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, and reproduced here:

USDA’s November revisions of 2017/18 world cotton supply and demand were generally price supportive due to lower beginning stocks and greater consumption. Changes to both of these variables involved revising historical consumption estimates higher, which subsequently affected ending stocks and carry-in.   These types of revisions are infrequent, so they bear more explanation.  USDA stated that “…new government data resulted in upward revisions to consumption going back as much as 10 years in Argentina, Uzbekistan, and Bangladesh. With these historical revisions, world consumption over the past 3 years was raised more than 400,000 bales each year, so a large portion of this month’s increase in expected 2017/18 consumption reflects an upward shift in the historical data. Historical estimates of world trade were also reduced over the past 4 years, largely due to lower estimated Uzbek exports.”

As a result of these historical revisions, 2017/18 beginning stocks were reduced month-over-month in Argentina, Australia and Uzbekistan. Likewise, the November forecast of world 2017/18 consumption was 1.2 million bales higher month-over-month, and was concentrated in Uzbekistan, China, and Bangladesh.  Forecasted world trade was also impacted by the historical revisions, with a 400,000 bale reduction in Uzbek exports being partially offset by increases in Brazil and several other countries.

For all the tightening, the November adjustments also saw a  596,000 bale net gain in forecasted world production, with increases in China (+500,000 bales) and the U.S. (+260,000 bales) outweighing a 200,000 bale reduction in Australia.   The bottom line of all this was a 1.5 million bale reduction in 2017/18 world ending stocks. Such an adjustment would be price supportive according to economic theory and history.  In addition, a muted market response might also be expected due to the main source of the adjustments being historical revisions (which tend to be disliked by traders and analysts alike).

The November revisions to 2017/18 U.S. cotton continued a trend of surprising adjustments to U.S. production.  After a post-hurricane month-over-month increase in September, then a cut in October, the November numbers reflected another healthy increase in in projected U.S. cotton production.  After slightly adjusting the “Unaccounted” fudge factor, projected U.S. ending stocks rose from 5.8 to 6.1 million bales, month over month.  The November adjustment would have a modestly bearish price response, all other things being equal.

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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