China's commercial cotton stocks have plummeted from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a drop of over 50%, with Xinjiang holding only 1.6712 million tons. With nearly two months until the new crop arrives, the market faces a potential supply crunch. Against this backdrop, the reserve cotton release policy acts as a precise 'supply supplement injection.'
Policy Details and Market Expectations
On July 14, the China Reserve Cotton Management Corporation officially released the implementation rules for the 2026 central reserve cotton sales, confirming the release will start on July 20, with daily sales on each legal working day. The total volume and end date are not fixed, and daily volumes will be adjusted flexibly based on market conditions. The pricing mechanism uses a dual-anchor model, weighting domestic and international 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/ton, offering a clear price advantage over the current spot market. Trading rules strictly limit participation to physical textile enterprises for self-use only, prohibiting resale or speculation, with violators permanently banned. This effectively blocks traders and speculative capital, making the bidding atmosphere more rational, with transaction prices likely close to the base price. The market generally expects the released cotton to be mainly imported, with stable quality but limited high-grade content, so the tight supply of high-quality Xinjiang cotton will persist in the short term.
Industry Impact: Short-Term Pressure vs. Long-Term Support
In the short term, the reserve release fills the supply gap between old and new crop seasons, smoothing raw material price fluctuations. However, the downstream textile sector is in its traditional off-season, with insufficient new orders. Spinning mill operating rates in major regions have dropped to 73.1%, and yarn inventories have accumulated to 30 days. Mills are only restocking for immediate needs, with little appetite for active hoarding. After the new reserve cotton enters the market, it will be difficult to generate strong buying support. On the futures front, the bearish news of the release was already priced in, with the Zhengzhou cotton main contract closing at 16,075 yuan/ton on July 15, down just 45 yuan. In the initial auction rounds, mills with low raw material inventories and strong demand for regular yarns may drive some price premiums, providing temporary support. But as the release continues and daily volumes accumulate, supply pressure will gradually weigh on near-month contracts, with the 16,000 mark tested repeatedly.
From a medium-to-long-term perspective, global fundamentals provide solid support. The latest USDA report forecasts 2026/27 world cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the supply-demand balance toward tightness. Coupled with the current domestic-international price spread of 3,010 yuan/ton, international price fluctuations directly affect the reserve base price, limiting downside room. Additionally, Xinjiang cotton fields are in a critical boll development stage, with persistent high temperatures since July stressing growth and fueling market expectations of a new crop production decline. The reserve release can only temporarily supplement short-term supply, not alter the core logic of global production cuts and domestic high-quality cotton scarcity. Once the release nears its end, market focus will shift to Xinjiang cotton growth, new crop opening prices, and downstream recovery during the 'golden September and silver October' peak season.
Practical Recommendations
For Buyers - Regular-yarn mills should focus on the initial auction window, using the price advantage to replenish stocks and stabilize costs. - Mills specializing in high-count or premium yarns should continue to lock in high-quality Xinjiang spot cotton to hedge against the shortage of high-grade supply. - All participating mills must strictly adhere to self-use rules to avoid losing trading qualifications.
For Foreign Trade Enterprises - Avoid large-scale stockpiling in the short term; follow orders for flexible procurement and sales, and closely monitor daily release volumes, transaction rates, and premium levels. - If market transactions remain sluggish, spot prices may correct; wait for a pullback to accumulate high-quality Xinjiang cotton positions, betting on the new crop production decline. - On the futures side, maintain a short-term bearish-to-sideways view; avoid chasing longs on near-month contracts under pressure. Far-month contracts benefit from weather risks and global production cuts, with limited downside; wait for a pullback to build long positions.
Key monitoring points include: daily release volumes and auction heat, temperature and rainfall in Xinjiang cotton areas, downstream weaving mill operating rates and yarn inventories, and domestic-international price spreads alongside US cotton trends. The first auction data on July 20 will be a key short-term indicator. Industry participants should continuously track real-time release data and adjust strategies based on production and demand changes.