On July 14, the ICE cotton futures for December fell 0.79% to 80.87 cents per pound, with the market directly attributing the drop to China's reserve cotton release announcement. But mills and traders should ask: is this a trend reversal or a normal correction after policy expectations were met?
Release and Capital Games
China National Reserve Cotton Management Co. announced that from July 20, it will start selling part of its central reserve cotton on each working day, with the daily volume flexibly arranged based on market conditions. This announcement was widely expected—after last week's USDA report raised US production estimates, the market had already anticipated China would use releases to fill the cotton gap. A StoneX broker noted that some funds chose to take profits after the announcement, which was the core driver of the decline from 83 cents on July 12.
From ICE position data, deliverable cotton inventories fell to 121,285 bales as of July 13, down 5,842 bales from the previous day, indicating that physical delivery demand has not shrunk despite the price drop. The combination of falling inventories and falling prices suggests the market is not simply bearish, but rather waiting for release details to be clarified before re-pricing.
Global Supply-Demand: Short-Term Pressure and Long-Term Support
The USDA July report raised the 2026/27 US cotton production estimate by 400,000 bales to 13.7 million bales, and global supply by 300,000 bales. But these adjustments are limited—US production is only about 3% higher than last year, and global ending stocks remain at multi-year lows. More notably, Brazil's 2025/26 output is estimated at 4.0598 million tons, down 0.5% year-on-year, with planted area shrinking 3.2% to 2.0186 million hectares. Brazil's output reduction means the world's second-largest exporter's supply elasticity is narrowing, supporting forward contracts.
Additionally, CBOT soybeans and corn both fell, reflecting weak sentiment across commodity markets. But oil prices rose about 2% due to Middle East tensions, indirectly raising production costs for synthetic fiber substitutes, which is a hidden positive for cotton—when polyester prices rise, downstream mills tend to favor cotton.
Industry Transmission: Mill Costs and Procurement Pace
The core purpose of the release is to meet mills' cotton demand. The current Cotlook A index remains at 90.70 cents per pound, with a spread of about 10 cents to futures, indicating spot prices have not followed futures down significantly. For mills, the release will increase low-cost supply, but the daily volume is unspecified, so buyers should watch the first week's average transaction price to gauge policy strength.
Historically, reserve releases tend to pressure prices in the first week, but if the transaction rate remains high, it actually reinforces expectations of tight supply. During the 2024 release, cotton prices fell in the first week then stabilized and rebounded, mainly due to strong mill restocking demand. This release comes in the pre-harvest season when supply is tightest, so transactions are expected to remain active.