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 November revisions of 2018/19 world cotton supply and demand were bullish on their face.  The November adjustments to foreign cotton supply and demand followed the U.S. pattern (see below) of aggregate net lower production (led by India, Pakistan, and Central Asia), which dominated an aggregate cut in domestic use (led by India, Pakistan, Turkey, Brazil, and Indonesia). All this, plus some revisionist history in Benin, led to yet another trimming of world ending stocks, the fifth in six months. Such an adjustment would be price supportive from a fundamental standpoint.

The USDA’s scheduled release of their October cotton production estimate was too soon after Hurricane Michael to account for the likely massive damage. As a result, most analysts, and the futures market itself, probably discounted the October numbers. Thus the November WASDE was set up as a fulfillment of expectations from a month ago. Accordingly, the November WASDE showed a major month-over-month reduction of 1.35 million bales, mostly from the southeastern U.S. This cut resulted from 5 percent less yield from 2 percent fewer harvested acres. U.S. exports were lowered by a half million bales, and domestic mill use was cut 100,000 bales. The bottom line of these adjustments was a 700,000 bale reduction in U.S. ending stocks, compared to the previous month. This would ordinarily be price supporting according to historical patterns and economic theory, While certainly bullish-looking, the muted market reaction may reflect that a big production cut was already priced in.

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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