On July 20, China's state reserve will begin selling cotton from its strategic stockpile, with daily auction volumes adjusted flexibly based on market conditions. This is the most significant supply-side variable for the 2026 cotton market, directly influencing domestic cotton prices over the next two months. The Zheng Cotton main contract has already retreated to 16,075 yuan/ton, making the 16,000-yuan mark a key battleground for bulls and bears.
Supply Side: Low Inventories Meet Reserve Release
According to China Customs data, domestic commercial cotton stocks had fallen to 2.8388 million tons by end-June, down over 50% from the peak of 5.6981 million tons at the start of the year. Xinjiang reserves now stand at just 1.6712 million tons, with high-grade supplies tightening. With nearly two months until the new crop enters the market, the reserve release is designed to smooth the transition and prevent sharp price swings.
The pricing mechanism uses a dual-index model, with domestic and international spot indices each accounting for 50% of the floor price, which is adjusted weekly. Based on current differentials, the first week's floor price is around 16,216 yuan/ton, offering a clear discount to spot market prices. Strict rules limit bidding to textile mills for self-use only, banning resale or speculative trading. Violators face a permanent ban from reserve transactions, effectively excluding traders and speculative funds, ensuring more rational bidding.
Downstream Demand: Seasonal Weakness, Restocking Only
However, supply-side positives are not without constraints. The textile industry is in its traditional off-season, with new orders insufficient. Operating rates at major mills have fallen to 73.1%, and yarn inventories have piled up to 30 days. Mills are adopting a just-in-time procurement strategy, with little appetite for building stocks. This means new reserve cotton entering the market will struggle to find strong buying support in the short term, capping price upside.
For conventional yarn producers, the price advantage of reserve cotton is attractive, and the first round of auctions is expected to see high participation. However, the share of high-grade cotton in the reserve is limited, failing to meet demand for premium high-count yarn. The tight supply of high-quality Xinjiang cotton will persist.
Global Fundamentals: Production Deficit Builds a Long-Term Floor
Globally, the latest USDA report forecasts 2026/27 world cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the market toward a balanced supply-demand. Meanwhile, Xinjiang cotton fields are in the critical boll-setting stage, and persistent high temperatures since July are pressuring crop development, fueling expectations of a production shortfall.
Additionally, the domestic-international cotton price spread remains wide at 3,010 yuan/ton. Under the dual-index pricing mechanism, international price fluctuations will directly affect the reserve floor price. A stronger overseas market would raise the cost of reserve cotton, further limiting downside for domestic prices. These factors together provide solid support for medium- to long-term cotton prices.
Market Dynamics: Short-Term Pressure, Long-Term Support
In the near term, when the first auction opens on July 20, mills' raw material inventories are generally low, and restocking demand is robust. Initial bids may carry some premium, providing temporary price support. But as sales continue and daily volumes accumulate, supply pressure will build, capping upside for nearby contracts. The 16,000-yuan level will be tested repeatedly.
Looking further ahead, the reserve release can only temporarily bridge the supply gap; it cannot change the core logic of a global production deficit and tight domestic high-quality supply. Once the release winds down, market focus will shift to Xinjiang crop progress, new-crop opening prices, and the recovery of downstream orders during the traditional peak season. The price floor remains solid.