The cotton futures market has recently witnessed a robust rally, with Zhengzhou Cotton's main contract breaking through key resistance levels. Since December, prices have climbed nearly CNY1,000 per tonne, significantly outperforming U.S. cotton during the same period and emerging as a focal point in the commodities market. This surge stems from multiple drivers: strong expectations fueled by policy adjustments, fundamental support from supply-demand dynamics, and the interplay between resilient real demand and short-term pressures.

The core logic behind Zhengzhou cotton's price surge stems from market expectations of reduced production in the new crop year, a forecast that has gradually been confirmed. Last week, the Xinjiang Uygur Autonomous Region Cotton Association published an article stating that on December 23, 2025, the Office of the Autonomous Region's Cotton Industry Development Leading Group convened a special meeting, indicating that Xinjiang's cotton planting area may undergo structural contraction in 2026.

This meeting provided the market with a clear direction for future production cuts. Market transactions reflecting the supply contraction driven by reduced planting directly propelled cotton prices to break through resistance and strengthen. The reduction in cotton planting area aims to adapt to changing market demand, optimize agricultural resource allocation, and alleviate water resource pressure. This policy orientation will have a long-term impact on the domestic cotton supply landscape.

Beyond policy expectations, the current tight supply-demand balance in the cotton market provides robust support for prices. Although domestic cotton output is projected to increase significantly in the 2025/2026 season, the supply structure is undergoing notable changes. The share of imports continues to decline, compounded by low carryover stocks this year, preventing any easing in overall supply-demand dynamics. Long-term fundamentals remain solid.

Demand resilience has become a key driver of market momentum. Whether measured by monthly and year-on-year retail sales of apparel and textiles, midstream textile enterprises' operating rates, or cotton consumption inferred from industrial and commercial inventory data, the demand side of the cotton textile supply chain remains robust, providing substantial price support.

Latest data shows China's November retail sales of apparel, footwear, knitting, and textiles reached RMB154.2 billion, up 3.5% year-on-year. Although midstream textile enterprises saw a slight decline in operating rates, yarn shipments remained relatively robust, and greige fabric inventory pressure remained manageable.

Notably, the current market is not characterized by unilateral positive factors but rather a coexistence of “strong expectations and weak reality.”

As cotton prices have risen beyond ginning mills' processing costs, hedging pressure from earlier fixed-price resources has begun to release. Although a portion has already been absorbed and both ginning mills and traders have increased their uncovered positions, the market still holds some hedging demand, exerting short-term downward pressure on prices.

Concurrently, the current seasonal slowdown has hindered downstream yarn prices from keeping pace with cotton's upward trajectory, squeezing spinning mills' profit margins. With inventory levels already relatively adequate, restocking incentives have weakened. Key attention should now focus on whether yarn price increases can effectively pass through following cotton's rally.

Notably, in stark contrast to Zhengzhou cotton's strength, U.S. cotton prices have remained range-bound due to insufficient drivers, widening the domestic-international price differential. Zhou Tianyu believes that while the low-price advantage of U.S. cotton hasn't directly dragged down Zhengzhou cotton due to uncertainties in import quota volumes, vigilance is needed against indirect impacts from imported yarn, which could affect domestic cotton consumption.

Additionally, with tariff quota allocations now finalized, the market must monitor potential arbitrage positions between domestic and international markets, which could further influence price dynamics. Recent data indicates China's cotton imports remain at historically low levels, with the 2024/2025 import volume down 67.5% year-on-year. Even if imports rebound in the new season, they are unlikely to alter the domestic cotton supply landscape.

Regarding future market trends, cotton futures are expected to maintain a moderately bullish oscillation in the short term. On one hand, the current market rally is driven by a combination of “strong expectations + strong reality,” differing from past pure expectation-driven trades, making it less likely for positive expectations to turn negative once realized. On the other hand, further policy benefits remain anticipated.

In recent years, cotton subsidy policies have increasingly favored high-quality cotton, with multiple key documents emphasizing “stabilizing production and improving quality” in the cotton industry. More crucially, the cotton target price subsidy policy is set for three-year cycles, with 2026 marking the start of a new cycle. Previously maintained at RMB18,600 per ton for an extended period, the market anticipates adjustments to the subsidy target price for the new year.

After absorbing a portion of the bullish factors, cotton prices may experience heightened short-term volatility. However, in the long run, significant upside potential remains for cotton prices.

Overall, short-term market optimism is expected to persist. In the medium to long term, supported by expectations of supply contraction and resilient demand, cotton futures prices may still have room to rise.

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