China's announcement of reserve cotton sales quickly cooled the ICE cotton futures that had just experienced a sharp rally last week. On July 14, the December contract settled at 80.87 cents per pound, down 0.79% on the day. On the surface, this is a normal correction after the policy was implemented, but behind it are multiple pressures: the USDA's upward revision of production, weakening global demand, and a shift in market sentiment. For the textile supply chain, this may signal that the upside for cotton prices is narrowing.
Event Background
China National Cotton Reserves Corporation announced that starting July 20, it will sell part of its central reserve cotton on each national working day, with daily volumes flexibly adjusted based on market conditions. This is the first reserve sale of 2026, aimed at alleviating supply tightness for cotton mills. The market had largely anticipated this move, but after the official announcement, long positions on ICE took profits. StoneX broker ValentinOlah attributed this to 'profit-taking after the expected event materialized.'
Meanwhile, the USDA's July supply-demand report raised its 2026/27 US cotton production estimate by 400,000 bales to 13.7 million bales, and the global supply estimate by 300,000 bales. This implies a looser global supply-demand balance for the new season. The concurrent weakness in CBOT soybeans and corn also reflects a generally bearish sentiment across the agricultural commodity complex.
Industry Impact
Supply-side pressure is not limited to the US. Brazil's Conab reported that 2025/26 cotton output is estimated at 4.0598 million tons, down 0.5% year-on-year, but planted area shrank 3.2% to 2.0186 million hectares. The slight output decline is more due to yield fluctuations than a structural supply contraction. As the world's second-largest exporter, Brazil's production remains above 4 million tons, offering limited support to international prices.
On the demand side, the picture is more fragile. The core reason for ICE cotton's decline is 'weakening demand prospects.' With China's reserve sales starting, domestic mills' short-term reliance on imported cotton may decrease, and as downstream textile and garment export orders recover slower than expected, cotton prices lack sustained upward momentum. The Cotlook A index held at 90.70 cents per pound, indicating that spot markets did not follow futures sharply lower, suggesting the move is more sentiment-driven than a fundamental breakdown.
Notably, ICE deliverable stocks fell from 127,000 bales to 121,000 bales, indicating weak physical delivery appetite and reduced short-covering pressure. A weaker US dollar and higher oil prices provide some support, but macro tailwinds are insufficient to offset the fundamentally bearish industrial backdrop.