The China National Cotton Reserves Corporation (CNCRC) released the implementation rules for the 2026 central reserve cotton sales on July 14, confirming that the new round of releases will start on July 20, with daily listings on each statutory working day. The total volume and end date remain undetermined, and daily release volumes will be flexibly adjusted according to market supply and demand. This policy aims to fill the supply gap during the transition between old and new cotton crop years, but also puts short-term pressure on cotton prices. Currently, the main Zheng cotton futures contract hovers around 16,075 yuan/ton, with the 16,000 mark becoming a focal point for long-short battles.
Supply Gap and Policy Response
Domestic cotton commercial stocks have dropped from a peak of 5.6981 million tons at the beginning of the year to 2.8388 million tons, a decline of over 50%. Stocks in Xinjiang are only 1.6712 million tons, with high-grade spot resources gradually tightening. With nearly two months until the new crop concentrates on the market, there is an inherent risk of a temporary supply shortage. The reserve cotton release is designed to smooth this transition and avoid drastic price fluctuations.
The pricing mechanism for this release uses a dual-anchor system, equally weighting domestic and international cotton spot indices, with the floor price adjusted weekly. Based on recent domestic-international price differences, the floor price is about 16,216 yuan/ton, offering a clear price advantage over current market spots. Trading rules have tightened entry barriers, allowing only physical textile enterprises to participate in bidding, and the purchased reserve cotton is limited to self-use, with resale strictly prohibited. Violators will be permanently disqualified from reserve cotton trading, effectively blocking traders and speculative capital. Market sources expect the released cotton to be mainly imported, with stable overall quality but limited high-grade content, failing to meet high-count yarn production needs, and the shortage of high-quality Xinjiang cotton will persist in the short term.
Weak Downstream Demand and Inventory Pressure
The downstream textile market is in a traditional off-season, with insufficient new orders. Operating rates in major spinning regions have fallen to 73.1%, and yarn inventories have piled up to 30 days. Mills are only restocking for essential needs, with little willingness to build inventory actively. The inflow of new reserve cotton will struggle to generate strong buying support in the short term. This means the supply increase from the release may be partially absorbed by essential demand initially, but as daily volumes accumulate, supply pressure will build, weighing on near-term contracts.
However, the global fundamentals provide medium-term support. Xinjiang cotton fields are in the critical boll development stage, with persistent high temperatures since July stressing cotton growth, fueling expectations of a new-crop production decline. The latest USDA supply-demand report projects 2026/2027 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the global supply-demand balance toward a tight equilibrium. With the domestic-international price spread remaining high at 3,010 yuan/ton, international price fluctuations will directly transmit to the reserve cotton floor price, further limiting downside risks.
Long-Short Battle and Operational Tempo
On the futures front, the bearish impact of the release has already been priced in. On July 15, the main Zheng cotton contract closed at 16,075 yuan/ton, down only 45 yuan. In the short term, when the first bidding round opens on July 20, mills with low inventory levels, especially those producing regular yarns, will show strong demand, potentially driving up initial transaction prices. This essential demand, combined with Xinjiang heat-related production concerns, will prevent deep declines. But as the release progresses, accumulated supply will pressure near-term contracts, capping upside potential. The 16,000 mark will be tested repeatedly.
From a medium-term perspective, the release only temporarily supplements short-term supply and cannot change the core logic of global production declines and domestic high-quality cotton scarcity. As the release winds down, market focus will shift to Xinjiang crop conditions, new-crop opening prices, and the recovery of downstream orders during the 'golden September and silver October' season. The price floor remains solid.