With nearly two months until the new cotton crop arrives, domestic commercial cotton inventories have fallen from 5.698 million tons at the start of the year to 2.8388 million tons, a decline of over 50%. Xinjiang stocks are down to 1.6712 million tons, with high-grade spot resources tightening. Against this supply gap, the China National Cotton Reserves Corporation announced a 2026 reserve cotton release starting July 20, with daily listings on working days, total volume and end date unspecified, and daily scale adjusted flexibly based on market conditions.
Policy Design: Dual-Anchor Pricing and Entry Barriers
This release features two key rule optimizations. Pricing uses a dual-anchor mechanism weighting domestic and international cotton spot indices at 50% each, with base prices adjusted weekly. Based on recent domestic-international price spreads, the base price is approximately 16,216 yuan/ton, significantly below current market levels, offering strong appeal to spinning mills. On entry barriers, only physical textile enterprises can participate, and purchased cotton is for self-use only, with resale prohibited. Violators face permanent disqualification from reserve transactions. This effectively excludes traders and speculative capital, leading to more rational bidding, with transaction prices likely close to the base price.
This policy design sends a clear signal: the core goal is to ensure supply and stabilize prices, not to suppress them. However, the market generally expects the released cotton to be primarily imported, with stable overall quality but limited high-grade content, failing to meet demand for high-count yarn production. The tight supply of high-quality Xinjiang cotton will persist in the short term, meaning mills focused on premium products must secure resources through other channels.
Industry Transmission: Dual Pressure from Supply Increase and Weak Demand
On the supply side, the reserve release directly fills the supply gap between old and new crops. But demand-side support is weak—the textile industry is in a traditional off-season, with mill operating rates in major regions falling to 73.1% and yarn inventories piling up to 30 days. Factories have insufficient new orders, maintaining only just-in-time replenishment with little willingness to build stocks. After the new reserve cotton enters the market, it will be difficult to generate strong buying to absorb the incremental supply in the short term.
This means that while the first auction window is a just-in-time replenishment opportunity, overall transaction heat may be limited. On July 15, the main Zhengzhou Cotton contract closed at 16,075 yuan/ton, down 45 yuan, with the bearish impact of the release already priced in. In the short term, at the initial auction on July 20, mills generally have low raw material inventories, and conventional yarn producers have strong participation willingness, potentially leading to some premium in early transactions, providing a temporary floor for spot and futures prices. However, as the release continues and daily supply accumulates, the supply pressure will gradually ferment, putting persistent downward pressure on near-term contracts.
Global Perspective: Production Cut Expectations Bolster Medium-Term Floor
Looking at the global fundamentals, medium-term cotton prices have solid support. Xinjiang cotton fields are in the critical boll development stage, and persistent high temperatures since July are stressing cotton growth, fueling market expectations for a new-crop production decline. The latest USDA supply-demand report forecasts 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.
Combined with the current domestic-international price spread of 3,010 yuan/ton, the dual-anchor pricing mechanism means international price fluctuations directly transmit to domestic reserve cotton base prices. A stronger overseas market simultaneously raises release costs, further compressing domestic downside. From a medium-term perspective, the reserve release can only temporarily supplement short-term circulating supply, not change the core logic of global production cuts and domestic high-quality cotton scarcity. As the release enters its final phase, market focus will shift to Xinjiang cotton growth, new-crop opening prices, and downstream order recovery during the peak 'Golden September and Silver October' season.