The reserve cotton release policy has landed, shifting market focus from the policy itself to its actual impact on supply-demand dynamics. The detailed rules released by CNCRC on July 14 indicate that the new round of release will start on July 20, with daily sales volumes adjusted flexibly and no fixed end date, leaving ample room for regulatory adjustment.
Pricing and Access: Double Insurance for Precise Regulation
This round introduces a dual-anchor pricing mechanism, equally weighting domestic and international cotton spot indices, with the base price adjusted weekly. Based on recent domestic-foreign price spreads, the first week's base price is around 16,216 yuan/ton, offering a clear price advantage over the current spot market. This design essentially creates an automatic buffer between international price fluctuations and domestic supply-demand dynamics. More critically, the new access rules restrict bidding to textile mills for self-use, with permanent disqualification for resale violations. This effectively excludes traders and speculative capital, ensuring rational bidding and prices likely close to the base price.
Inventory and Demand: Dual Squeeze from Supply Gap and Weak Season
The core logic behind this release is to fill the supply gap during the transition between old and new cotton seasons. Domestic commercial cotton inventories have been declining, dropping from a peak of 5.6981 million tons at the beginning of the year to 2.8388 million tons, a reduction of over half. Xinjiang inventories are down to 1.6712 million tons, with high-grade spot resources tightening. With nearly two months until the new cotton harvest, intervention is needed to prevent sharp price volatility. However, downstream demand is weak. The industry is in its traditional off-season, with mill run rates in major areas falling to 73.1% and yarn inventories piling up to 30 days. New orders are insufficient, and mills are only restocking for immediate needs. This means the price suppression effect of the release may be more pronounced than expected.
Global Production Decline: Anchor for Medium-to-Long-Term Support
Despite short-term pressure, medium-to-long-term cotton prices have solid support. The latest USDA report projects global cotton production for 2026/2027 at 25.53 million tons, down 3.8% year-on-year, shifting global supply-demand toward a tight balance. Combined with the current domestic-foreign spread of 3,010 yuan/ton, international price fluctuations will directly impact the reserve cotton base price, further limiting domestic downside. Xinjiang cotton fields are in a critical growth stage, with persistent high temperatures in July putting pressure on crops and raising expectations of a production decline. The reserve release can only temporarily supplement short-term supply; it cannot change the core logic of global production cuts and scarce high-quality domestic cotton. As the release concludes, market focus will shift to Xinjiang cotton growth, new cotton opening prices, and downstream recovery during the peak season.
Market Game: Repeated Battles at the 16,000 Level
In the short term, at the start of the first auction on July 20, mills with low raw material inventories will show strong demand, potentially driving up bid prices initially. Combined with Xinjiang heat-related production cut expectations, a deep decline is unlikely. However, as the release continues, accumulated supply will pressure near-term contracts, limiting upside. The 16,000 level will be repeatedly tested. On July 15, the main Zheng cotton contract closed at 16,075 yuan/ton, down 45 yuan, already partially pricing in the bearish news.