Domestic commercial cotton inventory has fallen nearly half from its peak at the start of the year, with high-grade Xinjiang spot resources tightening. Yet downstream textile mills face weak orders, operating rates dropping to 73.1%, and yarn inventory piling up to 30 days. The contradiction between tight supply and weak demand will intensify after the reserve cotton release begins on July 20.
Background
CNCRC announced the 2026 central reserve cotton sales rules on July 14, with the new round of releases starting July 20. Sales will be held every working day, with total volume and end date unspecified and daily volumes adjusted flexibly based on market conditions. This is a counter-cyclical adjustment operation under three overlapping factors: the transition between old and new cotton crop years, declining domestic inventories, and the traditional off-season downstream.
The pricing mechanism adopts a dual-anchor model with equal weight for domestic and foreign spot indices, with the base price adjusted weekly. Based on recent domestic-foreign price spreads, the first week's base price is about 16,216 yuan/ton, significantly lower than current market spot prices, making it attractive for yarn mills with rigid demand. Trading rules are also tightened: only physical textile enterprises can participate, and purchased cotton must be self-used, with resale strictly prohibited. Violators face permanent disqualification from reserve cotton trading, effectively isolating traders and speculative funds. Market expects most released cotton to be imported, with stable overall quality but limited high-grade grades, so tight supply of high-quality Xinjiang cotton for high-count yarn production will persist.
Industry Impact
The core logic of the release is to bridge the supply gap during the old-to-new crop transition. Domestic commercial inventory dropped from 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of over half, with Xinjiang inventory only 1.6712 million tons. With nearly two months until the new crop is widely available, the market faced potential supply tightness, and the reserve release helps smooth the transition window to avoid sharp price fluctuations.
However, downstream demand support is clearly weak. The industry is in its traditional off-season, with insufficient new orders. Operating rates in major textile regions have fallen to 73.1%, yarn inventory sits at 30 days, and mills only purchase for rigid replenishment, with low willingness to stockpile. After the new reserve cotton enters the market, it will be difficult to generate strong buying demand to absorb the incremental supply in the short term.
From a global fundamental perspective, medium-term cotton prices have solid support. Xinjiang cotton fields are in the critical boll development stage, with persistent high temperatures since July stressing growth, fueling expectations of a new-season production cut. The latest USDA supply-demand report shows global cotton production for 2026/2027 is expected at 25.53 million tons, down 3.8% year-on-year, shifting global supply-demand to a tight balance. Coupled with a domestic-foreign price spread of 3,010 yuan/ton, the dual-anchor pricing mechanism means international price fluctuations will directly transmit to the reserve cotton base price. A stronger foreign market would raise release costs, further limiting domestic price downside.
On the futures front, the bearish impact of the release has already been priced in. On July 15, the main Zhengzhou cotton contract closed at 16,075 yuan/ton, down 45 yuan. In the short term, as the first auction on July 20 begins, mills generally have low raw material inventories, and conventional yarn producers have strong replenishment demand, leading to high participation. Early transactions may see some premium, and rigid demand can temporarily support spot and futures prices. Combined with Xinjiang's high-temperature production cut expectations, a deep decline is unlikely. But as the release progresses, daily supply accumulation will gradually exert pressure on near-term contracts, limiting upside. The 16,000 yuan/ton level will be tested repeatedly. Over the medium term, the release only temporarily supplements short-term supply; it cannot change 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 peak season order recovery, with solid price support remaining.