Domestic and international cotton prices both retreated in the third week of July after two weeks of stalemate. The announcement of China's state reserve cotton sales directly reversed the previous market expectation of tight supply, while weak US export data and easing drought in major producing areas accelerated the price correction. This policy-and-supply-driven market is dragging the cotton sector into a new phase of intensified short-term volatility.
Policy Implementation and Price Transmission
On July 15, China National Cotton Reserves Corporation officially announced the public auction of state reserve cotton starting July 20, exclusively for textile enterprises. The first week's floor price was set at 16,291 yuan/ton, significantly below the prevailing spot market price.
This signal quickly transmitted to futures and spot markets. Zhengzhou cotton futures main contract average settlement price fell 0.9% week-on-week to 16,057 yuan/ton, while the China Cotton Price Index B dropped 0.5% to 17,659 yuan/ton. The spread between the reserve floor price and spot price, around 1,368 yuan/ton, means spinners can gain a clear cost advantage through bidding, putting downward pressure on spot prices in the near term.
Multiple Headwinds in International Markets
The US cotton market faced a triple blow this week. Export sales and shipments hit annual lows as of July 9, signaling weak overseas demand. Meanwhile, the US Drought Monitor showed 46% of cotton areas still in drought, though conditions eased slightly, reducing weather premium expectations. Additionally, Brazil's cotton exports surged, with daily average exports up 81.5% year-on-year in the second week of July, solidifying its position as the world's top exporter and squeezing US market share.
NY futures main contract average settlement price fell only 0.1% to 80.37 cents/lb, but the International Cotton Index (M) rose 1.6% to 89.32 cents/lb. As a result, the domestic-international price spread narrowed by 310 yuan/ton to about 2,897 yuan/ton, a decline of 9.7%. This narrowing benefits import cotton buyers but provides some support to domestic prices.
Macro and Industrial Tug-of-War
Global inflation expectations remain a sword of Damocles over the cotton market. After the US Supreme Court ruled some tariffs illegal, the Treasury paid about $49.2 billion in tariff refunds in June, expanding the monthly deficit to $120 billion. Meanwhile, the USTR plans to impose 25% tariffs on thousands of Brazilian goods from July 22, including apparel. A New York Fed survey showed over 40% of firms plan to pass tariff costs through price increases, while Brent crude broke $88/barrel, pushing up global inflation expectations.
Domestic consumption showed resilience. National Bureau of Statistics data showed total retail sales of consumer goods in H1 2026 grew 1.3% year-on-year, with apparel, footwear, and textile retail sales by units above designated size up 6.7%, significantly outperforming the overall figure. This provides a floor for textile chain demand. However, external demand remains affected by trade tensions, and export order recovery still needs monitoring.
Weather and Supply Variables
US cotton is in the squaring, blooming, and early boll-setting stage. As of July 12, the good-to-excellent rate was 44%, down 2 percentage points week-on-week. The next 2-3 weeks are critical for yield formation. Persistent high temperatures in Texas and other major areas could further cut yield expectations if drought continues. In India, monsoon rains have boosted planting progress, but uneven distribution in central cotton areas makes July-August weather the core variable.
Domestic cotton growth is stable. Xinjiang has generally favorable light and temperature conditions, though local high heat may have limited impact. Hebei cotton has set 10+ bolls, but the number of top bolls may be constrained during the dog days. Hunan growth is normal. Overall, no significant changes to domestic new crop yield expectations have emerged.
Textile Mill Procurement Sentiment Warms
In early July, mill operating rates averaged 79.7%, up 1.1 percentage points year-on-year; 46.3% of mills planned to purchase cotton, up 9.9 percentage points. This suggests gradual demand recovery, though the increase is largely driven by expectations of low-priced reserve cotton. The first week's floor price well below spot is expected to attract significant mill participation, increasing near-term supply and capping price upside.