state reserve cotton release rumors. Markets have circulated plans for over 3 million tons of reserve inventory release. Although no official document has been issued, this expectation has become a major drag on Zheng cotton futures. Notably, the market has partially priced in the bearish sentiment, limiting downside room and making a sharp drop unlikely. This means that once the release policy is confirmed, it may not trigger severe shocks, but prolonged uncertainty will continue to exert psychological pressure.
Downstream Textile Off-Season Weakness
Terminal textile demand remains flat, with typical off-season characteristics. Monitoring data shows that as of July 9, spindle utilization in major producing areas stood at 73.1%, down 0.81 percentage points month-on-month; finished yarn inventory cycles reached 30 days, up 1.69% month-on-month, indicating rising inventory accumulation and increased operational pressure. Current procurement strategies are focused on replenishing essential needs, with weak willingness for large-scale stockpiling. Insufficient downstream orders constrain raw material purchases, and rising yarn inventories suppress cotton price rebounds, becoming the core bearish factor in the short term.
USDA Report and International Support
In contrast to the domestic weakness, ICE cotton futures have steadily moved higher. The USDA's July global cotton supply-demand report is neutral to slightly tight: 2026/27 global cotton production was raised by 265,700 tons, consumption by only 41,400 tons, with production growth significantly outpacing consumption. However, beginning stocks were reduced by 198,100 tons, offsetting the production increase, resulting in a minor 19,600-ton rise in ending stocks, maintaining a tight balance. Weather disruptions in overseas producing areas continue to support bullish sentiment, providing medium-term support for international prices.
Industrial Impact of Narrowing Price Spread
The divergence in domestic and international cotton prices means imported cotton's cost advantage is weakening, which may further compress profit margins for domestic textile mills. For yarn mills relying on imported cotton, attention must be paid to exchange rate fluctuations and quota policy changes. Meanwhile, if domestic production cut expectations materialize, cotton prices will find stronger support, but reserve release uncertainty will still cap gains.