July's cotton market was a classic interplay of policy and expectation: reserve releases were fully subscribed, yet domestic prices peaked and fell, narrowing the internal-external spread to 2808 yuan per ton. Behind this lies a tug-of-war between short-term supply supplementation and weak demand, while new-crop reduction expectations and Xinjiang capacity expansion are reshaping the industry's pricing logic.
Supply-Demand: Signals of Impending Tight Balance
According to the latest forecast from the China Cotton Association, 2026/27 national cotton output is projected at 7.153 million tons, down 3.5% year-on-year, while consumption is expected to reach 8.92 million tons, up 1.7%. The widening gap will pull ending stocks down to 6.236 million tons, a 2.5% decline, further lowering the stock-to-use ratio. This data combination sends a clear signal: the new season will shift from loose to tight balance, with the price center likely moving upward.
Notably, the output decline stems mainly from area reduction (-3.9%), not yield deterioration. National yield is estimated at 166.1 kg/mu, up 0.4%, with Xinjiang's yield flat year-on-year but total output down 3.5% to 6.857 million tons. Inland regions diverge: the Yellow River valley is performing better than last year with a 2.6% yield increase, while the Yangtze River valley is expected to see a 14.3% drop due to excessive rainfall. Weather disruptions have limited actual impact on output, but market sensitivity to high temperatures and drought is rising.
Industry Chain: Weak Yarn Price Transmission and Inventory Build-up
High cotton prices have not transmitted smoothly downstream. In July, the average price of domestic 32-count pure cotton yarn was 23,328 yuan/ton, down only 8 yuan month-on-month but up 13.3% year-on-year, yet downstream acceptance was limited, and finished goods inventories kept accumulating. National yarn output was 1.814 million tons, down 5.9% month-on-month and 2.2% year-on-year, reflecting clear off-season characteristics. Notably, Xinjiang's yarn output reached 321,000 tons, up 17% year-on-year, expanding against the national decline, confirming the westward capacity shift.
This migration is altering cost structures and trade flows. Xinjiang's competitive edge extends beyond raw materials to electricity, land, and policy support, squeezing inland small and medium mills. Meanwhile, yarn profit margins are being compressed, prompting some mills to bid for reserve cotton to lower costs. In July, reserve releases were fully subscribed at an average price of 17,253 yuan/ton, with an average premium of 1,638 yuan/ton, indicating strong but rational restocking demand.
Imports and Inventories: Strategic Adjustments Behind Structural Changes
July cotton imports totaled 92,000 tons, down 16.6% month-on-month but up 72.5% year-on-year. The import source mix shifted dramatically: Australia's share rose to 59.8%, up 31.9 percentage points month-on-month, while Brazil and the US accounted for 18.8% and 6.7%, respectively. This shift reflects mills optimizing raw material portfolios using quotas and price advantages. The internal-external spread narrowed to 2,808 yuan/ton, reducing foreign cotton's cost-effectiveness, but the surge in Australian arrivals indicates concentrated delivery of earlier orders.
Inventory-wise, commercial stocks fell 19.4% month-on-month to 2.5 million tons, accelerating destocking; industrial stocks rose 2.3% to 888,000 tons, showing mills beginning to replenish after consuming lower-priced raw materials. Reserve releases supplemented market supply, but cumulative volume was only 80,200 tons, having limited impact on total stocks—more of a psychological anchor.
Price Outlook and Recommendations
In the near term, new-crop opening prices are expected to be high, driven by expectations of rising demand and falling output. Internationally, the USDA August report lowered global ending stocks by 326,600 tons, pushing the stock-to-use ratio down to 56.7%, intensifying supply concerns and supporting external prices. However, limited domestic downstream acceptance may cap upside potential.