The supply-demand balance of the cotton market is undergoing a subtle shift. On July 15, 2026, the central reserve cotton sales announcement was officially released, with competitive bidding starting on July 20, limited to textile mills. This move directly reversed the market's previous expectation of tight supply, causing domestic and international cotton prices to fall, albeit modestly, indicating ongoing market tug-of-war.
Price Decline and Narrowing Spread
The average settlement price of Zhengzhou cotton futures main contract was 16,057 yuan/ton, down 148 yuan/ton or 0.9% week-on-week. The National Cotton Price B Index, representing standard-grade lint cotton in inland China, averaged 17,659 yuan/ton, down 80 yuan/ton or 0.5%. Internationally, the New York cotton futures main contract averaged 80.37 cents/lb, down 0.1%, but the International Cotton Index (M) rose 1.6% to 89.32 cents/lb due to exchange rates and freight. The domestic-international cotton price spread narrowed by 310 yuan/ton, a 9.7% contraction. This means domestic cotton has become more cost-competitive, easing procurement pressure for mills prioritizing local resources.
Notably, cotton yarn and polyester staple fiber prices diverged. Domestic C32S carded yarn averaged 23,318 yuan/ton, up only 0.1%, while polyester staple fiber jumped 223 yuan/ton to 7,455 yuan/ton, a 3.1% increase. The rise in chemical fiber substitutes may support cotton demand for spinning, but sustainability of this trend needs monitoring.
Global Supply-Demand: Narrowing Deficit, Intensifying Competition
The USDA July report showed the 2026/27 global cotton production-consumption deficit narrowed by 223,000 tons from June, with ending stocks still high at 15.51 million tons. Reduced tightness pressures international prices. US cotton export sales hit a seasonal low, while Brazilian cotton, with record production, price advantages, and improved logistics, is surging. SECEX data shows Brazil's average daily exports in the second week of July surged 81.5% year-on-year, solidifying its position as the world's top cotton exporter and squeezing US market share.
Weather remains a factor. As of July 12, US cotton good-excellent rating was 44%, down 2 percentage points; about 46% of US cotton areas faced drought. The next 2-3 weeks are critical for yield formation; persistent heat could lower yield expectations. In India, monsoon rains boosted planting progress, but uneven distribution in central regions makes July-August weather a variable. Chinese cotton growth is generally stable, with Xinjiang having favorable conditions but requiring vigilance against sustained high temperatures.
Macro and Policy: Domestic Resilience vs. External Headwinds
Domestic consumption data provides some support. National Bureau of Statistics data shows retail sales of consumer goods in H1 2026 grew 1.3% year-on-year, with apparel, footwear, and textile retail sales from above-designated-size units up 6.7%, significantly outpacing overall growth. Consumer resilience in clothing continues to support downstream demand for raw materials.
However, external demand faces trade environment constraints. The US Treasury paid about $49.2 billion in tariff refunds in June due to a Supreme Court ruling, expanding the monthly deficit to $120 billion. Yet the US continues to advance new tariff frameworks, planning 25% tariffs on thousands of Brazilian goods from July 22, including apparel and machinery. Trade friction may weaken the Brazilian real, enhancing Brazilian cotton's export competitiveness and pressuring US cotton prices. Global inflation concerns persist, with the New York Fed survey showing over 40% of firms plan to pass tariff costs through price increases. Combined with Middle East tensions pushing Brent crude above $88/barrel, energy and tariff factors are jointly raising global inflation expectations.
Impact of Reserve Cotton Release
The first week's floor price for the reserve cotton sale is 16,291 yuan/ton, significantly below current spot prices. This spread will attract mills to actively bid, increasing supply in the short term and capping price upside. The restriction to textile mills ensures targeted supply and curbs speculation.
From mill behavior, operating rates in early July were up 1.1 percentage points year-on-year to 79.7%, and the share of mills planning to purchase cotton increased 9.9 percentage points year-on-year. This indicates recovering downstream demand, but mills remain cautious about high-priced raw materials, making the reserve release timely.
Overall, cotton prices are likely to trade in a range in the short term: downside supported by reserve floor prices and domestic consumption, upside capped by global supply-demand looseness and trade frictions.