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 July projections of 2016/17 world cotton supply and demand included modest changes that belie the end of the marketing year. Estimated world and foreign ending stocks were reduced by 930,000 bales, month over month.  This change largely resulted from several small adjustments to production, trade, and consumption variables in a number of countries.  A 500,000 bale reduction in Indian production highlighted the largest adjustments. There were no adjustments to any Chinese variables.   The modest monthly adjustment in world ending stocks would be neutral to slightly price supportive according to theory and history.

The 2016/17 U.S. cotton numbers were not adjusted at all compared to the May or June 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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