The announcement of China's central reserve cotton release triggered an immediate price drop in the domestic market, while weak US export data and easing drought in major producing areas pressured international prices. This week, the average settlement price of Zhengzhou cotton futures main contract was 16,057 yuan/ton, down 0.9% WoW; the national cotton price B index averaged 17,659 yuan/ton, down 0.5%. The spread between domestic and international cotton narrowed by 310 yuan/ton WoW, a 9.7% decline. Imported cotton, at 14,762 yuan/ton on a 1% tariff basis, saw the cost gap shrink significantly.
This decline is not an isolated event. From an industrial chain perspective, lower cotton prices directly ease raw material cost pressures for mills. Domestic C32S combed yarn averaged 23,318 yuan/ton, up only 0.1%, while imported yarn averaged 22,900 yuan/ton, still 418 yuan/ton cheaper than domestic yarn, maintaining the import substitution advantage. Polyester staple fiber prices rose 223 yuan/ton to 7,455 yuan/ton, driven by higher crude oil, shifting the cost-benefit balance between chemical fiber and cotton.
Background
The reserve release is the core trigger for this price adjustment. On July 15, China National Cotton Reserves Corporation announced that from July 20, it would auction some central reserve cotton through the National Cotton Trading Market, limited to textile mills, aiming to precisely guarantee supply and curb speculation. The first week's floor price of 16,291 yuan/ton is significantly below current spot market levels, effectively providing mills with a stable supply channel at below-market prices.
From a supply-demand perspective, this operation is timely. In early July, mill operating rates averaged 79.7%, up 1.1 percentage points YoY; 46.3% of mills planned to purchase cotton, up 9.9 percentage points YoY. Mill restocking demand had been rising, but tight supply expectations previously pushed prices higher. The release announcement directly broke that expectation, driving prices back to reasonable levels.
Meanwhile, international bearish factors are stacking. US cotton export sales hit a seasonal low, while Brazilian cotton exports surged—daily average exports in the second week of July reached about 10,000 tons, up 81.5% YoY. Brazil, with record production, price advantages, and improved logistics, has become the world's largest cotton exporter, persistently pressuring US cotton. Additionally, after the US Supreme Court ruled some tariffs illegal, the Treasury paid about $49.2 billion in tariff refunds in June, pushing the monthly deficit to $120 billion. Yet the US continues advancing new tariff frameworks, with Brazil as the first target—25% tariffs on thousands of Brazilian goods, including apparel, motors, and paper, effective July 22. If trade friction weakens the Brazilian real, it will further enhance Brazil's cotton export competitiveness and pressure US prices.
Industry Impact
The short-term price pressure affects different chain segments unevenly. For mills, the reserve release directly lowers raw material costs, and the mill-only participation rule prevents speculative hoarding by traders. The floor price of 16,291 yuan/ton is roughly 1,000 yuan/ton below spot, offering significant cost savings potential and improving industry margins.
For upstream cotton farmers, domestic cotton growth is generally stable. Xinjiang enjoys favorable sunlight and temperature, with limited impact from localized heat; Hebei's cotton plants have more than 10 bolls, but mid-plant boll numbers may be limited during the dog days, requiring attention to late-season output. While the reserve release temporarily depresses prices, it also avoids violent price swings from supply tightness, helping stabilize farmers' planting expectations.
For downstream apparel exporters, external uncertainties persist. US tariff policies continue impacting global trade; a New York Fed survey shows over 40% of firms plan to pass tariff costs through price hikes. Tensions in the Middle East have pushed Brent crude above $88/barrel, with energy and tariff factors jointly raising global inflation expectations. Domestically, June retail data shows consumption resilience—apparel, footwear, hats, and knitwear retail sales by enterprises above designated size grew 3.9% YoY, significantly faster than overall retail growth, providing support for the textile chain.
Looking ahead, the USDA July WASDE report shows the 2026/27 global cotton production-consumption gap narrowing by 223,000 tons month-on-month, with ending stocks of 15.51 million tons remaining high. US cotton quality stands at 44% good/excellent, down 2 percentage points, with persistent high temperatures in Texas and other major producing areas. The next 2-3 weeks are critical for yield formation; if hot, dry weather continues, yield expectations may be revised down; conversely, rain would limit weather premiums. India's monsoon improvement boosts planting, but uneven rainfall in central cotton areas makes July-August weather a key variable.
In summary, the central reserve release will phase-increase domestic supply, with the first week's floor price well below spot, likely suppressing domestic and international prices in the short term. However, consumption resilience, mill restocking demand, and weather uncertainties provide a price floor, suggesting range-bound trading with limited upside and downside.