The reserve cotton release policy has landed, with the first auction scheduled for July 20. The China National Cotton Reserves Corporation set the base price using a dual-anchor mechanism weighted equally by domestic and international spot indices, estimated at around 16,216 yuan/ton—a clear discount to current market prices. The policy restricts participation to physical textile mills for self-use, prohibits resale, and permanently bans violators. This threshold effectively excludes traders and speculative capital, making bidding more rational and prices likely close to the base.
Industrial Impact
Domestic commercial stocks have fallen from 5.6981 million tons at the start of the year to 2.8388 million tons, a drop of over 50%. Xinjiang stocks stand at just 1.6712 million tons, with high-grade supplies tightening. With nearly two months until the new crop arrives, the supply gap between old and new cotton is the main trigger for this release. Reserve cotton inflows can smooth this transition and prevent sharp price swings. However, the released cotton is expected to be mostly imported, with limited high-grade content, failing to meet demand for high-count yarns. The scarcity of quality Xinjiang cotton will persist.
Downstream textile demand is in the traditional off-season, with weak support. Industry data shows mill operating rates have fallen to 73.1%, yarn inventories pile up to 30 days, and new orders are insufficient. Mills are buying only for immediate needs, with little desire to stockpile. This means fresh reserve supply will struggle to find strong buying support, and supply pressure may accumulate.
Bull-Bear Dynamics
The bearish impact of the release was already priced in. On July 15, the main Zheng Cotton contract closed at 16,075 yuan/ton, down 45 yuan, with a muted reaction to the policy. In the near term, initial auctions may see strong participation from mills with low inventories, especially for regular yarns, potentially driving some premium bids. This, combined with heat stress on Xinjiang cotton fields during the critical boll-forming stage and rising crop-cut expectations, prevents deep price declines.
Global fundamentals provide medium-to-long-term support. The USDA's latest report projects 2026/27 global cotton output at 25.53 million tons, down 3.8% year-on-year, shifting the supply-demand balance to a tight equilibrium. The current domestic-international price spread of 3,010 yuan/ton means that, under the dual-anchor mechanism, international price moves directly affect the reserve base price, limiting downside.
As the release continues, the cumulative supply overhang will pressure near-term contracts, capping upside. The 16,000 mark will be tested repeatedly. Over the medium-to-long term, the release only temporarily supplements supply; it cannot alter the core logic of global production cuts and scarce quality Xinjiang cotton. Once the release winds down, market focus will shift to Xinjiang crop conditions, new-crop opening prices, and the recovery of downstream demand in the peak season, with solid price support intact.