On July 20, China's reserve cotton release will begin, with daily sales and flexible volumes. This counter-cyclical operation comes as domestic commercial stocks have fallen to 2.8388 million tons from a peak of 5.6981 million tons at the start of the year, with Xinjiang reserves at just 1.6712 million tons. The gap before new-crop arrival is nearly two months, creating objective tightness.
Supply Gap and Policy Anchoring
The pricing adopts a dual-anchor mechanism equally weighted by domestic and international spot indices, with weekly adjustments. Based on recent spreads, the floor price is around 16,216 yuan/ton, offering a clear discount to spot. Strict rules limit bidding to textile mills for self-use only, barring traders and speculators. This ensures rational bidding, with transaction prices likely near the floor.
Weak Downstream Demand Caps Buying
Demand is tepid: mill run rates have fallen to 73.1%, and yarn inventories have built up to 30 days. Mills are restocking only for immediate needs, with little appetite for hoarding. While initial auctions may see some premium due to low mill stocks, the cumulative supply pressure will weigh on near-term contracts.
Global Production Cuts Underpin Medium-Term Floor
The USDA's latest report projects 2026/27 global cotton output at 25.53 million tons, down 3.8% year-on-year, shifting the balance toward tightness. A 3,010 yuan/ton domestic-international spread means global price moves directly affect reserve floor prices. Meanwhile, heatwaves in Xinjiang during the boll-setting stage raise crop-loss expectations, and high-grade Xinjiang cotton remains scarce.