Domestic cotton commercial inventories have plummeted from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of more than half. Xinjiang production areas now hold only 1.6712 million tons. With nearly two months until the new crop is concentratedly marketed, the pressure of a supply gap is building. Against this backdrop, China National Cotton Reserves Corporation announced that the 2026 central reserve cotton release will officially commence on July 20, with listings on each legal working day. The total volume and end date remain undetermined, with daily release scales adjusted flexibly based on market conditions. This counter-cyclical operation aims to smooth the supply gap during the transition between old and new crops, avoiding drastic price fluctuations.
The Game: Short-Term Headwinds vs. Medium-Term Support
The short-term bearish effect of the reserve release has been partially priced in. The main Zheng cotton futures contract closed at 16,075 yuan per ton on July 15, having already weakened. However, the tug-of-war around the key 16,000 yuan threshold is far from over. On one hand, the daily supply increment will continue to pressure near-month contracts, with upside limited by policy. On the other, multiple bullish factors—global production cuts, low inventories, and adverse weather in production areas—are building a solid price floor. The latest USDA report forecasts 2026/27 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the supply-demand balance toward a tight equilibrium. This means the reserve release can only temporarily supplement short-term supply; it cannot change the core logic of global production cuts and domestic high-grade cotton scarcity for the new season.
Trading Rules: Dual-Anchor Pricing and Entry Barriers
The trading rules for this release balance price stability with market-oriented pricing. The pricing mechanism uses a dual-anchor system, 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 reserve cotton base price is approximately 16,216 yuan per ton, offering a clear price advantage over current spot market prices, making it attractive for mills with genuine demand. Strict entry barriers allow only physical textile enterprises to participate in bidding, and purchased reserve cotton is for self-use only, with resale and speculation prohibited. Violators will have their trading qualifications permanently revoked. This effectively shuts out traders and speculative capital, promoting rational bidding. Market consensus expects the released cotton to be primarily imported, with stable overall quality but a limited share of high-grade cotton, which cannot meet the demand for high-count yarns. The tight supply of high-quality Xinjiang cotton is unlikely to ease in the short term.
Industry Impact: The Contradiction Between Restocking Demand and Weak Demand
Current downstream textile demand is weak, with the industry entering a traditional off-season. Operating rates in major spinning regions have fallen to 73.1%, and yarn inventories have built up to 30 days. Factories lack new orders, and procurement is limited to essential restocking, with little willingness to build inventories. After the new reserve cotton enters the market, it will be difficult to generate strong buying power to absorb the incremental supply. In the initial rounds of bidding starting July 20, mills with generally low raw material inventories, especially those producing standard yarns, will have strong demand and may bid aggressively, with some premiums possible. This genuine demand can temporarily support spot and futures prices. However, as the release progresses, the cumulative supply pressure will build, limiting price upside and subjecting the 16,000 yuan threshold to repeated tests.
Outlook: Four Key Monitoring Points
Future market focus will center on four areas. First, the daily listed volume, transaction heat, and premium levels of the reserve release, which directly reflect the true demand level of mills. Second, Xinjiang cotton fields are in the critical boll-setting stage, with persistent high temperatures in July stressing cotton growth and intensifying production cut expectations. Continuous assessment of crop conditions and potential yield reductions is needed. Third, changes in downstream spinning mill operating rates, yarn inventories, and domestic/international orders will track the pace of demand recovery during the peak season. Fourth, the domestic-international price spread and US cotton trends. The current spread stands at a high 3,010 yuan per ton. International cotton price fluctuations will directly transmit to the reserve cotton base price; a stronger external market will raise the cost of the release, further compressing the downside for domestic prices.