The 2026 reserve cotton release policy has been finalized, with sales starting July 20 at a floor price of approximately 16,216 yuan per ton, offering a clear discount to current spot prices. The core intent is to smooth the supply gap between the old and new crop years, not to unilaterally suppress prices. However, the market now sits at a crossroads of opposing forces—low inventories versus weak demand, short-term supply additions versus medium-term production decline expectations.
Supply Gap vs. Actual Demand
Domestic commercial cotton stocks have fallen from 5.6981 million tons at the start of the year to 2.8388 million tons, a decline of over 50%, with Xinjiang reserves at just 1.6712 million tons. With nearly two months until the new crop concentrates on the market, without reserve supplementation, the market would face a stage of tight supply or even disruption risk. This is the direct reason for the policy intervention.
But the downstream textile sector is in its traditional off-season, with insufficient new orders. The operating rate of mills in major regions has dropped to 73.1%, and yarn inventories have piled up to 30 days. Companies are adopting a conservative procurement stance, only restocking essential needs, with little willingness to build inventories. This means that after reserve cotton enters the market, it will be difficult to generate strong buying to absorb incremental supply in the short term, limiting upward price potential.
Pricing Mechanism and Trading Threshold
This release adopts a dual-anchor pricing mechanism, weighting the domestic and international cotton spot indices equally at 50% each, with the floor price adjusted weekly. Based on recent domestic-international price spreads, the floor price is around 16,216 yuan per ton, offering clear cost advantages that appeal to mills with immediate needs. Trading rules are further tightened—only physical textile enterprises are allowed to bid, and purchased reserve cotton is restricted to self-use, with resale or speculation strictly prohibited. Violators face permanent disqualification from reserve transactions. This effectively blocks traders and speculative capital from entering the auction, creating a more rational bidding environment where transaction prices are likely to hover near the floor price.
Market participants generally expect the released cotton to be primarily imported, with stable overall quality but limited high-grade content, insufficient for high-count yarn production. This means the tight supply of high-quality Xinjiang cotton will not ease in the short term, and high-count yarn mills will need to source elsewhere.
Global Production Decline Logic and Weather Disruptions
From a medium-term perspective, the cotton price floor has solid support. The latest USDA supply-demand report shows global cotton production for 2026/2027 is projected at 25.53 million tons, down 3.8% year-on-year, shifting the supply-demand balance toward a tight equilibrium. Combined with the current domestic-international price spread of 3,010 yuan per ton, international cotton price fluctuations will directly transmit to the domestic reserve cotton floor price. A stronger external market will simultaneously raise the cost of reserve releases, further compressing the downside room for domestic prices.
Xinjiang cotton fields are in the critical boll development stage, and persistent high temperatures since July continue to stress cotton growth, fueling market expectations of a new crop production decline. This factor will continue to ferment until the new crop comes to market, serving as a key bullish catalyst.
Market Game and Post-Release Rhythm
The bearish impact of the reserve release has already been priced in, with Zhengzhou cotton futures weakening last week. On July 15, the main contract closed at 16,075 yuan per ton, down 45 yuan for the day. In the short term, at the start of the first auction on July 20, mills generally have low raw material inventories, and regular yarn producers have strong replenishment demand, leading to high participation willingness. Early transactions may see some premium, with essential demand providing a temporary floor for spot and futures prices.
However, as the release continues and daily supplies accumulate, the impact of incremental supply will gradually unfold, putting sustained pressure on near-month contracts. The 16,000 yuan mark will be tested repeatedly, with a weak and volatile short-term trend. From a medium-term perspective, the reserve release can only temporarily supplement short-term circulation supply but cannot change the core logic of global production decline and tight domestic high-quality cotton supply. As the release nears its end, market focus will shift to Xinjiang cotton growth conditions, new crop opening prices, and the recovery of downstream orders during the 'golden September and silver October' peak season. The price floor remains solid.