On July 20, the 2026 central reserve cotton release will officially begin. The policy's bearish impact had been partially priced in before the announcement, with Zhengzhou cotton futures fluctuating around the 16,000 yuan/ton threshold. However, this release is not a simple price suppression tool; it operates within a complex interplay of depleted old-crop inventories, expectations of a new-crop production decline, and weak off-season downstream demand.
Inventory Squeeze and Policy Support
Domestic commercial cotton stocks have fallen from a peak of 56.981 million tons at the start of the year to 28.388 million tons, a decline of over 50%. Xinjiang's stocks stand at just 16.712 million tons, with high-grade spot resources tightening. With nearly two months until the new crop concentrates on the market, a phase of tight supply looms. The core goal of the reserve release is to smooth the supply gap between the old and new crop years, preventing sharp price volatility.
The trading rules for this release reflect a clear focus on stabilizing supply and prices. The pricing mechanism uses a dual-index approach, weighting domestic and international cotton spot indices equally at 50% each, with the floor price adjusted weekly. Based on recent domestic-international price spreads, the initial floor price is approximately 16,216 yuan/ton, offering a clear discount to current spot prices. Strictly, only textile enterprises can bid, and purchased cotton must be for self-use, with resale prohibited. Violators face permanent disqualification. This effectively shuts out speculators and traders, fostering a more rational bidding environment.
Supply-Demand Weakness and Market Battle
In the near term, the supply increase is a clear bearish factor. The downstream textile sector is in its traditional off-season, with operating rates in major spinning regions falling to 73.1% and yarn inventories piling up to 30 days. Mills are purchasing only for immediate needs, with little appetite for stockpiling. The influx of reserve cotton is unlikely to meet strong buying demand initially.
However, downside potential is limited. Xinjiang cotton fields are in a critical growth stage, and persistent high temperatures since July have intensified expectations of a reduced new crop. The latest USDA report projects global cotton production for 2026/2027 at 25.53 million tons, down 3.8% year-on-year, shifting the global balance toward a tight equilibrium. Additionally, the current domestic-international price spread remains high at 3,010 yuan/ton, meaning international price movements will directly influence the reserve floor price through the dual-index mechanism, limiting domestic price declines.
On July 15, the main Zhengzhou cotton contract closed at 16,075 yuan/ton, down 45 yuan. In the initial auction rounds, mills with low inventories are expected to bid actively, providing a floor for spot and futures prices. But as the release progresses, the cumulative supply will exert increasing pressure, and the 16,000 yuan/ton level will be tested repeatedly.
Long-Term Logic Unchanged
The reserve release only temporarily supplements short-term supply; it cannot alter the core logic of a global production decline and domestic shortage of high-quality cotton. Current reserves are mainly imported cotton with stable quality but limited high-grade content, unable to meet demand for premium yarns. This means the scarcity of high-quality Xinjiang cotton will persist, keeping cost pressure on high-end spinners.
Once the release nears its end, market focus will shift to Xinjiang cotton growth progress, new-crop opening prices, and downstream order recovery during the peak autumn season. By then, the supply contraction from global production cuts will reassert its influence, providing a solid floor for medium-term cotton prices.