The launch of reserve cotton sales is imminent, yet cotton prices are caught in a tug-of-war between weak supply and demand. On July 20, China National Cotton Reserves will begin auctioning cotton at a base price of approximately 16,216 yuan per ton, a clear discount to current spot prices. However, the downstream textile sector is in its traditional off-season: mill run rates have fallen to 73.1%, and yarn inventories have piled up to 30 days, with mills only replenishing for immediate needs. This short-term supply boost collides with tepid demand, pushing Zhengzhou Cotton Futures to oscillate around 16,075 yuan per ton. The battle at the 16,000 mark is far from over.
Supply Gap and Immediate Pressure
The primary driver for this round of reserve sales is to bridge the supply gap between old and new cotton seasons. Domestic commercial cotton inventories have dropped sharply from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a reduction of over 50%. Stocks in Xinjiang now stand at just 1.6712 million tons, with high-grade supplies tightening. With nearly two months until the new crop hits the market, without reserve releases, the market would face a clear shortage risk.
The auction rules balance supply stabilization with price stability. A dual-anchor pricing mechanism gives equal weight to domestic and international cotton spot indices, with the base price adjusted weekly. At the current domestic-international price spread, the 16,216 yuan/ton base price is attractive for mills with immediate needs. Crucially, only textile enterprises are allowed to bid, and purchased cotton must be for self-use, with violators permanently banned from future auctions. This effectively shuts out traders and speculative capital, keeping bidding rational and prices close to the base.
However, market expectations suggest the released cotton will be primarily imported, with limited high-grade content, failing to meet the needs of high-count yarn producers. The tight supply of high-quality Xinjiang cotton is unlikely to ease in the near term.
Demand Side: Off-Season Drag
Whether the reserve sales can stabilize prices ultimately depends on demand. The downstream textile market is in its traditional off-season, with insufficient new orders and mills only replenishing as needed. The 73.1% run rate and 30-day yarn inventory highlight a lack of price elasticity in end demand.
Once reserve cotton enters the market, it will struggle to find strong buyers. While conventional yarn mills have restocking needs, their limited orders and working capital constrain bidding premiums. In the initial rounds, low mill inventories may spur active participation and some price premiums, providing a temporary floor. But as daily volumes accumulate, the supply overhang will increasingly pressure near-term contracts, capping upside potential.
Global Production Cuts: Medium-Term Support
Despite short-term headwinds, medium-term support remains intact. The global cotton supply-demand balance is tightening. The latest USDA report projects 2026/27 world cotton production at 25.53 million tons, down 3.8% year-on-year. Meanwhile, Xinjiang cotton fields are in the critical boll-setting stage, and persistent high temperatures in July are stressing crops, fueling expectations of a reduced new-season harvest.
The domestic-international cotton price spread stands at a high 3,010 yuan per ton. Under the dual-anchor pricing mechanism, international price fluctuations directly affect the reserve sale base price. A stronger offshore market would raise the cost of reserve releases, compressing the downside for domestic prices. Over the medium to long term, reserve sales can only temporarily supplement supply; they cannot alter the core logic of global production cuts and domestic high-quality cotton scarcity. As the sales wind down, market focus will shift to Xinjiang crop conditions, new-season opening prices, and the recovery of downstream demand during the 'Golden September and Silver October' peak season. The price floor remains solid.