On July 20, the 2026 reserve cotton release will officially begin, with daily listings but no total cap or end date set. This policy brings a short-term supply injection at a time when the domestic cotton market is squeezed between low inventories and weak demand.
Inventory crunch meets seasonal slump
China Customs data show domestic commercial cotton stocks have plunged 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 hold only 1.6712 million tons, with high-grade spot resources tightening noticeably. With nearly two months until the new crop hits the market, a supply gap looms, making the reserve release timely to smooth the transition between old and new seasons.
Yet downstream textiles are in a traditional low season. Operating rates at major mills have fallen to 73.1%, yarn inventories have piled up to 30 days, new orders are insufficient, and mills are only restocking for immediate needs. This means the additional reserve supply may not be quickly absorbed, leaving a risk of supply-demand mismatch.
Pricing mechanism and market dynamics
The 2026 release features an optimized pricing rule: a dual-anchor mechanism equally weighting domestic and international cotton spot indices, with the floor price adjusted weekly. Based on recent spreads, the floor is around 16,216 yuan/ton, offering a clear price advantage over current spot markets and strong appeal for yarn mills with real demand.
Bidding is restricted to textile enterprises only, and purchased cotton must be used internally, with resale banned and violators permanently disqualified. This effectively excludes traders and speculative capital, fostering rational bidding and prices likely close to the floor. The released cotton is expected to be mostly imported, with stable overall quality but limited high-grade content, failing to meet demand for high-count yarns. The tight supply of premium Xinjiang cotton remains unresolved in the short term.
Global production cuts and weather risks
Globally, the latest USDA report forecasts 2026/27 world cotton output at 25.53 million tons, down 3.8% year-on-year, shifting the balance toward tighter supply. Combined with a current domestic-international spread of 3,010 yuan/ton, international price movements directly affect the reserve floor, and a stronger overseas market would further limit domestic downside.
Domestically, Xinjiang cotton fields are in the critical boll development stage, with persistent high temperatures in July raising expectations of a lower new crop. This fundamental bullish factor offsets the bearish impact of the reserve release, keeping Zheng cotton futures oscillating around the 16,000 yuan/ton threshold.
Short-term volatility, medium-term floor
In the futures market, 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 near term, as the first auction round begins on July 20, mills with low inventories will show strong demand, especially for regular yarn, potentially pushing initial bids slightly above the floor. This spot demand can temporarily support prices. However, as daily listings accumulate, the increasing supply will pressure near-month contracts.
Over the medium term, the reserve release only provides a temporary buffer for spot supply; it cannot alter the core logic of global production cuts and scarce premium Xinjiang cotton. Once the release winds down, market focus will shift to Xinjiang crop progress, opening prices for the new season, and the recovery of downstream orders during the 'golden September and silver October' peak season. The price floor remains solid.