China National Cotton Reserves Corporation announced on July 15 that it would auction some central reserve cotton through the National Cotton Trading Market starting July 20, exclusively for textile mills. The first-week floor price of 16,291 yuan/ton is significantly below current spot prices, aiming to ensure supply and curb speculation. This move quickly compressed the supply-driven premium, sending domestic cotton prices lower.
Price Transmission and Spread Restructuring
Data shows the adjustment is fully underway. Zhengzhou cotton futures averaged 16,057 yuan/ton, down 0.9% WoW; the China Cotton Price Index B fell 0.5% to 17,659 yuan/ton. Internationally, New York cotton futures averaged 80.37 cents/lb, down 0.1%, while the International Cotton Index M rose 1.6% due to exchange rates and freight, converting to 14,762 yuan/ton. The domestic-international price gap narrowed to 2,897 yuan/ton, a 9.7% reduction. This signals that the previously widening spread is returning to a rational range, easing cost pressure for mills reliant on imported cotton.
Downstream, C32S combed yarn prices edged up to 23,318 yuan/ton, with imported yarn at 22,900 yuan/ton, maintaining a 418 yuan/ton spread. Polyester staple fiber surged 223 yuan/ton to 7,455 yuan/ton, reflecting resilient demand for substitutes amid looser cotton supply.
Global Supply-Demand Dynamics and Policy Shocks
On the supply side, the USDA July report narrowed the 2026/27 global cotton deficit by 223,000 tons from June, with ending stocks at a high 15.51 million tons. US cotton is in its critical squaring-to-bloom stage; as of July 12, the good-to-excellent rate dropped to 44%, and 46% of planting areas face drought. The next 2-3 weeks of high heat in Texas could further lower yield expectations. However, US export sales are weak, hitting a seasonal low for the week ending July 9, contrasting sharply with Brazil's strong performance. Brazil's daily cotton exports in the second week of July surged 81.5% year-on-year, cementing its position as the world's top exporter and pressuring US prices.
Policymakers: The US Trade Representative plans to impose 25% tariffs on thousands of Brazilian goods starting July 22, including apparel and electronics. This could weaken the Brazilian real, boosting its cotton export competitiveness. Meanwhile, the US Supreme Court ruled some tariffs illegal, leading to $49.2 billion in refunds in June, expanding the fiscal deficit to $120 billion. Global inflation concerns persist, with the New York Fed survey showing over 40% of firms plan to raise prices. Brent crude broke $88/barrel amid Middle East tensions, pushing energy and tariff factors together to lift inflation expectations, pressuring commodity pricing.
Domestic Market: Consumption Resilience, Export Recovery Uncertain
China's macroeconomy remains stable. National Bureau of Statistics data on July 15 showed retail sales grew 1.3% YoY in H1 2026, with June turning positive at 1.0%. Apparel, footwear, and textile retail sales by units above designated size rose 6.7% YoY (3.9% in June), outpacing overall retail growth, indicating resilient consumer demand. Mill operating rates held at 79.7%, up 1.1 ppt YoY, and 46.3% of mills plan to purchase cotton, up 9.9 ppt, reflecting confidence in future demand.
However, external demand remains affected by trade policies and tariffs, and export orders recovery is uncertain. The reserve cotton release will increase domestic supply, with the first-week floor price well below spot, likely capping prices in the short term and keeping them range-bound. Xinjiang cotton areas have favorable conditions, but high heat risks remain; Hebei and Hunan cotton is growing steadily, but summer heat may limit boll formation, requiring close monitoring.