2021/22 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 September WASDE report  showed modest tightening in the 2021/22 crop balance sheet for world cotton. The new crop world numbers reflected net higher production month-over-month, mostly in the U.S., Australia and Argentina (offsetting decreases in India, West Africa, and Greece).  The world trade categories were a half million bales higher than the August forecast.  World consumption was up 810,000 bales, mostly in Pakistan, Bangladesh, Brazil, and Turkey, while there was a partial offset with lower consumption in covid-affected Vietnam. Those first three countries were also adjusted higher in 20/21 consumption, which carried in to the 21.22 balance sheet as higher beginning stocks.  The bottom line was that world ending stocks were a modest 550,000 bales lower, month-over-month, which is fundamentally price neutral/supportive in the monthly adjustment.

The U.S. new crop picture was changed more substantially and unexpectedly.  First, the old crop carry-in was cut 50,000 bales month over month because of lowered old crop exports.  Forecasted new crop production was raised 7% (or 1.25 million bales), which was higher than pre-report expectations.  This outcome happened despite  5% and 4% cuts to planted and harvested acres as NASS reconciled with FSA certified acres.  With abandonment little changed from August to September, the explanation for the increase in production was mostly due to a huge 95 pound per acre increase in average U.S. yield, spearheaded by Texas.  The basis for the yield increase was NASS’s objective yield field sampling, which in Texas involved 491 samples of 40 feet of row, counting bolls of various sizes and maturity.  The remaining adjustment to the U.S. balance sheet was a 500,000 bale increase in projected exports, which was justified by both having larger exportable surpluses and recent export demand.  The bottom line of all these adjustments was a 700,000 bale increase in projected U.S. ending stocks, which would ordinarily be  price negative 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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