The policy signal in the cotton market is becoming clear. On July 14, 2026, China Reserve Cotton Management Co., Ltd. announced that it will start listing central reserve cotton for auction starting July 20, 2026, with sales conducted every national working day. This move indicates that the state is actively intervening in the cotton supply-demand balance through reserve adjustment, providing textile mills with a stable source of raw materials.
Pricing Mechanism: Dual Index Linkage, Weekly Reset
The most notable aspect of this reserve cotton sale is its pricing logic. The floor price is no longer determined by a single market but uses a "dual index weighted" model: the domestic spot cotton price index (the average of China Cotton Price Index and National Cotton Price Index) and the Cotlook A Index converted to RMB each account for 50% weight. This design means that fluctuations in international cotton prices will directly affect the cost line of domestic reserve cotton sales, while domestic spot trends are also factored in.
More critically, the floor price is adjusted weekly rather than fixed. This dynamic pricing gives the reserve cotton sale more flexibility, preventing failed auctions due to high prices or market disruption from low-price sales. For textile mills, this means the auction cost may change weekly, requiring procurement schedules to align closely with price windows.
Participation Threshold: Mill Self-Use Only, Resale Prohibited
Strict eligibility conditions are set for this sale. Only textile mills can bid, and the purchased reserve cotton is limited to self-use—the unified social credit code or tax registration number must be identical. Non-textile enterprises violating the rules will be considered in default, losing future trading qualifications; textile mills that resell reserve cotton face permanent disqualification.
This restriction effectively cuts off speculative demand, ensuring that reserve cotton flows to production. For small and medium mills, this could be a positive: reducing interference from traders and speculators, creating a fairer bidding environment. However, it also means mills must plan their cotton usage in advance, as once purchased, the cotton cannot be resold on the open market.
Industry Impact: Stabilizing Expectations, But Cost Pass-Through Risks
The release of reserve cotton helps alleviate recent pressure on textile mills' cotton demand, especially when the domestic-international price spread is volatile. The dynamic pricing mechanism helps mills lock in relatively reasonable raw material costs. However, it is important to note that the floor price includes the international cotton price index, with Cotlook A Index converted using tariffs and VAT. This means that if international cotton prices continue to rise, the reserve cotton floor price will also increase, potentially pushing up mills' procurement costs.
From an industry chain perspective, changes in cotton costs directly affect cotton yarn prices, then flow downstream to grey fabrics and finished textiles. For export-oriented textile enterprises, rising raw material costs may weaken export competitiveness; for domestic-focused firms, they must weigh whether to pass cost pressure to end consumers.