On July 20, China National Cotton Reserves Corporation officially launched competitive sales of state reserve cotton, with the first week's floor price set at 16,291 yuan/ton, a clear discount to spot prices. This policy signal quickly transmitted to futures markets: Zhengzhou Cotton futures main contract settlement averaged 16,057 yuan/ton, down 0.9% week-on-week; the National Cotton Price B Index averaged 17,659 yuan/ton, down 0.5%. The reserve sales aim to precisely ensure supply and curb speculation, with bidding restricted to textile mills, directly alleviating earlier market concerns over tight supply.
Event Background and Policy Impact
The reserve cotton sales announcement was released on July 15, just five days before the actual sale, indicating a tight schedule. The restriction to mills prevents middlemen from hoarding. Data shows mill cotton procurement intentions are rising: 46.3% of mills planned to purchase cotton in early July, up 9.9 percentage points year-on-year; average mill operating rates reached 79.7%, up 1.1 percentage points. The below-spot price of reserve cotton provides a cost buffer, especially benefiting small and medium-sized mills.
Meanwhile, international bearish factors accumulated. US cotton export sales hit a season low, and while 46% of US growing areas still face drought, conditions have eased compared to earlier weeks, prompting markets to correct previous optimistic pricing. New York Cotton futures main contract averaged 80.37 US cents/lb, down 0.1% week-on-week. Notably, the International Cotton Index (M) rose 1.6% week-on-week, with import costs at 14,762 yuan/ton (1% tariff basis), narrowing the domestic-international price gap by 310 yuan/ton or 9.7%. This enhances imported cotton's competitiveness, further pressuring domestic prices.
Industry Impact: Supply Chain Restructuring and Competition
Brazil's cotton surge is the most significant structural shift. SECEX data shows Brazil exported about 80,300 tons in the second week of July, with daily exports of 10,000 tons, up 81.5% year-on-year. With record production, price advantages, and logistics improvements, Brazil has become the world's largest cotton exporter. The USDA July report shows the 2026/27 global production-consumption gap narrowed by 223,000 tons from June, with ending stocks at 15.51 million tons still elevated. Brazil's sustained output directly squeezes US export space, with US sales and shipments remaining weak.
Domestically, cotton growth is generally stable but faces weather risks. Xinjiang has favorable sunlight and temperature, but persistent high heat requires monitoring; Hebei plants have 10+ bolls, but high temperatures during the dog days may limit top boll numbers. The next 2-3 weeks are critical for US and Indian cotton yields; if high heat and low rainfall persist, yield expectations may be revised down; otherwise, weather premiums will be capped. India's monsoon rains have improved, boosting sowing progress, but uneven distribution remains a concern.
Demand shows divergence between domestic and export markets. Domestic consumption shows resilience: H1 2026 retail sales of consumer goods grew 1.3% year-on-year, with apparel, footwear, and textiles above designated size up 6.7% (June: 3.9%), significantly outpacing overall retail. This provides support for the textile chain. However, external demand is dragged by US tariff policies—the USTR plans to impose 25% tariffs on thousands of Brazilian goods including apparel from July 22; over 40% of US firms plan to pass on tariff costs via price increases, fueling global inflation expectations. The New York Fed survey shows energy prices (Brent crude above $88/barrel) and tariffs are jointly pushing up global inflation, pressuring textile export order recovery.