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 April revisions of 2018/19 world cotton supply and demand projections did not involve major adjustments, which is not unusual for this time of the year.  The month-over-month change from March to April showed a 350,000 bale increase in world ending stocks. This was mostly driven by decreases in projected consumption in Turkey (-300,000 bales) and Vietnam (-100,000 bales), in addition to offsetting adjustments  in Central Asia (+50,000 bales) and Indonesia (-50,000 bales). The foreign trade categories were both reduced by 90,000 bales stemming from a lot of mostly offsetting adjustments.  The latter included an increase of 500,000 bales of Chinese imports that was offset by reduced imports in India (-200,000 bales), Vietnam (-100,000 bales), Brazil (-50,000 bales) Indonesia (-50,000 bales), Turkey (-20,000 bales) and the EU (-10,000 bales). The exports category adjustments were in Australia (+200,000 bales), India (-300,000 bales), West Africa (-150,000 bales), Turkey (+100,000 bales), and the EU (-30,000 bales).. The bottom line of all this was  a 0.35 million bale increase in world ending stocks, which would have neutral to modestly bearish implications for world prices.

The USDA’s April WASDE showed no changes in the U.S. cotton production, which is also not usual at this stage.  U.S. exports were not adjusted either.  Perhaps USDA is waiting like the rest of us for a near term resolution of the U.S.-China trade dispute before getting bold on export projections.  The one monthy-over-month adjustment was a 100,000 decrease in U.S. domestic use, which follows the pattern of lower foreign consumption. The bottom line of this is neutral to slightly bearish according to historical patterns and economic theory.

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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