The first round of reserve cotton auctions on July 20 saw a higher-than-expected clearance rate, with a base price of 16,216 yuan/ton—about 300 yuan/ton below spot market levels—directly stimulating mills' restocking demand. However, whether this supply injection can truly reverse the downward trend in cotton prices is not straightforward.
Event Background The 2026 reserve cotton release policy was announced by CNCRC on July 14, with sales starting July 20 on every working day. Total volume and end date are not fixed; daily volume adjusts flexibly based on market supply-demand. Pricing uses a dual-anchor mechanism weighting domestic and international spot indices equally, with weekly adjustments. The current base price offers a clear discount to spot, attracting essential buyers. Trading rules strictly curb speculation: only textile enterprises can participate, and purchased cotton must be self-used, with permanent disqualification for violations. Market expects the release to consist mainly of imported cotton with stable quality but limited high-grade content.
Industry Impact On the supply side, the core goal of the reserve release is to bridge the supply gap between old and new crops. Domestic commercial cotton inventory fell from 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of over half. Xinjiang stocks are down to 1.6712 million tons, with high-grade supplies tightening. With nearly two months before the new crop arrives, there is a real risk of periodic shortages. However, downstream demand is weak during the traditional slack season. New orders are insufficient, mill operating rates in major regions have dropped to 73.1%, and yarn inventories have piled up to 30 days. Mills are only restocking on a need-to basis, with little appetite for building inventories. The new supply from auctions will struggle to find strong buying support in the short term.
On the global front, medium-to-long-term support for cotton prices remains. The latest USDA report projects 2026/27 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the supply-demand balance toward tightness. The current domestic-international price spread of 3,010 yuan/ton means that a stronger international market will lift the reserve auction floor price, capping downside. Xinjiang cotton fields are in the critical boll-setting stage, with sustained high temperatures in July stressing growth and raising expectations of a production shortfall.
In futures markets, the bearish impact of the auction was already priced in. On July 15, the main Zheng cotton contract settled at 16,075 yuan/ton, down 45 yuan. In the near term, the first few auction rounds may see active bidding as mills with low inventories seek to restock, providing a floor for spot and futures prices. But as auctions continue, the cumulative supply will pressure near-term contracts, keeping the 16,000 level contested.