In July, domestic cotton prices surged then retreated, with reserve sales fully subscribed yet failing to shift downstream buying caution. According to the China Cotton Association, the CCIndex 3128B monthly average rose 15.2% YoY but only 0.8% MoM, reflecting sluggish gains amid rising finished goods inventories and limited yarn price pass-through. Meanwhile, international prices strengthened on tightening supply-demand expectations, narrowing the domestic-import spread to RMB 2,808/ton, down RMB 221 from June, reducing the appeal of imported cotton.
Supply-Demand Dynamics: Production Cut vs. Reserve Release
Ahead of the new crop, the market is in a critical tug-of-war. Reserve sales launched on July 20, with 80,200 tons fully subscribed by end-July, averaging a premium of RMB 1,638/ton. The premium narrowed as releases continued, indicating a shift from panic buying to rational replenishment. The release filled the supply gap before new cotton arrives but did not suppress price upside: the Association projects 2026/27 output at 7.15 million tons, down 3.5% YoY, with Xinjiang contributing 6.857 million tons (-3.5%), while consumption is expected to rise 1.7% to 8.92 million tons, widening the supply deficit to 1.77 million tons, necessitating imports and stock drawdowns.
On imports, July saw 92,000 tons, down 16.6% MoM but up 72.5% YoY, with Australian cotton dominating at 59.8% share. January-July cumulative imports reached 1.026 million tons, double YoY, highlighting rising import dependence. The USDA August report cut global ending stocks by 326,600 tons, pushing the stocks-to-use ratio to 56.7%, reinforcing tight supply expectations. Thus, even with reserve releases, near-term prices retain upward support, and seed cotton opening prices are likely to stay elevated.
Industry Transmission: Off-Season Inventory Buildup and Export Dip
High cotton prices are not passing through effectively, with the textile sector in a clear off-season. July yarn output fell 2.2% YoY and 5.9% MoM to 1.814 million tons, though Xinjiang output rose 17% YoY to 321,000 tons, reflecting ongoing capacity migration but overall weak orders. Domestic 32s pure cotton yarn averaged RMB 23,328/ton, down RMB 8 MoM but up 13.33% YoY, far below cotton's price gain, squeezing spinner margins. Downstream mills resist yarn hikes, and finished goods inventories accumulate.
Exports of textiles and apparel reached $28.79 billion in July, up 7.6% YoY but down 1.6% MoM, with cotton product exports at $5.99 billion, down 7.3% MoM, including double-digit declines to the EU (-11.9%) and single-digit drops to the US (-4.2%) and Belt and Road countries (-8.9%). Southeast Asian competition and trade policy uncertainty persist. Commercial cotton inventories fell to 2.5 million tons (-19.4% MoM), while industrial stocks inched up 2.3% to 888,000 tons, indicating cautious replenishment.
Regional Divergence: Xinjiang Flat, Inland Mixed
Output prospects vary by region. Xinjiang, despite reduced acreage, is expected to hold yield steady, with output of 6.857 million tons (-3.5%). The Yellow River region shows improved growth, with yields up 2.6%, while the Yangtze region suffers from excess rain, with yields up only 2.1% and output down 14.3%. This divergence implies uneven quality and harvest timing, affecting sourcing strategies and pricing.