2018/19 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 for 2017/18 and 2018/19, and reproduced below (2nd and 3rd columns, respectively).

USDA’s September revisions of 2018/19 world cotton supply and demand involved some month-over-month additions to foreign supplies and ending stocks. World production was raised in places like China (+1 million bales), Brazil (+500,000 bales), and the U.S. (+447,000 bales), all of which outweighed a cut in Australia (-558,000 bales).   The increase in production outweighed reductions in carry-in, mostly reflected by an 800,000 cut in Indian beginning stocks.  The foreign production increase also outweighed a 320,000 bale increase in foreign consumption, most of which was in India.  The bottom line of all this was a modest 360,000 bale increase in world ending stocks, month-over-month. Such an adjustment would be price neutral from a fundamental standpoint, although those waiting for large historical revisions to Indian carry-over stocks were again disappointed.

The September revisions to 2018/19 U.S. cotton involved another surprising increase in U.S. supply. This happened despite a 100,000 bale reduction in 2018/19 carry-in owing to an increase in 2017/18 U.S. mill use. Second, USDA raised its U.S. production forecast by 447,000 bales based on revised planted acreage numbers and follow-up field sampling.  U.S. 2018/19 exports were raised by 200,000 bales to account for more exportable surpluses.  The bottom line of these changes was a month-over-month upward adjustment from 4.6 million to 4.7 million bales of ending stocks.  This adjustment would have bearish implications according to historical patterns.

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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