2017/18 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 2016/17 and 2017/18, and reproduced here (2nd and 3rd columns):

Looking strictly at the numbers, USDA’s February revisions of 2017/18 world and U.S. cotton supply and demand were both generally neutral to bearish  in terms of month-over-month changes to ending stocks.

The world balance sheet was adjusted in various ways in a number of different countries.  Foreign production was raised by a net 400,000 bales mostly from a big increase in China (+1.1 million bales) that outweighed a month-over-month cut in India (-800,000 bales).  World cotton imports and exports were both cut almost 150,000 bales each, and world consumption categories were reduced by over 300,000 bales, mostly in India.  The bottom line of all this was 760,000 bale increase in world ending stocks, month over month.  Such an adjustment would be price neutral according to economic theory and history.

The February revisions to 2017/18 U.S. cotton were less complicated and mainly involved an adjustment in U.S. exports ending stocks.  U.S. production was unchanged month-over-month, although the late pace of ginning will doubtless lead to some tinkering with projected production in future reports.  U.S. exports were decreased 300,000 bales which was attributed to the “lagging pace of shipments“.  This adjustment went straight to the bottom line, which lifted projected U.S. ending stocks declined from 5.7 to 6.0 million bales, month over month.  This adjustment would be neutral, looking strictly at the numbers.  I am a bit surprised that futures did not sell off more given the apparently surprise adjustment to U.S. exports.

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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