2016/17 Fundamentals and Outlook

Fundamental analysis involves comparing major supply and demand variables like production, consumption, and ending stocks.  This is usually based on organized tables, the prime example of which are published by USDA.

USDA’s June projections of 2016/17 world cotton supply and demand included modest changes that belie the end of the marketing year.  World and foreign estimated ending stocks were reduced only 180,000 bales, month over month.  This change largely resulted from several small adjustments to production, trade, and consumption variables in a number of small countries.  A 200,000 bale increase in estimated Chinese imports, and a 500,000 bale increase in estimated Chinese consumption highlighted the largest adjustments.  (Note that this follows a 750,000 bale increase in Chinese consumption in the May WASDE).   The small monthly adjustment in world ending stocks would be neutral according to theory and history.

The 2016/17 U.S. cotton numbers were not adjusted at all compared to the May estimates.  Estimated U.S. ending stocks remain at 3.2 million bales.  Obviously this would be expected to have a neutral price response, assuming traders were not expecting some major changes that were unrealized.

Fundamental analysis is fairly straightforward in its application.  However, there are a lot of moving parts and uncertainty in balancing supply and demand variables.  The price outlook can also be influenced by non-fundamental factors, particularly in the short run.

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