China's cotton market is facing a new round of policy intervention. On July 14, the China National Cotton Reserves Corporation released the 2026 reserve cotton sales rules, confirming that the release will start on July 20. Daily auction volumes will be flexible, with no fixed total or end date. The core goal is to bridge the supply gap of about two months between the old and new crop years.
Domestic commercial stocks have dropped sharply from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of over 50%. Stocks in Xinjiang stand at only 1.6712 million tons. High-grade spot resources are tightening, while the new crop will not be available until late September. The reserve release is essentially a counter-cyclical smoothing operation to prevent sharp price fluctuations due to periodic shortages.
Policy Design: Dual-Anchor Pricing and Access Barriers
The pricing mechanism for this release is noteworthy. The floor price uses a dual-anchor model, with domestic and international cotton spot indices each weighting 50%, adjusted weekly. Based on recent price spreads, the initial floor price is around 16,216 yuan/ton, significantly below current spot prices, making it attractive for mills with immediate needs. Strict entry barriers have been set: only physical textile enterprises can participate, and purchased cotton must be used for self-consumption, with resale prohibited. Violators face permanent disqualification. This effectively blocks traders and speculative funds, ensuring more rational bidding and prices likely close to the floor.
The market expects the released cotton to be mainly imported, with stable overall quality but limited high-grade content, unable to fully replace premium Xinjiang cotton. For mills producing high-count yarns, this means limited room for raw material optimization.
Downstream Demand: Off-Season Effect Caps Buying
Whether the supply increase can be absorbed depends on downstream demand. The textile industry has entered the traditional off-season, with insufficient new orders. Mill run rates in major regions have fallen to 73.1%, and yarn inventories have piled up to 30 days. Purchasing strategies are focused on replenishing immediate needs, with little willingness to stockpile. After the reserve cotton enters the market, it will be difficult to generate strong buying to absorb the incremental supply in the short term, capping price upside.
On the futures market, the release news has been partially priced in. On July 15, the main Zheng cotton contract closed at 16,075 yuan/ton, down 45 yuan, reflecting cautious expectations. The 16,000 yuan/ton level has become a key battleground for bulls and bears.
Global Fundamentals: Production Cut Expectations Underpin Support
Despite near-term pressure, the medium-term price floor remains solid. The latest USDA report forecasts 2026/27 global cotton production at 25.53 million tons, down 3.8% year-on-year, pointing to a tight balance. In Xinjiang, cotton is in the critical boll-setting stage, and persistent high temperatures in July have intensified concerns about a new crop reduction.
Moreover, the current domestic-international cotton price spread remains high at 3,010 yuan/ton. Under the dual-anchor pricing mechanism, international price fluctuations directly affect the reserve floor price. A stronger offshore market would raise the release cost, limiting domestic price downside. This means that while short-term supply pressure exists, global production cuts, low inventories, and weather disruptions provide solid support.
Outlook: First Auction Data Sets the Tone
Looking ahead, the first auction on July 20 will be a key short-term indicator. Mills' raw material inventories are generally low, and demand for regular yarn production is strong. Initial auctions may see some premium bidding, providing temporary price support. However, as the release continues, the cumulative supply effect will gradually weigh on near-term contracts, with the 16,000 yuan/ton level repeatedly tested.
From a medium-term perspective, the reserve release only temporarily supplements circulating supply; it cannot change the core logic of global production cuts and domestic high-quality cotton scarcity. As the release winds down, market focus will shift to Xinjiang crop conditions, opening prices, and the recovery of downstream orders during the peak autumn season.