2019/20 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 and reproduced below (see the 3rd column of numbers for the current 2019/20 marketing year).

USDA’s September projections of 2019/20 world cotton supply and demand highlighted continued reductions in forecasted world consumption, mainly in India and China.   India supply also increased from upward adjustments to beginning stocks, production, and imports.   World trade categories saw various adjustments in various places that resulted in a net reductions in aggregate imports and exports.  The bottom line of all this was a 1.3 million bale increase in world ending stocks, which would have somewhat bearish implications for 2019/20 world prices.

USDA’s September adjustments to the U.S. all cotton numbers saw a month-over-month decrease in carry-in (-400,000 bales), production (-654,000 bales), exports (-700,000 bales), domestic use (-100,000 bales) and un-accounted (-250,000 bales).  These changes netted out to no change in the bottom line of the U.S. 2019/20 crop balance sheet.  Both the monthly and year-over-year increase in ending stocks would be neutral according to history 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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