2022/23 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:

The January WASDE report showed a small net decrease in world ending stocks.  The month-over-month adjustments to the world cotton supply and demand numbers were mostly offsetting.  They were also concentrated in six countries.  The biggest adjustments were in the U.S. with higher production and lower exports (more about that below). Brazil saw a little less carry-in, outweighed by a little more production, resulting in a 200,000 gain in ending stocks.  India saw a million fewer bales of production, 50,000 more bales of imports, a half million fewer bales of domestic use, and 250,000 fewer bales of exports.  All of that added up to only a 200,000 bale cut to ending stocks. China was; adjusted 250,000 bales downward in their imports, which carried straight through to a similar sized cut in ending stocks.  Lastly, Indonesia and Viet Nam had modest cuts to imports and to domestic use, resulting in only a 100,000 cut in ending stocks across both countries. The world numbers continued a trend of lower world mill use and reduced trade – evidence of weakening demand.  From an ending stocks adjustment standpoint, this report was fundamentally price neutral since the month-over-month change was only +370,000 bales.

The U.S. adjustments were more surprising since most analysts expected USDA to finally account for more non-harvested acres in the southern plains.  This report actually gave us that – planted acres were cut slightly and harvested acres were reduced 440,000 acres.  However, the average yield per harvested acre was increased by 79 pounds to a record 947 pounds per acre. I can understand this in terms of both strong yields in the eastern cotton belt as well as not including the lower yielding acres that were abandoned. This added 440,000 bales to raise U.S. all cotton production to 14.68 million.  This is the fourth month-over-month increase in five months.  And despite having more exportable surplus, U.S. cotton exports were cut 250,000 bales.   The bottom line of the U.S. adjustments was a bearish 700,000 bale increase in projected ending stocks.

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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