Domestic cotton prices peaked then fell in July, while the first month of reserve releases saw full absorption, reflecting a delicate balance between supply gaps and weak demand. The China Cotton Association's latest monthly report projects 2026/27 output at 7.15 million tons, down 3.5%, with consumption rising 1.7% to 8.92 million tons and ending stocks down 2.5%. The supply-demand mismatch supports short-term price strength, but downstream absorption capacity is the key variable.
Supply-Demand Data Signals
The output reduction stems from a 3.9% decline in planted area to 43.066 million mu, with yields up 0.4% to 166.1 kg/mu, broadly in line with expectations. Xinjiang, the main producing region, is expected to produce 6.857 million tons, down 3.5%, but yields are flat year-on-year, indicating that weather disruptions have not caused substantial losses. The more notable signal is consumption resilience: the 8.92 million ton projection is underpinned by textile capacity migration to Xinjiang, where July yarn output rose 17% year-on-year, far outpacing the national average.
Import data reveal structural shifts. July imports were 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year. Australian cotton's share jumped to 59.8%, up 31.9 percentage points, while Brazilian and US shares were 18.8% and 6.7%, respectively. This concentration reduces bargaining power, and reserve releases partially substitute for imports. Small mills, facing quota shortages, bid for imported reserves at an average premium of 1,638 yuan per ton, indicating rigid demand for high-grade cotton.
Price Transmission and Inventory Pressure
Price movements diverged domestically and internationally. The CCIndex3128B averaged 17,695 yuan per ton, up 15.2% year-on-year but only 0.8% month-on-month, with declines late in the month. The CotlookA index averaged 88.9 US cents per pound, up 3% month-on-month, narrowing the domestic-international spread to 2,808 yuan per ton. Lower foreign cotton cost-effectiveness dampened import appetite, while domestic price increases failed to transmit downstream; 32-count cotton yarn averaged 23,328 yuan per ton, nearly flat.
Inventory data corroborate this stalemate: commercial stocks fell 19.4% month-on-month to 2.5 million tons but remained 14.1% higher year-on-year; industrial stocks rose 2.3% to 888,000 tons. More concerning is finished goods accumulation: July yarn output fell 5.9% month-on-month, exports dropped 1.6%, with cotton product exports down 7.3% month-on-month and EU-bound shipments down 11.9%. Off-season orders, trade policy volatility, and Southeast Asian competition for low-end orders are squeezing margins.
Event Impact and Outlook
Reserve releases began July 20, with cumulative sales of 80,200 tons by month-end at an average price of 17,253 yuan per ton (17,871 yuan per ton for 3128B equivalent). Initial premiums were high but narrowed as releases continued, signaling easing supply anxiety. The USDA August report lowered global ending stocks by 326,600 tons, pushing the stocks-to-use ratio to 56.7%, reinforcing tight supply expectations and providing a floor for international prices.
For the new season, seed cotton opening prices are expected to be high, but downstream acceptance is critical. If cotton prices stay elevated while yarn prices lag, mill profits will remain under pressure, potentially forcing output cuts or product mix changes. Xinjiang's cost advantages may partially offset raw material costs, but inland small mills face more direct survival challenges.