On July 20, China National Cotton Reserves Corporation (CNCRC) will begin the 2026 reserve cotton release, with daily volumes adjusted flexibly and no fixed total or end date. This policy aims to fill the supply gap between old and new crop seasons, but weak downstream demand during the off-season keeps the Zhengzhou Cotton Futures (ZCE) main contract oscillating around the 16,000 yuan/ton mark, a critical battleground for bulls and bears.
Supply-Demand Weakness and the Logic of Release
Domestic commercial cotton stocks have dropped from 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of over 50%. Xinjiang stocks alone are down to 1.6712 million tons, with high-grade spot resources tightening significantly. With nearly two months until the new crop concentrates on the market, there is an inherent risk of a supply squeeze. The reserve release's core mission is to smooth this transition and prevent violent price swings.
However, the downstream textile sector is in its traditional off-season, with new orders insufficient. Mill operating rates in major regions have fallen to 73.1%, and yarn inventories have accumulated to 30 days. Mills are only restocking for immediate needs, with little appetite for active stockpiling. The inflow of reserve cotton is unlikely to attract strong buying power in the short term, increasing the bearish impact of the release.
Policy Fine-Tuning Curbs Speculation, Base Price Anchors Market
This release features optimized trading rules. Pricing uses a dual-anchor mechanism equally weighting domestic and international cotton spot indices, with the base price adjusted weekly. Based on recent spreads, the base price is around 16,216 yuan/ton, offering a clear discount to current spot prices, attractive to cash-strapped mills.
Crucially, participation is strictly limited to physical textile mills for their own use, with resale or speculation banned and violators permanently disqualified. This excludes traders and speculative capital, ensuring rational bidding and prices likely close to the base price. The released cotton is expected to be mainly imported, with stable quality but limited high-grade content, failing to meet high-count yarn needs. The shortage of high-quality Xinjiang cotton will persist.
Global Production Cuts Build a Medium-Term Floor
Despite short-term pressure, the global fundamentals remain supportive. The latest USDA report forecasts 2026/27 global cotton production at 25.53 million tons, down 3.8% year-on-year, shifting the global supply-demand balance toward tightness. The current domestic-international price spread of 3,010 yuan/ton means that under the dual-anchor pricing, international price fluctuations directly affect the reserve base price. A stronger overseas market would raise the cost of the release, limiting downside for domestic prices.
Additionally, Xinjiang cotton fields are in the critical boll development stage, with persistent high temperatures in July stressing crop growth, fueling expectations of a new-crop production decline. The reserve release can only temporarily supplement short-term supply; it cannot change the core logic of global production cuts and domestic high-quality cotton scarcity. Once the release winds down, market focus will shift to Xinjiang crop conditions, new-crop opening prices, and the 'golden September-silver October' peak season demand recovery, providing solid price support.
Market Outlook: Short-Term Pressure vs. Long-Term Support
The bearish news of the release was already priced in. On July 15, the ZCE main contract closed at 16,075 yuan/ton, down 45 yuan, with the 16,000 level precarious. In the initial phase of the release starting July 20, mills with low inventories and strong replenishment needs for regular yarns may bid aggressively, providing temporary spot and futures support. Coupled with the Xinjiang heat wave, a deep sell-off is unlikely.
However, as the release progresses, the cumulative supply increment will weigh on near-month contracts, capping upside. The 16,000 level will be tested repeatedly. In the medium term, the release cannot alter the core logic of production cuts and high-quality scarcity. Far-month contracts, benefiting from weather concerns and global production cuts, have limited downside.