Reserve Cotton Release Triggers Profit-Taking, Short-Term Correction but Trend Intact

ICE cotton futures for December delivery settled at 80.87 cents per pound on July 14, down 0.64 cents or 0.79% from the previous session. The decline was triggered by China's announcement that it will start selling state reserve cotton on July 20, and the USDA's upward revision of 2026/27 US production to 13.7 million bales.

Background

The reserve cotton release had been widely anticipated since late June, so the official announcement largely met market expectations. However, funds chose to take profits after last week's rally, indicating high sensitivity to marginal changes in short-term supply-demand dynamics. USDA data shows global cotton supply for 2026/27 was revised up by 300,000 bales, with US production up 400,000 bales, reinforcing expectations of ample supply.

Meanwhile, Brazil's Conab reported 2025/26 cotton output at 4.0598 million tons, down 0.5% year-on-year, with planted area down 3.2% to 2.0186 million hectares. This modest decline partially offsets global supply growth.

Industry Impact

The reserve release directly benefits domestic cotton mills, which have faced high raw material costs due to inverted domestic-import price spreads. Reserve cotton sold via auction, with starting prices referenced to domestic spot prices, is expected to ease procurement pressure, especially for small and medium mills producing 32s and 40s combed yarn.

However, the release may lead to temporary oversupply in the domestic spot market. China's commercial cotton inventory remains about 15% higher than last year, and the addition of reserve cotton will further increase market liquidity, putting pressure on spot prices in the short term.

Internationally, ICE cotton's decline aligns with weakness in CBOT soybeans and corn, reflecting broad optimism about agricultural supply. A weaker dollar and higher oil prices provide some support, but weaker demand expectations remain the dominant factor.

Practical Recommendations

For Buyers - Watch for buying opportunities below 80 cents/lb. The current range of 80-82 cents may present a mid-term entry point if broken to the downside. - Prioritize competitive bidding for domestic reserve cotton over imported options during the release period. - Use hedging tools to lock in raw material costs if forward export orders are in place.

For Exporters - Include price adjustment clauses in export quotations to protect margins from raw material volatility. - Monitor Brazil's new crop progress. Despite a slight output decline, Brazilian cotton offers stable quality as an alternative to US cotton. - Track US-China trade policies and exchange rates. A weaker dollar boosts RMB-denominated export competitiveness, but currency fluctuation risks should be managed.