China's cotton market is bracing for a new round of state reserve cotton releases. China Reserve Cotton has announced that the 2026 central reserve cotton sales will begin on July 20, with daily listings on each legal working day. The total volume and end date remain undetermined, with daily volumes adjusted flexibly according to market conditions. This policy signals a temporary supply boost during the transition between old and new crop years.
Inventory Depletion Reveals Supply Gap
Domestic commercial cotton inventories have been steadily declining this year. Industry data shows stocks have fallen from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a drop of over half. Xinjiang production areas now hold only 1.6712 million tons, with high-grade spot resources tightening. With nearly two months until the new crop concentrates on the market, the risk of a supply shortage looms. The reserve release is designed to smooth this transition and prevent sharp price volatility.
Under the trading rules, the policy balances supply assurance with market-based pricing. A dual-anchor mechanism, giving equal weight to domestic and international cotton spot indices, sets the base price, adjusted weekly. Based on recent domestic-international price spreads, the reserve cotton base price is around 16,216 yuan/ton, offering a clear price advantage over current spot market, attractive for cash-strapped spinning mills. Strict access rules allow only textile enterprises to bid, with purchases for self-use only and resale prohibited. Violators face permanent disqualification, effectively barring traders and speculative capital. Market sentiment suggests a rational bidding environment, with transaction prices likely close to the base price. The released cotton is expected to be mainly imported, with stable quality but limited high-grade content, failing to meet demand for high-count yarns. The shortage of high-quality Xinjiang cotton will persist in the short term.
Weak Downstream Demand Weighs on Short Term
Downstream textile demand remains weak. The industry is in the traditional off-season, with factories reporting insufficient new orders. Mill operating rates in major regions have dropped to 73.1%, and yarn inventories have piled up to 30 days of output. Mills are only restocking for immediate needs, showing little appetite for active hoarding. The influx of reserve cotton is unlikely to encounter strong buying support in the near term.
On the futures front, the bearish news of the release was already priced in. On July 15, the main Zheng Cotton contract closed at 16,075 yuan/ton, down 45 yuan. In the early days of the auction starting July 20, mills with low raw material inventories will likely bid actively for regular yarn production, potentially driving some price premiums and providing a temporary floor. However, as the release continues, the cumulative supply pressure will weigh on near-month contracts, capping upside potential. The 16,000 yuan/ton level will be tested repeatedly.
Global Production Cuts Bolster Medium-to-Long Term
From a global perspective, medium-to-long-term support remains solid. Xinjiang cotton fields are in the critical boll-setting stage, and persistent high temperatures since July have pressured growth, fueling expectations of a new crop reduction. 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. With the current domestic-international price spread at 3,010 yuan/ton, the dual-anchor mechanism means international price fluctuations directly impact domestic reserve cotton base prices. A stronger external market would raise release costs, further limiting domestic price downside.
In the medium-to-long term, the reserve release can only temporarily supplement short-term supply; it cannot change the core logic of global production cuts and domestic high-quality cotton scarcity. As the release winds down, market focus will shift to Xinjiang cotton growth, new crop opening prices, and the recovery of downstream orders during the "golden September and silver October" peak season. Price support at the bottom remains robust.