On July 20, a new round of reserve cotton auctions will officially begin. According to the detailed rules released by CNCRC, the pricing mechanism uses a dual-anchor system equally weighting domestic and international cotton spot indices, with the base price adjusted weekly—currently around 16,216 yuan/ton, a notable discount to market spot prices. Trading rules have been tightened: only physical textile mills can participate in bidding, and purchased cotton is strictly for self-use, with violators permanently banned from future reserve cotton trading.
The policy signal is clear: stabilizing supply and prices is the primary goal, not suppressing cotton prices. However, the market has already priced in this move, with Zheng cotton futures oscillating around the 16,000 yuan/ton mark, reflecting heightened bull-bear divergence.
Supply Gap vs. Weak Demand
The immediate reason for the release is to fill the supply gap during the transition between the old and new cotton seasons. Domestic commercial cotton stocks have fallen from 5.7 million tons at the start of the year to 2.84 million tons—a drop of over 50%. Xinjiang's stocks alone stand at just 1.67 million tons, with high-grade spot resources tightening. The new cotton crop is still nearly two months away from concentrated arrival, creating a latent risk of supply shortage.
But demand-side realities are less optimistic. The downstream textile sector has entered the traditional off-season, with mill operating rates in major regions falling to 73.1% and yarn inventories building up to 30 days. New orders are insufficient, and mills are only purchasing for immediate needs, with little appetite for stockpiling. This means that once reserve cotton enters the market, it will be hard to find strong buying support in the short term.
The mismatch between supply and demand is the core contradiction. The supply increase is clear, but whether demand can effectively absorb it depends on the pace of downstream order recovery.
Global Production Cuts Bolster Long-Term Support
Zooming out, the global cotton supply-demand balance is tightening. The latest USDA report projects 2026/27 world cotton production at 25.53 million tons, down 3.8% year-on-year. This production cut provides underlying support for forward prices.
Domestically, Xinjiang's cotton fields are in the critical boll development stage. Persistent high temperatures since July have intensified market expectations of a new-season production shortfall. The scarcity of high-quality Xinjiang cotton is unlikely to be alleviated by reserve releases—market participants generally expect the auctioned cotton to be mostly imported, with a limited share of high-grade bales, insufficient to meet the needs of high-count yarn production.
The domestic-international cotton price spread remains at 3,010 yuan/ton, meaning that international price fluctuations will directly feed into the reserve cotton base price. A stronger offshore market will raise the cost of reserve cotton, further limiting the downside for domestic prices.
Short-Term Volatility, Medium-Term Support
In the near term, when the first auction round begins on July 20, mills with low raw material inventories—especially those producing regular yarns—will have strong replenishment needs and may bid aggressively. This initial demand could provide a temporary floor for spot and futures prices, especially with the Xinjiang heat wave stoking production fears, preventing a deep selloff.
However, as the release continues and daily supply accumulates, the pressure from incremental volume will gradually weigh on near-term contracts. Policy constraints will cap any price upside, and the 16,000 yuan/ton level will be tested repeatedly.
Over the medium to long term, the reserve release can only temporarily supplement short-term circulating supply. It cannot change the core logic of global production cuts and domestic high-grade cotton scarcity. Once the release winds down, market attention 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.