The 2026 reserve cotton release policy has been finalized, with China National Cotton Reserves Corporation set to start daily auctions on July 20. The daily volume will be flexibly adjusted based on market supply-demand dynamics. The policy aims to smooth the supply gap during the transition between old and new cotton seasons, but the current market environment is complex: domestic inventories are rapidly depleting, downstream demand remains weak, and global production cuts loom. Zheng cotton futures hover around 16,075 yuan/ton, with the 16,000 mark becoming a battleground for bulls and bears.
Supply-Demand Weakness and Inventory Dynamics
On the inventory front, domestic commercial cotton stocks have fallen from 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of over 50%. Xinjiang stocks stand at just 1.6712 million tons, and high-grade spot resources are increasingly tight. With nearly two months until the new crop concentrates on the market, this inventory level implies a risk of temporary supply tightness.
However, demand provides little support. The downstream textile sector has entered the traditional off-season, with mill operating rates in major regions dropping to 73.1% and yarn inventories piling up to 30 days. Factories lack new orders, and procurement is limited to essential restocking, with little appetite for active stockpiling. This means that even if reserve cotton enters the market at a discount to spot prices, it will struggle to generate strong buying interest in the short term.
Pricing Mechanism and Trading Rule Design
This release features notable rule optimizations. The pricing adopts a dual-anchor mechanism, weighting domestic and international cotton spot indices at 50% each, with the floor price adjusted weekly. Based on recent domestic-international price spreads, the floor price is estimated at around 16,216 yuan/ton, offering a clear discount to current spot prices. This provides a direct opportunity for mills with genuine demand to lower raw material costs.
More importantly, strict eligibility criteria are in place: only physical textile enterprises can participate, and purchased reserve cotton must be for self-use, with resale strictly prohibited. Violators face permanent disqualification from future auctions. This design effectively bars traders and speculative funds, ensuring a more rational bidding environment where transaction prices are likely to stay close to the floor. However, the market generally expects the released cotton to be primarily imported, with limited high-grade content, failing to meet demand for high-count yarns. The tight supply of premium Xinjiang cotton is unlikely to ease in the near term.
Global Production Cuts Bolster Medium-Term Floor
From a global perspective, medium-term cotton prices have solid support. The latest USDA supply-demand report projects 2026/2027 world cotton output at 25.53 million tons, down 3.8% year-on-year, pushing the supply-demand balance toward a tight equilibrium. With the domestic-international price spread at a high of 3,010 yuan/ton, the dual-anchor pricing mechanism means that international price volatility will directly feed into the floor price of reserve cotton. A stronger overseas market will lift the release cost, compressing the downside for domestic prices.
Additionally, Xinjiang cotton fields are in the critical boll-setting stage, and persistent high temperatures since July have pressured crop development, fueling expectations of a reduced new-season harvest. This factor will provide underlying support for cotton prices in the medium term, especially after the release concludes and market focus shifts to the new crop opening price.
Operational Tactics Aligned with Release Rhythm
For industry participants, operational tempo must adapt to the release schedule.
For Buyers - Mills producing standard yarns should focus on the initial auction window, leveraging the price advantage of reserve cotton for cost-effective restocking. - Factories specializing in high-count, high-end yarns must continue to lock in premium Xinjiang spot cotton to hedge against high-grade supply shortages. - All participating enterprises must strictly comply with self-use rules to avoid losing trading qualifications.
For Foreign Trade Companies - Avoid large-scale stockpiling in the near term; maintain flexible sourcing aligned with orders, and closely monitor daily release volume, transaction rates, and premium levels. - If market transactions remain sluggish, spot prices may correct, offering opportunities for better procurement timing. - In the medium term, selectively build positions in premium Xinjiang cotton to capitalize on potential price rallies driven by the reduced harvest.
Key Monitoring Points Ahead
Market focus should center on four areas: first, the daily release volume, transaction heat, and premium levels, which reflect genuine mill demand; second, temperature and precipitation changes in Xinjiang cotton regions, assessing boll-setting progress and potential crop reduction; third, downstream weaving mill operating rates, yarn mill inventories, and domestic/export order trends, tracking the pace of seasonal demand recovery; fourth, the domestic-international price spread and US cotton futures, gauging the linkage effect on China's reserve floor price.
The first auction data on July 20 will serve as a short-term market barometer. In the near term, the bearish impact of supply increments needs to be gradually absorbed, with Zheng cotton likely to remain in a weak oscillation range. However, multiple supportive factors—including global production cuts, low inventories, and weather disruptions in growing regions—have already cemented a medium-term price floor. Industry players should continuously track real-time release data, adjust procurement and trading strategies in line with production zone and downstream dynamics, and rationally seize phased market opportunities.