The latest monthly report from the China Cotton Association shows that the country's cotton output in 2026/27 is projected at 7.15 million tons, down 3.5% year-on-year, while consumption is expected to reach 8.92 million tons, up 1.7%. The supply-demand gap widens to 1.77 million tons, implying greater reliance on reserve releases and policy imports before the new crop arrives. For mills, the cost center may continue to rise, but whether end orders can absorb price increases remains the key variable.
Supply-Demand Dynamics: Price Game Under Tight Balance
The output decline is mainly due to a 3.9% reduction in planting area to 43.066 million mu, while yield edged up 0.4% to 166.1 kg/mu, insufficient to reverse the total drop. Regionally, Xinjiang's output is forecast at 6.857 million tons, down 3.5%; the Yellow River and Yangtze River regions fall 2.4% and 14.3% respectively, the latter hit by excessive rainfall. This divergence means inland small mills may face higher raw material costs than Xinjiang counterparts, further strengthening Xinjiang's cluster advantage.
On the consumption side, the 2025/26 season saw both supply and demand grow, with capacity shifting to Xinjiang driving demand recovery. However, July yarn output fell 5.9% month-on-month to 1.814 million tons, while Xinjiang grew 17% to 321,000 tons, indicating a contraction in inland spinning. This structural shift is reshaping cotton logistics and trade flows, urging inland mills to adjust procurement strategies, relying more on reserve or imported cotton.
Market Response: Reserve Sales Hot, Price Gap Narrows
Reserve cotton releases started on July 20 and all listed lots were sold, with cumulative sales of 80,200 tons by July 31 at an average price of 17,253 yuan/ton, with an average premium of 1,638 yuan. Early premiums were higher, but later rationalized as mills became price-sensitive. This shows rigid dependence on policy cotton, yet also growing price sensitivity as mills weigh reserve versus market cotton.
International cotton prices strengthened, with CotlookA averaging 88.9 US cents/lb, up 3% month-on-month, and after 1% tariff, the gap to domestic prices narrowed to 2,808 yuan, down 221 yuan from the previous month. Reduced foreign cotton cost-effectiveness, coupled with reserve releases substituting for imports, led July imports to fall 16.6% month-on-month to 92,000 tons. However, Australian cotton's share rose to 59.8%, indicating a shift in import sources.
Prices and Inventories: Short-term Support, Long-term Concerns
Domestic cotton prices spiked then fell in July, with CCIndex3128B averaging 17,695 yuan/ton, up 15.2% year-on-year but only 0.8% month-on-month. Early heat and drought fueled output cut expectations, but reserve releases eased supply pressure. Meanwhile, cotton yarn prices struggled to follow, with 32s carded yarn averaging 23,328 yuan/ton, barely changed, squeezing margins. Finished goods inventories accumulated, and textile and apparel exports fell 1.6% month-on-month to $28.79 billion, with EU exports down 11.9%, indicating weak overseas demand.
By end-July, commercial inventories stood at 2.5 million tons, down 19.4% month-on-month but up 14.1% year-on-year; industrial inventories rose 2.3% to 888,000 tons. De-stocking is clear, but the industrial inventory increase suggests mills replenished at low prices, risking write-downs if prices fall. The USDA August report cut global ending stocks by 326,600 tons, bringing the stocks-to-use ratio to 56.7%, intensifying global supply concerns, but domestic downstream absorption is weak, so the price gap may continue to narrow.