Domestic commercial cotton stocks have halved from 5.6981 million tons at the start of the year to 2.8388 million tons, a drop of over 50%. Xinjiang stocks are down to 1.6712 million tons, with high-grade spot supplies tightening. With nearly two months until the new crop hits the market, the supply gap during the transition period is imminent.
Policy Details: Dual-Anchor Pricing, Strict Entry Rules
On July 14, China National Cotton Reserves Corporation (CNCRC) released the implementation rules for the 2026 reserve cotton sales. The new round will start on July 20, with daily listings on each working day. Total volume and end date are not fixed; daily volume will be adjusted flexibly based on market conditions.
Pricing uses a dual-anchor mechanism with equal weight (50%) to domestic and international spot indices. The base price will be adjusted weekly. Based on recent domestic-international spreads, the base price is estimated at around 16,216 yuan/ton, a significant discount to spot prices, making it attractive for mills.
Entry rules have been tightened: only textile mills can bid, and purchased cotton must be used for self-production. Reselling is strictly prohibited, and violators face permanent disqualification. This design effectively keeps traders and speculative capital out, ensuring more rational bidding with prices likely close to the base.
Market expects the release to consist mainly of imported cotton with stable quality, but high-grade grades will be limited, failing to meet high-count yarn demand. The shortage of premium Xinjiang cotton will persist.
Weak Demand: Mill Operating Rates Drop to 73.1%
The release aims to fill the supply gap during the crop transition. However, downstream textile mills have entered the traditional off-season, with new orders insufficient. Operating rates in major regions have fallen to 73.1%, and yarn inventories have piled up to 30 days. Mills are only restocking for immediate needs, with little appetite for hoarding. The additional supply from the release will struggle to find strong demand in the near term.
This supply-demand weakness means limited upside for cotton prices in the short term, but also limited downside, as global production cuts provide solid support.
The latest USDA report forecasts 2026/27 global cotton production at 25.53 million tons, down 3.8% year-on-year, pushing the global balance toward tightness. Combined with the current domestic-international spread of 3,010 yuan/ton, international price movements will directly affect the reserve release base price. A stronger international market will lift the release cost, further capping downside risks.
Short-Term vs. Long-Term: The 16,000 Yuan/ton Level as a Battleground
The negative impact of the release had already been priced in. On July 15, the Zhengzhou cotton futures main contract closed at 16,075 yuan/ton, down 45 yuan. When the first round of bidding starts on July 20, mills with low inventories will actively bid for standard-grade cotton, providing temporary support for spot and futures prices.
However, as the release continues, the cumulative supply will gradually pressure near-term contracts. The policy effectively caps upside, and 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-grade cotton scarcity. Once the release enters its final phase, market focus will shift to Xinjiang crop conditions, new-crop opening prices, and the recovery of downstream orders during the peak 'golden September and silver October' season. The price floor remains solid.