Cotton prices, after a period of strength, have shown a clear correction signal this week. The launch of domestic reserve cotton sales, coupled with US cotton export data falling to a seasonal low, has driven both domestic and international prices downward, though the price spread has narrowed. This reflects a correction in supply expectations and structural divergence in demand.
Background
On July 15, China National Cotton Reserves Corporation announced the sale of central reserve cotton, starting July 20, via public auction on the National Cotton Trading Market. The sale is limited to textile enterprises, with the first week's floor price set at 16,291 yuan/ton, significantly below current spot market levels. This targeted release aims to ease previous supply tightness expectations and curb speculation.
Internationally, US cotton export sales hit a season low, while drought conditions in major growing areas eased, prompting a market correction of prior optimistic pricing. Meanwhile, Brazilian cotton exports surged, with daily average exports in the second week of July up 81.5% year-on-year, further squeezing US market share.
Industry Impact
Domestic cotton prices reacted quickly to the reserve sales. Zhengzhou cotton futures main contract averaged 16,057 yuan/ton, down 148 yuan/ton week-on-week, while the National Cotton Price B Index averaged 17,659 yuan/ton, down 80 yuan/ton. This indicates that the market has already priced in the increased supply, putting short-term pressure on prices.
International cotton price dynamics are more complex. NY futures main contract averaged 80.37 cents/lb, down 0.1% week-on-week, but the International Cotton Index (M) averaged 89.32 cents/lb, up 1.6% in yuan terms. The domestic-international price spread narrowed by 310 yuan/ton, or 9.7%, reducing the appeal of imported cotton and favoring domestic demand.
Downstream textile markets show divergence. Domestic C32S carded yarn averaged 23,318 yuan/ton, up 0.1%, while imported C32S yarn was 418 yuan/ton lower. Polyester staple fiber prices rose 223 yuan/ton to 7,455 yuan/ton, indicating continued substitution of cotton by synthetics.
Macroeconomically, domestic consumption provides a floor. National Bureau of Statistics data shows retail sales of apparel, footwear, and textiles above designated size grew 6.7% year-on-year in H1 2026, outpacing overall retail growth. However, external demand faces uncertainty from US tariff policies, with Brazil as a new target, potentially impacting cotton prices through exchange rates and trade flows.
Supply-Side Variables
The USDA July report shows the global cotton production-consumption gap narrowed by 223,000 tons from June, with ending stocks at 1.551 million tons, still relatively high. This easing of supply tightness pressures international prices.
US cotton weather remains a key variable. As of July 12, US cotton condition rated good/excellent was 44%, down 2 percentage points; about 46% of US cotton areas faced some drought. The next 2-3 weeks are critical for yield formation; if high temperatures persist, yield expectations may be revised down.
Brazilian cotton export competitiveness continues to strengthen. Benefiting from record production, price advantages, and improved logistics, Brazil remains the world's largest cotton exporter, with export growth far exceeding expectations, persistently pressuring US cotton.