On July 20, a new round of reserve cotton releases will officially begin, marking the first operation after the implementation of the 2026 central reserve cotton sales rules. The policy aims to smooth supply gaps during the transition between old and new cotton seasons through flexible daily release volumes. However, the market is more focused on how this release will affect cotton prices amid weak off-season demand and rising global production cut expectations.
Policy Design: Flexible Regulation and Market Gaming
This release adopts a dual-anchor pricing mechanism, weighting domestic and international cotton spot indices equally at 50% each, with the base price adjusted weekly. Based on recent domestic-international price spreads, the initial base price is approximately 16,216 yuan per ton, offering a clear price advantage over current spot markets and attracting cash-strapped spinning mills.
More critical are the strict access rules. Only physical textile enterprises can participate in bidding, and purchased cotton must be for self-use, with resale strictly prohibited. Violators face permanent disqualification from reserve cotton trading. This rule directly excludes traders and speculative capital, fostering more rational bidding. The market generally expects initial transaction prices to remain close to the base price, with limited premiums.
In terms of supply structure, the released cotton is mainly imported, with stable overall quality but limited high-grade content. This means high-end, high-count yarn producers will still rely on Xinjiang premium cotton, which faces tightening inventories.
Supply-Demand Mismatch: Short-Term Pressure vs. Long-Term Support
Domestic commercial cotton inventories have dropped from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of over 50%. Xinjiang inventories are down to 1.6712 million tons, with high-grade spot resources gradually scarce. With nearly two months until the new cotton harvest, the reserve release aims to fill this supply gap and prevent sharp price fluctuations.
However, downstream textile demand is notably weak. The industry is in its traditional off-season, with new orders insufficient. Mill operating rates have fallen to 73.1%, and yarn inventories have built up to 30 days. Enterprises are only restocking for immediate needs, with low willingness to accumulate inventory. After new reserve cotton enters the market, it will be difficult to generate strong buying support in the short term, limiting upward price potential.
From a global perspective, medium-term cotton prices have solid support. The latest USDA report projects 2026/2027 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the supply-demand balance toward tightness. Combined with the current domestic-international price spread of 3,010 yuan per ton, international price fluctuations will directly affect domestic reserve cotton base prices, further limiting downside room.
Market Gaming: Repeated Tests at the 16,000 Yuan Threshold
The bearish impact of the release has been partially priced in. On July 15, the main Zhengzhou cotton contract closed at 16,075 yuan per ton, down 45 yuan. In the short term, as the first auction opens on July 20, mills with low raw material inventories and strong demand for regular yarn will actively participate, potentially driving some premiums in early transactions, providing temporary support for spot prices.
However, as releases continue, daily supply accumulation will gradually exert pressure. Quantitative supply increases will weigh on near-term contracts, with the 16,000 yuan threshold repeatedly tested. From a medium-term perspective, the release only temporarily supplements short-term supply and cannot alter the core logic of global production cuts and domestic high-quality cotton scarcity. As the release nears its end, market focus will shift to Xinjiang cotton growth, new season opening prices, and downstream demand recovery during the golden September-October peak season.