In July, the domestic cotton market presented a typical tug-of-war between policy support and weak demand: reserve cotton was fully sold in the first month of release, yet cotton yarn prices remained nearly flat month-on-month, and finished goods inventories continued to accumulate. This divergence between supply and demand suggests that while cotton prices have short-term support, upward momentum cannot be effectively transmitted downstream, squeezing mills' profit margins from both ends.
Supply-Demand Data Behind the Signals
According to the latest forecast from the China Cotton Association, the 2026/27 national cotton output is projected at 7.15 million tons, down 3.5% year-on-year, with Xinjiang contributing 6.857 million tons, a similar decline, accounting for as much as 95.9% of the national total. The expected yield of 166.1 kg/mu, up 0.4%, indicates that area reduction is the main driver of lower output, not weather disasters. Meanwhile, consumption is expected to reach 8.92 million tons, up 1.7%, imports 1.62 million tons, up 1.3%, and ending stocks to fall to 6.236 million tons, down 2.5%. This combination of falling output, rising demand, and declining inventories provides medium-term bottom support for cotton prices.
Notably, the 2025/26 import estimate was sharply revised up to 1.6 million tons, up 51.9% year-on-year, reflecting the rapidly growing dependence on cheaper foreign cotton. July imports alone were 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year, with Australia's share jumping to 59.8%, up 31.9 percentage points, indicating a shift toward more cost-effective Australian cotton. For buyers, this means the stability and cost advantage of foreign cotton channels remain key bargaining chips.
Reserve Release and Inventory Structure Changes
The reserve cotton release launched on July 20 had cumulative transactions of 80,200 tons by end-July, all sold, at an average price of 17,253 yuan/ton, equivalent to 17,871 yuan/ton for Grade 3128B, with an average premium of 1,638 yuan/ton. The premium narrowed from earlier highs as enterprises turned rational. This policy tool effectively filled the supply gap before the new crop, but also confirmed the tightness of commercial stocks—commercial inventories fell 19.4% month-on-month to 2.5 million tons, though still up 14.1% year-on-year. Industrial inventories inched up 2.3% to 888,000 tons, indicating mills maintained low raw material stocks during the off-season, only restocking for immediate needs.
This pattern of commercial destocking and low industrial inventories means traders and ginners face greater selling pressure, while mills hold the procurement upper hand. For upstream suppliers, the destocking pace before the new crop will be critical to avoid price collapses from concentrated selling.
Xinjiang Capacity Shift and Divergent Textile Operations
National yarn output in July fell 2.2% year-on-year and 5.9% month-on-month to 1.814 million tons, but Xinjiang output rose 17% year-on-year to 321,000 tons, with only a 2.6% month-on-month dip. This stark contrast highlights the accelerating westward shift of textile capacity. Xinjiang's advantages in electricity, land, and raw cotton are making it the core destination for new investment. For inland mills, this means a widening cost disadvantage; developing differentiated products such as high-count yarn or blends may be a practical path to compete.
Meanwhile, textile and apparel exports reached $28.79 billion in July, up 7.6% year-on-year but down 1.6% month-on-month; cotton product exports fell 7.3% month-on-month to $5.99 billion, with EU down 11.9% and Belt and Road countries down 8.9%. Weak export momentum and Southeast Asian competition limit cotton price support.
Price Trends and Spread Changes
Domestic cotton prices peaked and fell in July. The CCIndex3128B monthly average was 17,695 yuan/ton, up 15.2% year-on-year and 0.8% month-on-month. Early-month heat and drought in Xinjiang fueled reduction expectations, pushing prices up; mid-month reserve releases eased supply, and prices fluctuated lower. International prices firmed, with CotlookA averaging 88.9 US cents/lb, up 3% month-on-month, equivalent to 14,887 yuan/ton after 1% tariff, 2,808 yuan lower than domestic prices, narrowing the spread by 221 yuan. A narrower spread reduces the cost advantage of imports, potentially curbing import demand, but also eases downward pressure on domestic prices.
For textile mills, the still-wide spread makes imported cotton a cost-saving option, but currency and tariff policy changes warrant attention.
Strategies Ahead of New Crop Arrival
Overall, the market before the new crop will maintain a balance between policy-backed supply and pending autumn/winter order demand. Short-term prices have upward momentum but are limited by downstream acceptance. Industry players should plan ahead to navigate potential volatility.