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 February revisions of 2018/19 world cotton supply and demand were mixed.  The two month change from December to February showed and increase in beginning world stocks (+600,000 bales), a cut in domestic use (-1.99 million bales, mostly in China, India, and Turkey), and 600,000 bale increases in both world trade categories.  The bottom line of all this was  a 2.31 million bale increase in world ending stocks, which has price weakening implications (but not as much for a two month adjustment).

The USDA’s January WASDE showed small adjustments to the U.S. cotton numbers.  U.S. production was trimmed 200,000 bales stemming from a curious increase of 60,000 planted acres,  plus a 1% reduction in abandonment, which was offset by yield decrease from 860 to 838 pounds per acre.  Domestic mill use was lowered by 100,000 bales, and there was no adjustment to U.S. exports.  After tinkering with the unaccounted category, the bottom line of these adjustments was a 100,000 bale decrease in U.S. ending stocks, compared to two months prior. This would be price neutral 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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