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:

Over the last several months, the world cotton consumption category has been adjusted rather dramatically due to the observed and likely recessionary impacts of the COVID-19 pandemic.  Projected world cotton consumption was 7.5 million fewer bales in April compared to March. The May WASDE lowered world consumption another 5 million bales, and the June WASDE lowered it another 2 million bales.  Projected world ending stocks keep being revised higher, which is fundamentally bearish in terms of the monthly adjustment and in the resulting levels.

Domestically, the April and May WASDE reports also saw dramatic adjustments to the U.S. cotton consumption.  U.S. domestic consumption was lowered 100,000 bales in April, and another 200,000 bales in May, to 2.7 million. The June WASDE saw more of this with another 200,000 bale decrease in U.S. mill use, to 2.5 million bales.   Second, U.S. exports were unchanged in May and June, but that is after being lowered by a whopping 1.5 million bales, to 15.0 million in the April WASDE.  All of these adjustments were attributed to the global economic slowdown as a result of the COVID-19 pandemic.   The downshifting in U.S. consumption over the three month period resulted in U.S. 19/20 ending stocks rising from 5.1 million bales in March to 6.7 million bales in April, to 7.1 million bales in May, and finally to 7.3 million bales in June..  Ending stocks-to-use likewise made a dramatic shift higher to a burdensome 40+%, which is fundamentally bearish 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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