2020/21 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 February WASDE report  saw a continuation of moderate tightening to the foreign and world cotton balance sheets for the 20/21 marketing year. On the supply side,  world beginning stocks were a net 360,000 bales fewer, month over month, mostly in India.  World production, however, was raised by 1.27 million bales, month over month.  This adjustment was accounted for by a big increase in China (+1.5 million bales) plus Pakistan (+200,000 bales) less a 500,000 bale cut in Indian production.  World imports and exports were both raised roughly 350,000 bales compared to the January forecast, involving a number of partially offsetting adjustments in a number of countries.  Domestic consumption was raised 1.48 million bales month over month, from increases in China (+1 million bales), India (+300,000 bales), Pakistan (+200,000 bales) and several other countries. The bottom line of all these adjustments was 580,000 bale decrease in world ending stocks, month over month, which is fundamentally neutral in the monthly adjustment.  The resulting level of 95.74 million bales in world ending stocks continues to take the edge off the previously bearishly high level.

The U.S. cotton balance sheet had one tightening adjustments.  This did not involve another monthly cut in forecasted U.S. cotton production,despite widespread expectations of a least a few hundred thousand bales fewer.  Forecasted U.S. domestic use was also left unchanged.  U.S. exports were increased 250,000 bales month over month (on top of the 250,000 bales in January and the 400,000 bale increase in December).  This adjustment to consumption  plus some tinkering with the Unaccounted (fudge factor) category resulted in a modest 300,000 million bale cut in forecasted ending stocks, month over month.  The resulting stocks-to-use ratio has now dropped from 40% (November) to 33% (December ) to 26% (January) and now 24%.  All of these monthly adjustments are price supportive, or perhaps price explanatory.  The resulting stocks levels are historically neutral according to history and economic theory, but this is a set-up for significant fundamental tightening in 2021.

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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