2020/21 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  saw some tightening to the foreign and world cotton balance sheets for the 20/21 marketing year. On the supply side,  world beginning stocks were 1.12 million bales fewer compared to August, mostly in India.  Further, the September estimate of world production was lowered 330,000 bales, month over month.  The reduced production resulted from a big cut in the U.S. (- 1M bales) plus Pakistan (-300,000) and Turkey (-200,000) that outweighed increases in China (+750,000), India (300,000), and Australia (+200,000).  The world imports and exports were raised 170,000 and 130,000 bales, respectively.  A 360,000 bale month-over-month cut in world consumption was spread over the U.S.,  Brazil, and Mexico.  The supply reductions dominated the other changes resulting in 1.07 million fewer bales of world ending stocks, which is fundamentally neutral/bullish in terms of the monthly adjustment.  The resulting level of 103.84 million bales is still historically bearish.

The U.S. cotton balance sheet adjustments were driven by somewhat expected cuts to U.S. production.  Some trimming of 19/20 mill use and adding of exports resulted in 50,000 more bales of 20/21 carry-in, raising it to 7.25 million bales.  This is perhaps the most fixed and bearish aspect of the new crop balance sheet.  U.S. all cotton planted acreage was lowered by 70,000 acres. U.S. 2020 crop abandonment was raised from 24% to 26% (which is the fourth highest in twenty years).  However, abandoning a lot of dryland on the southern plains helped maintain a high national average yield per harvested acre (i.e., it only dropped month-over-month from 938 to 910 pounds per acre).   These reinforcing effects combined to decrease U.S. new crop production from 18.03 million to 17.06 million bales.

The cut to production resulted in fewer exportable surpluses, hence USDA decreased their estimate of U.S. exports was by 400,000 bales, month over month.  Lastly, U.S. mill use was lowered 200,000 bales.  The bottom line of all these adjustments was a trimming of new crop ending stocks from 7.6 million to 7.2 million bales.  The resulting stocks-to-use ratio likewise remains above the burdensome 40% threshold level, 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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