2022/23 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, and reproduced below:

The September WASDE report  showed net gains in world stocks from supply side increases to the 2022/23 world old crop cotton balance sheet, driven largely by U.S. adjustments (see below).  Beginning stocks were raised a negligible 70,000 bales, month over month.  World production was 1.44 million bales higher compared to last month, as a result of increases in the U.S., China, Australia and Turkey that outweighed decreases to flood ravaged Pakistan.  Forecasted Indian production was unchanged, month over month.  The world trade categories were little changed after a few mostly offsetting adjustments. Most notably, Pakistani imports were raised as an impact of their production losses. World consumption was cut 460,000 bales, again mostly in Pakistan, along with a 100,000 bale cut in Vietnamese spinning.  The cuts to world total use were outweighed by the gains in production, leading to a two million bale increase to world ending stocks, month-over-month.  This adjustment is fundamentally price negative in the size of the monthly decline, although the resulting stocks level has historically neutral price implications.

The U.S. 2022/23 crop cotton balance sheet (see Table above, last column) saw surprisingly large additions to U.S. all cotton production in the September WASDE compared to August.  On the supply side, U.S. carry-in was raised 250,000 bales, month over month, reportedly to jibe with USDA AMS and USDA NASS data on 2021/22 ending stocks.  More dramatically, U.S. production was raised 1.26 million bales month over month.  This is after a three million bale cut to forecasted U.S. production in the August WASDE.  The higher production forecast was driven by a 1.31 million increase in planted acres.  National average yield was lowered by three pounds per acre, and national average abandonment was unchanged at 43%.  This effectively led to a forecast of 7.88 million harvested acres and 13.83 million bales of production.  On the demand side, domestic use was unchanged while forecasted U.S. exports were raised 600,000 bales, month over month.  The bottom line of all this was a 900,000 bale increase in U.S. ending stocks, which is bearish, while remaining reasonably bullish in the resulting level.

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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