On July 20, China National Cotton Reserves Corporation will launch the 2026 reserve cotton release, with daily listings and flexible volumes based on market supply-demand dynamics. The policy, anticipated by the market, saw Zhengzhou cotton futures settle around 16,075 yuan/ton. Currently, domestic commercial cotton inventory has dropped to 2.8388 million tons from a peak of 5.6981 million tons earlier this year, a decline of over 50%. Xinjiang region holds only 1.6712 million tons, with high-grade supplies tightening. With nearly two months until the new crop concentrates on the market, the release aims to smooth the transition period and prevent sharp price volatility.
Policy Balance Under Weak Supply and Demand
The auction adopts a dual-anchor pricing mechanism, weighting domestic and international cotton spot indices equally, with the base price adjusted weekly. Based on recent price spreads, the base price is about 16,216 yuan/ton, offering a clear discount to current spot prices, attractive for mills with immediate needs. Strict participation rules allow only textile enterprises to bid, and purchased cotton must be self-used, with resale banned and permanent disqualification for violators. This excludes speculators, ensuring rational bidding and prices likely near the base. Market sources expect the released cotton to be mainly imported, with stable quality but limited high-grade content, unable to fully meet high-count yarn demand, keeping Xinjiang high-quality cotton tight.
However, downstream demand is weak. The industry is in its traditional off-season, with mills reporting insufficient new orders. Operating rates in major regions have fallen to 73.1%, and yarn inventories have built up to 30 days. Mills are purchasing only for immediate needs, with little enthusiasm for stockpiling. The additional supply from the release may not find strong buyers in the short term.
Global Production Cut Expectations Support Long-Term Prices
On the global front, medium- to long-term cotton prices have solid support. Xinjiang cotton fields are in the critical boll-setting stage, and persistent high temperatures since July have pressured growth, fueling market expectations of a new crop production decline. The latest USDA report projects 2026/2027 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the global balance to tight supply, providing underlying support for forward prices. Coupled with the current domestic-international price spread of 3,010 yuan/ton, the dual-anchor mechanism means international price fluctuations directly affect reserve cotton base prices, lifting release costs and limiting domestic downside.
In the near term, as the first auction round begins, mills with low inventories and strong demand for regular yarn will actively bid, potentially driving some premium initially, supporting spot and futures prices. The high-temperature-induced production cut expectations also prevent deep declines. But as the release progresses, accumulating supply will pressure near-term contracts, capping upside and testing the 16,000 yuan/ton level repeatedly.
Over the medium to long term, the release only supplements short-term supply, unable to alter the core logic of global production cuts and domestic high-quality cotton scarcity. As the release winds down, market focus will shift to Xinjiang crop conditions, new-crop opening prices, and the recovery of downstream orders during the peak autumn season, with a solid price floor.