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, and reproduced here:

USDA’s September projections of 2017/18 world cotton supply and demand were dominated by a large month-over-month increase in projected world production of 3.44 million bales.  This resulted from increases in the U.S. (+1.2 million), India (+1.0 million), Brazil (+500K), Mexico (+230K), Australia and Turkey (both +200K), and West Africa (+80K).  Estimated foreign ending stocks were increased by 860,000 bales, month over month.  After some small adjustments to carry-in, consumption and trade, the bottom line was a 2.45 million bale increase in world ending stocks, month over month.  Such an adjustment would be price weakening according to theory and history.  The post-WASDE limit down settlement of ICE cotton futures certainly reflected the expected response.

The 2017/18 U.S. cotton numbers were significantly adjusted by another large and surprising 1.2 million bale increase in forecasted U.S. production month-over-month (following a 1.55 million bale increase in August).  USDA noted that production data collection in the areas affected by Hurricanes Harvey and Irma may be incomplete.  After adjusting U.S. carry-in and exports higher, the forecasted U.S. ending stocks rose from 5.8 to 6.0 million bales, month over month.   Such an adjustment would have a price weakening response based on theory and history.

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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