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, and reproduced below:
Updated world cotton supply/demand. USDA’s month-over-month adjustments in the November WASDE report reflected a continuation of modest tightening of 2024/25 world cotton balance sheet, particularly and consistently on the supply side. Beginning stocks were cut by 610,000 bales, mostly in India (-400,000) and Central Asia (-110,000). World production was likewise 460,000 million bales fewer than the previous month, mostly in the Pakistan (-200,000), the EU (-60,000), Bangladesh (-10,000), Central Asia (-10,000) and the U.S. (10,000). Similarly, the world imports categories saw 330,000 fewer bales compared to last month, mostly in Turkey (-400,000), partially offset by Central Asia (+70,000).
On the demand side, world exports were reduced by 290,000 bales month over month, mostly in the U.S. (-200,000) and the EU (-20,000), and partially offset by 30,000 in other exporting countries. World domestic use was a net 520,000 bales fewer, month over month, mostly in Turkey (-400,000), Pakistan (-100,000), and Central Asia (-10,000). The supply side cuts dominated those on the demand side, so the bottom line of all these adjustments was a modest 580,000 bale decrease in world ending stocks. This adjustment would be historically neutral to price supporting.
Updated U.S. cotton supply/demand. The November WASDE saw minor month-over-month adjustments to the U.S. balance sheet (third column of numbers in the table above). On the supply side, beginning stocks and imports were unchanged, as was yield per harvested acre. For that matter planted and harvested acres were also unchanged from last month, thus implying the same 22% abandonment rate. Still, somehow USDA carved 10,000 bales off last month’s production estimate, attributed to additions in Georgia that were offset by cuts in Texas and other minor adjustments.
On the demand side, U.S. domestic use and import categories were unchanged while U.S. exports were trimmed by 200,000 bales, month over month. The bottom line of all these adjustments plus some minor tinkering with the “Loss” fudge factor was a net 200,000 increase in U.S. ending stocks, to 4.3 million. The monthly adjustment would historically be price neutral to slighty bearish both in the adjustment and the resulting level of U.S. ending stocks.
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.