On July 20, the 2026 central reserve cotton release will commence with daily auctions, with no fixed total volume or end date, and daily volumes adjusted flexibly based on market conditions. This policy lands at a critical juncture as the old and new cotton seasons overlap, domestic spot stocks continue to decline, and the downstream textile sector enters its traditional off-season. The expected supply increase is weighing on short-term cotton prices, but the fundamental supports—global production cuts and scarcity of high-quality cotton—have not disappeared. The tug-of-war around the 16,000 yuan mark on Zhengzhou cotton futures is about to intensify.
Accelerated Inventory Drawdown Creates Supply Gap
Domestic cotton commercial stocks have been declining steadily this year. Industry data shows stocks have fallen from a peak of 5.6981 million tons at the start of the year to 2.8388 million tons, a drop of over half. Xinjiang region stocks are now only 1.6712 million tons, with high-grade spot resources gradually tightening. With nearly two months until the new cotton crop is fully available, the market already faced a risk of periodic supply tightness. The core purpose of the reserve release is to smooth the supply gap between old and new cotton seasons and prevent sharp price swings.
Weak Downstream Demand Limits Upside
However, downstream demand remains weak. The industry is in its traditional off-season, with mills reporting insufficient new orders. Operating rates in major spinning regions have fallen to 73.1%, and yarn inventories have built up to 30 days. Mills are only replenishing for immediate needs, with little appetite for stockpiling. Once reserve cotton enters the market, it will be difficult to generate strong buying interest to absorb the additional supply. This means even with added supply, weak demand will cap any price increase.
Rule Changes Curb Speculation
The trading rules for this release reflect a balanced approach between price stability and market pricing. The base price uses a dual-anchor mechanism, weighting domestic and international cotton spot indices equally, with weekly adjustments. Based on recent domestic-international price spreads, the base price is around 16,216 yuan/ton, which is competitive compared to current spot prices and attractive for mills with immediate needs. Strict eligibility criteria allow only textile enterprises to bid, and purchased reserve cotton must be used for self-consumption, with resale strictly prohibited. Violators face permanent disqualification from future reserve auctions. This effectively blocks traders and speculative funds from participating, leading to more rational bidding and prices likely close to the base price. Market expectations suggest the released cotton will be mainly imported, with stable quality but limited high-grade content, unable to meet demand for high-count yarns, leaving the tight supply of high-quality Xinjiang cotton unresolved.
Global Production Cuts Provide Long-Term Floor
Looking at the global fundamentals, medium- to long-term support for cotton prices remains solid. Xinjiang cotton fields are in the critical boll development stage, and persistent high temperatures since July are stressing crop growth, fueling expectations of a new-season production shortfall. The latest USDA supply-demand report forecasts global cotton production for 2026/2027 at 25.53 million tons, down 3.8% year-on-year, shifting the global supply-demand balance toward a tight equilibrium. This provides underlying support for forward prices. Combined with the current high domestic-international price spread of 3,010 yuan/ton, the dual-anchor pricing mechanism means international price volatility will directly affect the reserve release base price. A stronger foreign market would lift the release cost, further limiting downside for domestic prices.
Market Outlook: Short-Term Pressure, Long-Term Support
The bearish impact of the release has already been priced in. On July 15, the main Zhengzhou cotton futures contract closed at 16,075 yuan/ton, down 45 yuan. In the near term, initial auctions on July 20 will see active participation from mills with low raw material inventories and strong replenishment needs for regular yarns. Early trading may see some premium, providing a temporary floor for spot and futures prices. The high-temperature threat to Xinjiang crops also limits the downside. However, as the release continues, cumulative supply pressure will weigh on near-term contracts, with policy capping any upside. The 16,000 yuan mark will be tested repeatedly.
Over the medium to long term, 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. As the release winds down, market focus will shift to Xinjiang crop conditions, new-season opening prices, and the recovery of downstream orders during the traditional "golden September and silver October" peak season. The price floor remains solid.