In July, domestic cotton prices peaked then fell, with the China Cotton Index (CCIndex 3128B) averaging 17,695 yuan/ton, up 15.2% year-on-year but only 0.8% month-on-month, while the international Cotlook A index rose 3% month-on-month, narrowing the domestic-international price gap to 2,808 yuan. This contrast reveals the core contradiction: supply reduction expectations versus weak demand, with industry profits being squeezed from upstream to midstream.
Supply-Demand Structure: Slight Output Decline Under Tight Balance Expectations
The China Cotton Association forecasts 2026/27 national cotton output at 7.15 million tons, down 3.5% year-on-year, with Xinjiang contributing 6.857 million tons, accounting for 95.9%. Yield is expected to edge up 0.4% to 166.1 kg/mu, indicating that area reduction is the main driver. Notably, the Yangtze River region may see output drop 14.3% to 72,000 tons due to excessive rainfall, while the Yellow River region shows better growth with yield up 2.6%.
On imports, 2026/27 is projected at 1.62 million tons, up 1.3%, but July imports were only 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year. Australian cotton arrivals surged, accounting for 59.8%, while Brazil and the US held 18.8% and 6.7% shares. This shift reflects global supply adjustments—US production cut expectations and Australian cotton's cost-effectiveness.
Consumption is estimated at 8.92 million tons, up 1.7%, with ending stocks at 6.236 million tons, down 2.5%. 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. This suggests cotton prices will find support before the new crop arrives, but upside is limited by downstream acceptance.
Industry Chain Transmission: Reserve Releases and Spinning Mill Margin Rebalancing
Reserve releases began July 20, with 80,200 tons sold by month-end, all subscribed, averaging a premium of 1,638 yuan/ton, with the highest at 19,000 yuan. Spinning mills participated actively, especially small and medium mills lacking import quotas, which used imported reserve cotton as an alternative. Premiums narrowed as sentiment turned rational, indicating market adaptation.
However, releases did not reverse mills' profit woes. July 32s pure cotton yarn averaged 23,328 yuan/ton, down only 8 yuan month-on-month but up 13.3% year-on-year, while cotton prices rose more, causing yarn to lag. National Bureau data shows July yarn output at 1.814 million tons, down 5.9% month-on-month, with Xinjiang at 321,000 tons, up 17% year-on-year but down 2.6% month-on-month. The trend of textile capacity aggregating in Xinjiang continues, but off-season orders and inventory buildup suppress operating rates.
Exports: July textile and apparel exports were $28.79 billion, 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 exports down 11.9%, US down 4.2%, and Belt and Road countries down 8.9%. Southeast Asian diversion of low-to-mid-end orders persists, and high base effects slow export growth, limiting external demand support for cotton prices.
Inventories and Prices: Accelerated De-stocking but Rising Risks
July commercial inventories stood at 2.5 million tons, down 19.4% month-on-month but up 14.1% year-on-year, with faster de-stocking aided by reserve releases and trader sell-offs. Industrial inventories were 888,000 tons, up 2.3% month-on-month, reflecting small replenishments after low-cost raw material consumption. Mills maintain low inventories during off-season, limiting replenishment.
Short-term price direction hinges on seed cotton opening prices. Market expectations are high due to demand growth and output decline. However, if cotton prices rise too much, yarn price increases may fail, triggering negative feedback—mills cutting purchases and pressuring prices. The domestic-international gap has narrowed to 2,808 yuan, reducing foreign cotton's appeal; if international prices strengthen further, the gap may compress or even invert, affecting import pace and mills' cotton mix.