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 for 2017/18 and 2018/19, and reproduced here (2nd and 3rd columns):

USDA’s July revisions of 2017/18 world cotton supply and demand involved a major tightening of foreign supplies and ending stocks, month-over-month.  The dominant source of change was a 2.5 million bale decrease in Chinese carry-in.  This latter was the result of a revision of the previous three years of Chinese consumption (adjusted higher) and carryover stocks (adjusted lower).  Other major month-over-month changes included increased production in India (+500,000 bales) and Brazil (+300,000 bales) as well as a one million bale increase in Chinese consumption.   The 3.25 million bale decline in world ending stocks, month over month would be price supporting according to economic theory and history.

The July revisions to 2017/18 U.S. cotton involved yet another month-over-month increase (+200,000 bales) in U.S. exports (it was +500,000 bales in June, +500,000 bales in May, +200,000 bales in April, and +300,000 bales in March).  With no other changes to the U.S. balance sheet, the bottom line was a month-over-month downward adjustment from 4.2 million to 4.0 million bales of ending stocks.  This adjustment would have bullish implications according to historical patterns, and the strong post-report response of ICE futures reflected this expectation.

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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