Cotton prices edged lower last week, ending a multi-week rally. The correction was driven by two key factors: China's official announcement of reserve cotton sales, which quickly reversed market expectations of supply tightness, and weak US export data coupled with reduced drought area in major US growing regions, cooling international optimism.
Price Transmission and Spread Changes
Zhengzhou cotton futures average settlement price for the main contract fell 148 yuan/ton week-on-week to 16,057 yuan/ton, a drop of 0.9%. The China Cotton Price Index B also declined 80 yuan/ton to 17,659 yuan/ton. Internationally, NY cotton futures average settlement price edged down 0.12 cents/lb to 80.37 cents/lb, but the Cotlook A Index rose 1.6% to 89.32 cents/lb due to exchange rate and freight factors. The domestic-international price gap narrowed by 310 yuan/ton, or about 9.7%, indicating improved competitiveness of imported cotton.
Cotton yarn and polyester staple fiber prices saw slight increases. Domestic C32S combed yarn averaged 23,318 yuan/ton, up 20 yuan/ton; imported yarn averaged 22,900 yuan/ton, up 79 yuan/ton, keeping the spread at 418 yuan/ton. Polyester staple fiber jumped 223 yuan/ton to 7,455 yuan/ton, directly linked to cost pass-through from crude oil breaking $88/barrel.
Macro and Policy Dual Pressures
US trade policy uncertainty continues to ferment. After the 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. However, the US is not slowing tariff implementation, planning to impose 25% tariffs on thousands of Brazilian goods from July 22, covering apparel, motors, and paper. Analysis suggests this could weaken the Brazilian real, boosting Brazilian cotton's price competitiveness globally and pressuring US cotton exports.
Domestic consumption showed positive signals. National Bureau of Statistics data shows H1 retail sales of consumer goods grew 1.3% YoY, with apparel, footwear, and textile sales at units above designated size growing 6.7%, significantly outpacing overall retail growth. This indicates resilience in domestic textile demand, providing a floor for cotton consumption.
Global Supply-Demand Balance Marginally Loosens
The USDA July report cut the 2026/27 global cotton production-consumption gap by 223,000 tons from June, with ending stocks still high at 15.51 million tons. The easing supply tightness pressures international prices. US cotton is entering the critical squaring, flowering, and boll-setting period. As of July 12, the good-to-excellent rate was 44%, down 2 percentage points week-on-week, with about 46% of growing areas under drought. Weather over the next 2-3 weeks will be key to yield outcomes.
Brazilian cotton exports remain strong. Daily exports in the second week of July surged 81.5% YoY, cementing Brazil's position as the world's largest cotton exporter. Indian monsoon rains have improved planting progress, but uneven distribution in central zones makes July-August weather a core variable.
Impact of Reserve Cotton Release
On July 15, China National Cotton Reserves Corporation announced reserve cotton sales starting July 20 via open auction on the National Cotton Trading Market, limited to textile mills. The first week's floor price is 16,291 yuan/ton, significantly below current spot prices, directly pressuring the market. Early July data shows mill operating rates at 79.7%, up 1.1 percentage points YoY, with 46.3% of mills planning to purchase cotton, up 9.9 percentage points, confirming real downstream demand. The reserve release will increase supply and curb speculation in the short term but won't alter the fundamental domestic consumption recovery.
Outlook and Recommendations
Cotton prices face short-term pressure but limited downside. Reserve sales will cap prices temporarily, but intertwined factors—global inflation expectations, US weather premium, strong Brazilian exports, and domestic consumption resilience—suggest prices will remain range-bound.