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 December WASDE report reflected only modest adjustments to 2024/25 world cotton balance sheet. Beginning world stocks were cut by 430,000 bales, mostly in India (-500,000). World production was 1.21 million bales more than the previous month, mostly in India (+1.0 million), Brazil (+100,000), and the U.S. (+70,000) and slightly offset by West Africa (-100,000). World imports saw 100,000 more bales month-over-month as a result of Pakistan (+500,000) offsetting China (-500,000), Vietnam (100,000) offsetting Mexico (-100,000), plus a small gain in Thailand (+30,000).
On the demand side, world exports were raised by 80,000 bales month over month, with Brazil (-200,000) being partially offset by West Africa (-70,000) and Mexico (-50,000). World domestic use was a net 570,000 bales higher, month over month, mostly in India (500,000), Pakistan (400,000), Vietnam (100,000) and Thailand (20,000), and partially offset by China (-500,000) and Mexico (-50,000). The supply side gains dominated those on the demand side, so the bottom line of all these adjustments was a modest 270,000 bale increase in world ending stocks. This adjustment would be historically neutral. The monthly gains in domestic consumption might be construed as bullish if only because it’s the first time in a while to see increases.
Updated U.S. cotton supply/demand. The December 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 planted and harvested acres, while yield per harvested acre was raised slightly. This increase was reportedly the net effect of higher yields in the eastern Cotton Belt offsetting lower yields on the western side. Thus USDA raised production by 64,000 bales over last month’s production estimate.
On the demand side, U.S. domestic use, import and export categories were unchanged over last month. The bottom line of all these adjustments plus some minor tinkering with the “Loss” fudge factor was a net 100,000 increase in U.S. ending stocks, to 4.4 million. The monthly adjustment would historically be price neutral to slightly 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.