The reserve cotton release policy has landed, intensifying the long-short battle in Zheng cotton futures. On July 14, China Reserve Cotton announced the 2026 central reserve cotton sales implementation rules, confirming the release will start on July 20, with daily sales on each legal working day. The total volume and end date are not set, and daily scale will be adjusted flexibly based on market conditions. This move directly impacts Zheng cotton futures hovering around the 16,000 yuan mark, which closed at 16,075 yuan/ton on July 15, down 45 yuan.
Supply Gap vs. Weak Demand
The core logic behind this release is to fill the supply gap during the transition between old and new crop years. Domestic commercial cotton stocks have been declining from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a drop of over 50%. Xinjiang stocks are only 1.6712 million tons, with high-grade spot resources tightening. With nearly two months before the new crop concentrates on the market, the release helps smooth the transition and avoid sharp price fluctuations.
However, downstream textile demand remains weak. The industry has entered the traditional off-season, with mills reporting insufficient new orders. Spinning mill operating rates have fallen to 73.1%, and yarn inventories have built up to 30 days. Mills are only making essential purchases, with little appetite for stockpiling. The new release supply entering the market is unlikely to attract strong buying interest in the short term, potentially further pressuring spot prices.
Optimized Trading Rules Curb Speculation
The trading rules for this release balance supply stabilization with market pricing. The pricing mechanism uses a dual-anchor system, weighting domestic and international cotton spot indices at 50% each, with the floor price adjusted weekly. Based on recent domestic-international price spreads, the floor price for this release is around 16,216 yuan/ton, offering a clear price advantage over current spot market, appealing to mills with real demand.
More critically, strict entry barriers are set. Only physical textile enterprises are allowed to bid, and the purchased reserve cotton must be used for self-consumption, with resale strictly prohibited. Violators face permanent disqualification from reserve transactions. This effectively blocks traders and speculative capital from entering, ensuring a more rational bidding environment. Market expectations suggest that the released cotton will be primarily imported, with stable overall quality but limited high-grade content, failing to meet high-end yarn production needs. The tight supply of high-quality Xinjiang cotton will persist.
Global Production Cuts Provide Support
From a global perspective, medium-to-long-term cotton prices have solid support. Xinjiang cotton fields are in the key boll development stage, with persistent high temperatures since July pressuring growth, fueling market expectations of a new crop production cut. The latest USDA report projects 2026/27 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the global supply-demand balance to a tight equilibrium, providing underlying support for forward prices.
Coupled with the current domestic-international price spread of 3,010 yuan/ton, the dual-anchor pricing mechanism means international price fluctuations directly impact the domestic reserve floor price. A stronger external market will raise release costs, further limiting domestic price downside. This suggests the short-term bearishness from the release is unlikely to break the bottom, with the 16,000 yuan mark becoming a focus of repeated long-short battles.
Short-Term Weakness, Long-Term Stability
In the near term, when the first bidding session opens on July 20, mills with low raw material inventories will show strong participation, especially for conventional yarn production. Initial bids may see some premium, providing temporary support for spot and futures prices. Combined with Xinjiang heat-induced production cut expectations, a deep decline is unlikely. However, as the release continues and daily supply accumulates, the incremental supply pressure will gradually weigh on near-month contracts, capping price upside. The 16,000 yuan level will be tested repeatedly.
From a medium-to-long-term perspective, the release only temporarily supplements short-term circulation supply and cannot change the core logic of global production cuts and domestic high-quality cotton scarcity. As the release nears its end, market focus will shift to Xinjiang cotton growth, new crop opening prices, and downstream 'golden September and silver October' seasonal demand recovery. Price bottom support remains solid.