Reserve Cotton Release Begins: Short-Term Supply Pressure vs. Long-Term Production Decline Logic

The 2026 reserve cotton release policy has been finalized, starting on July 20 with daily listings and a base price of approximately 16,216 yuan/ton. This price offers a clear advantage over current spot markets, directly attracting spinning mills. However, market sentiment is not one-sided: domestic commercial stocks have fallen from a peak of 5.6981 million tons at the beginning of the year to 2.8388 million tons, with Xinjiang stocks at only 1.6712 million tons, tightening high-grade resources. Meanwhile, downstream textiles have entered a traditional off-season, with mill operating rates dropping to 73.1% and yarn inventories reaching 30 days, reflecting weak demand and limited new orders, with mills only purchasing for immediate needs.

Background

The core goal of this release is to smooth the supply gap during the transition between old and new cotton crops. With nearly two months until the new crop is widely available, the market already faced risks of periodic tight supply. The reserve release can fill this gap, preventing sharp price fluctuations. Trading rules feature a dual-anchor pricing mechanism with equal weight for domestic and international cotton spot indices, with the base price adjusted weekly. The current domestic-international price spread is about 3,010 yuan/ton, meaning international price movements directly impact the reserve base price, with a stronger international market raising costs. Additionally, bidding is limited to textile mills, with resale prohibited and violators permanently disqualified, effectively excluding traders and speculators, promoting a more rational bidding atmosphere.

Industry Impact

In the short term, the supply increase from the reserve release will continue to pressure cotton prices. On July 15, the main Zheng cotton contract closed at 16,075 yuan/ton, down 45 yuan, indicating the bearish impact was partially priced in. However, in the initial bidding rounds, mills generally have low raw material inventories, with strong demand for replenishment from regular yarn producers, likely leading to some premium in early transactions, providing temporary support. As the release progresses, the cumulative supply will increasingly pressure near-term contracts.

Medium to long term, the global production decline expectation provides solid support. The USDA's latest report projects 2026/2027 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting supply-demand to a tight balance. Combined with persistent high temperatures during the critical boll development stage in Xinjiang, market expectations for a new crop production decline are rising. The reserve release only temporarily supplements short-term supply, unable to change the core logic of global production decline and domestic high-quality cotton scarcity. As the release nears its end, market focus will shift to Xinjiang cotton growth, new crop opening prices, and downstream recovery from the 'golden September and silver October' peak season.

Practical Advice

For Buyers - Regular yarn mills should focus on the initial bidding window, using the price advantage of reserve cotton to replenish as needed, smoothing raw material costs. - Mills specializing in high-count, high-end yarns still need to lock in high-quality Xinjiang spot supplies to hedge against the shortage of high-grade cotton. - All participating mills must strictly adhere to self-use regulations to avoid losing trading qualifications due to violations.

For Foreign Trade Companies - Avoid large-scale stockpiling in the short term; follow orders flexibly and continuously monitor daily release volumes, transaction rates, and premium levels. - If market transactions remain weak, spot prices may correct, providing opportunities to wait for lower costs. - Medium to long term, consider buying high-quality Xinjiang cotton at lower prices, betting on price gains from the new crop production decline.