The imminent release of reserve cotton has driven domestic cotton prices lower, with the domestic-international spread narrowing to 310 yuan per ton, down nearly 10% week-on-week. This signals that the market's earlier tight-supply expectations are being corrected by policy intervention, setting a clear short-term bearish tone.
Policy Implementation and Price Transmission
On July 15, China National Cotton Reserves Corporation officially announced the sale of some central reserve cotton through competitive bidding on the National Cotton Trading Market starting July 20, with only textile mills eligible to participate. The initial weekly floor price was set at 16,291 yuan per ton, significantly below the current spot price of 17,659 yuan per ton for standard-grade inland cotton, a discount of over 1,300 yuan.
This precision supply operation directly impacted the futures market. The average settlement price of Zhengzhou Cotton Futures' main contract fell 0.9% week-on-week to 16,057 yuan per ton. The spot-side National Cotton Price B Index also declined 0.5%, indicating the policy signal has transmitted from futures to spot. For spinners, the low-cost reserve supply offers potential raw material cost relief, supporting the current 79.7% operating rate among mills.
Dual Pressures from International Markets
On the international front, the main US cotton futures contract edged down 0.1% to 80.37 cents per pound, but the actual decline was masked by dollar pricing. In yuan terms, the International Cotton Index M rose 1.6% to 14,762 yuan per ton, narrowing the domestic-international spread by 310 yuan. This divergence reflects a structural contradiction between weak US export data—hitting a season low—and booming Brazilian shipments.
The USDA July supply-demand report showed the global 2026/27 cotton production-consumption gap narrowed by 223,000 tons from June, while ending stocks remained high at 15.51 million tons. Meanwhile, Brazil's cotton exports surged—daily average exports in the second week of July hit about 10,000 tons, a staggering 81.5% year-on-year increase. With record output and improved logistics, Brazil has solidified its position as the world's largest cotton exporter, persistently pressuring US cotton prices.
Adding to the pressure, the US Trade Representative plans to impose 25% tariffs on thousands of Brazilian goods starting July 22, including apparel, motors, and paper products. This could weaken the Brazilian real, further boosting the price competitiveness of Brazilian cotton and posing additional downside risks for US cotton.
Weather Gambit in the Critical Window
US cotton is currently in the squaring, flowering, and early boll-setting stages, with the next 2-3 weeks critical for yield formation. As of July 12, the US cotton crop condition rated good-to-excellent stood at 44%, down 2 percentage points week-on-week, while 46% of cotton-growing areas faced varying degrees of drought. Persistent high temperatures in Texas and other key regions could further lower yield expectations if dry weather continues; conversely, rainfall could ease drought conditions and limit weather premiums.
In India, improved monsoon rains have boosted planting progress, but uneven distribution in central cotton areas means July-August weather remains a key variable for new crop output. Domestically, Xinjiang's cotton is progressing well with adequate sunshine and heat, though sustained high temperatures in the coming week require monitoring. In Hebei, boll counts are concentrated on lower branches, limiting potential from middle and top bolls during the dog days, which may affect later-stage yields.
Consumption Resilience Supports, but External Demand Uncertain
Domestic consumption data provides some market support. According to the National Bureau of Statistics, total retail sales of consumer goods in the first half of 2026 grew 1.3% year-on-year, with apparel, footwear, and textile retail sales up 6.7%, significantly outperforming overall retail growth. In June alone, this category grew 3.9%, turning positive from negative the previous month, indicating sustained resilience in consumer apparel spending.
However, external demand remains uncertain. US tariff policies continue to impact global trade, with a New York Fed survey showing over 40% of firms plan to pass tariff costs through price increases. Combined with Middle East tensions pushing Brent crude above $88 per barrel, energy and tariff factors are jointly fueling global inflation expectations, casting doubt on the recovery of textile export orders.
Price Outlook: Range-Bound
Overall, the domestic reserve cotton release will increase supply in stages, with the initial floor price well below spot, suppressing prices in the near term. Internationally, strong Brazilian exports, weak US sales, and a narrowing global supply-demand gap all cap upside potential. However, weather premiums, consumption resilience, and macro policy support provide a floor. Over the coming weeks, domestic and international cotton prices are likely to remain range-bound, with Zhengzhou Cotton futures fluctuating between 15,800 and 16,300 yuan per ton and US cotton between 78 and 82 cents per pound.