The cotton market is facing its annual policy event. On July 14, China National Cotton Reserves Corporation released the 2026 reserve cotton sales rules, with the new round of releases starting July 20. Unlike previous years, this round features significant adjustments in trading rules, pricing mechanisms, and entry barriers, signaling a shift from simple 'stock release' to more refined 'market stabilization.'
Dual-Anchor Pricing and Entry Barriers: A Shift in Policy Logic
The core change lies in the pricing mechanism. The floor price adopts a dual-anchor model, equally weighting domestic and international cotton spot indices, with weekly dynamic adjustments. Based on recent price spreads, the initial floor is around 16,216 yuan/ton, offering a clear advantage over current spot prices. This design means international cotton price fluctuations will directly affect domestic reserve costs, with a stronger foreign market raising the floor and limiting downside room for domestic prices.
Tightened entry barriers are equally noteworthy. Only实体 textile mills can participate in bidding, and purchased reserve cotton must be for self-use, with resale strictly prohibited. Violators face permanent disqualification. This effectively shuts out traders and speculative capital, fostering a more rational bidding environment where transaction prices are likely to hover near the floor. For mills, this opens a transparent, low-premium window for raw material replenishment.
Supply Gap and Weak Demand: The Short-Term Squeeze
The fundamental logic behind this release is to bridge the supply gap during the old-new crop transition. Domestic cotton commercial stocks have fallen 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 stocks are down to just 1.6712 million tons, with high-grade spot resources tightening. With nearly two months until the new crop concentrates on the market, the reserve release smooths this transitional gap.
However, downstream demand support is notably weak. The industry has entered a traditional off-season, with mill operating rates in major regions falling to 73.1% and yarn inventories piling up to 30 days. Factories face insufficient new orders, with procurement limited to essential restocking and little appetite for active hoarding. This means new reserve cotton entering the market will struggle to find strong buying support in the short term. The dual pressure of supply increase and weak demand makes short-term price pressure highly probable.
Global Production Cuts and High-Grade Scarcity: The Medium-Term Floor
Despite short-term bearish factors, the medium- to long-term fundamentals remain constructive. The latest USDA supply-demand report projects 2026/27 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the global balance toward a tight equilibrium. Combined with a domestic-international price spread of 3,010 yuan/ton, a stronger international market will, through the pricing mechanism, raise domestic release costs, further limiting downside room.
Domestically, Xinjiang cotton fields are in a critical boll development stage, with persistent high temperatures since July stressing crop growth and fueling expectations of a new-season production decline. More critically, this round of releases primarily consists of imported cotton with limited high-grade content, unable to meet demand for high-count yarn production. The tight supply of high-quality Xinjiang cotton is unlikely to ease in the short term, meaning cost pressure for high-end yarn mills will persist despite the release.
Market Game and Operational Rhythm: Testing the 16,000 Mark Repeatedly
The bearish impact of the release has already been priced in. On July 15, the main Zheng cotton contract closed at 16,075 yuan/ton, down 45 yuan. In the short term, with mill inventories generally low, conventional yarn producers have strong replenishment demand and will likely bid actively in the initial rounds, with some premium possible. This just-in-time demand can provide a temporary floor. However, as daily supplies accumulate, the impact of incremental supply will gradually build, capping upside potential. The 16,000 yuan/ton mark will be repeatedly tested.
Looking ahead, the release only temporarily supplements short-term liquidity; it cannot alter the core logic of global production cuts and domestic high-grade 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 'golden September and silver October' peak season. The price floor remains solid.