Cotton prices corrected this week as three bearish factors converged: the release of China's state reserve cotton, weak US export data hitting a seasonal low, and shrinking drought area in key US growing regions. However, the market did not panic, suggesting current pricing has partially absorbed downside risks.
Reserve Cotton Enters Market: A Price Anchor for Precise Supply
The China National Cotton Reserves Corporation announced on July 15 that it would auction reserve cotton via the National Cotton Trading Market starting July 20, exclusively for textile mills. The first-week floor price was set at 16,291 yuan/ton, significantly below the spot China Cotton Price Index B of 17,659 yuan/ton, but above the import cost of approximately 14,762 yuan/ton. This pricing strategy aims to provide mills with a supplementary supply without crashing the market.
Zhengzhou Cotton Futures main contract averaged 16,057 yuan/ton, down 148 yuan/ton (0.9%) week-on-week, while the spot B index fell 80 yuan/ton to 17,659 yuan/ton (0.5%). The larger drop in futures indicates the market has already priced in improved supply expectations. The domestic-international price spread narrowed by 310 yuan/ton to 2,897 yuan/ton (a 9.7% contraction), further weakening imported cotton's price advantage.
External Demand Variables: Tariff Policy and Brazilian Competition
US trade policy remains a key disruptor. The US Trade Representative plans to impose 25% tariffs on thousands of Brazilian goods from July 22, including apparel and machinery. While this may suppress Brazilian exports to the US in the short term, it could force Brazil to redirect cotton to other markets at lower prices, intensifying competition for US cotton. Brazilian cotton exports are already surging: daily exports in the second week of July averaged 10,000 tons, up 81.5% year-on-year, cementing Brazil's position as the world's top cotton exporter.
The USDA July report narrowed the 2026/27 global cotton deficit by 223,000 tons from June, with ending stocks at 155.1 million tons. US cotton export sales remained weak through July 9, and the crop condition rating stood at 44% good-to-excellent, down 2 percentage points. Critically, 46% of US cotton acreage faces drought, with Texas experiencing persistent heat. The next 2-3 weeks are critical for yield formation.
Domestic Resilience: Textile Retail as a Bright Spot
China's textile and apparel retail showed surprising strength. National Bureau of Statistics data for the first half of 2026 shows total retail sales grew 1.3% year-on-year, but sales of clothing, footwear, and textiles by units above designated size jumped 6.7% (3.9% in June alone), far outpacing the overall figure. This indicates robust consumer demand for apparel despite a moderate macro recovery.
Mill operating rates stood at 79.7% in early July, up 1.1 percentage points year-on-year, with 46.3% of mills planning to purchase cotton, up 9.9 percentage points. The reserve sale is timely, relieving inventory pressure without fueling spot price spikes. Polyester staple fiber prices rose 223 yuan/ton to 7,455 yuan/ton, increasing substitution pressure on cotton.
Key Window: July-August Weather and Policy Resonance
Cotton prices are currently trapped in a narrow range with mixed signals. Upside risks include persistent heat in US growing areas, uneven monsoon rains in India, and energy-driven inflation from Middle East tensions. Downside pressures come from continued reserve releases, surging Brazilian exports, and deteriorating trade environment from US tariffs.