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 for 2016/17 and 2017/18, and reproduced here (2nd and 3rd columns):

USDA’s April revisions of 2017/18 world cotton supply and demand were neutral in terms of month-over-month changes to ending stocks.  There really weren’t that many month-over-month adjustments, which is not usual as we are late in the marketing year.   Foreign carry-in was raised 900,000 bales, from historical revisions in Brazil (+700,000), Australia (+200,000), and Central Asia (+50,000). Foreign production was raised 240,000 bales from a large increase in Brazil (+700,000) that outweighed a 425,000 bale reduction in Sudan (which was a big source of adjustments in the March WASDE).  World cotton imports and exports raised by 230,000 and 240,000 bales, respectively. World consumption was cut 400,000 bales month over month from adjustments in India (-300,000), Indonesia (-100,000), Thailand (-50,000) and partially offset by Vietnam (+100,000).  The bottom line of all this was a 560,000 bale decrease in world ending stocks, month over month.  Such an adjustment would be price neutral according to economic theory and history.

The April revisions to 2017/18 U.S. cotton involved another increase in U.S. exports (+200,000 bales — it was +300,000 bales in March) which was attributed by USDA to the strong pace of recent sales and shipments.   With no other changes to the U.S. balance sheet, the export adjustment went straight to the bottom line for a month-over-month downward adjustment from 5.5 to 5.3 million bales of ending stocks.  This adjustment would have neutral to bullish implications according to historical patterns.

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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