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 June 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 May to May June a 1.06 million bale increase in world ending stocks. This change resulted from a 500,000 bale month-over-month increase in Indian production, outweighing a 100,000 cut in Australia.  The higher foreign production was added to by 400,000 fewer bales of domestic use, month over month. These cuts in consumption involved China (-500,000 bales) and Indonesia (-100,000 bales) which outweighed 100,000 bale increases in both Turkey and Vietnam. The imports category showed increases in India, China, and Turkey which outweighed a cut in Indonesia for a net 330,000 bale increase.  Exports were raised only 70,000 bales, month over month, due to small changes in various places. The bottom line of all this was  a modest increase in world ending stocks, which would have neutral implications for old crop world prices as well as for the world new crop balance sheet.

The USDA’s June WASDE had no month over month adjustments for the U.S. old crop balance sheet.  This would obviously be 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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