COTTON DIVISION

WEEKLY REPORT
by Alex Gansch -- Vice President / Senior Trader

January 5 - 9, 2004

The cotton market during this first week of the New Year found itself trading in consolidation prior to the upcoming USDA Supply and Demand Report to be released this next Monday, January 12. Though most analysts expect few changes, the market was unable to establish its conviction of following the bull-trend it apparently has set for itself for the longer term. Dunavant’s speech during the Beltwide Cotton Conference, despite a few bullish comments was not inspiring enough to get the buyers out in big numbers. Mr. Dunavant openly declared, though, what most observers have been mentioning for the longest time and that is that the Chinese will most likely produce only 20.7 million bales in the 2003/2004 season while the Chinese National Bureau of Statistics will officially point towards 22.5 million bales. The weekly spec/hedge report revealed on Tuesday that speculators had expanded their net long position to 36.9 percent versus the previous week’s net long position of 30.4 percent. This figure apparently leaves room for further buying should the speculators appetite grow for cotton in the coming days and weeks. Although the cotton market was also affected by the more significant sell-off witnessed in some of the other soft commodities on Wednesday of this week, partly as a result of profit-taking, position adjustment and the stronger US Dollar, the recovery followed promptly as Thursday’s USDA export report despite the Holiday Season showed respectable sales of 103,500 bales or 16 percent above the previous

week and 37 below the 4-week average. The fact that China appeared as major buyer, again, with 28,200 bales was generally viewed as favourable for the market. Though one can never tell in these commodity markets, for cotton the path appears to be rather clear, albeit one needs to expect the usual twists and turns. With technical indicators having turned favourable again and the fundamentals pointing towards strong demand from overseas buyers amidst a further weakening of the US Dollar plus the ever increasing lure of commodities, many of which remain at values well below their historic average, cotton seems to be one of those commodities that can well handle further adjustments to the upside.

The weekly USDA export report revealed slow sales of US Pima as expected due to the Christmas and New Year’s Holidays. Merely 400 bales were sold during the week that ended January 1, 2004, which brings total sales for the season to 409,000 bales. While this figure is less than 3,000 bales above last year’s level at the same time, what is remarkable is that the quantity already shipped this season of 332,100 bales is 40 percent higher than at the comparable time last year. With the ginning about 2/3 finished and quality reported for this season once again very satisfying, focus is moving towards the next crop year. Current private estimates are calling for Pima acreage in California to grow about 40 percent to 225,000 acres for the coming season up from this year’s 139,000 acres harvested, which would mean when combined with an average increase in acreage in Arizona, New Mexico and Texas that total land planted with Pima for the US will arrive at approximately 260,000 acres total. Considering average yields, this will lead to production of around 650,000 bales.

Adding anticipated ending stocks of 100,000 bales for the current crop year leads to total availability of US Pima of 750,000 bales or about still 25 percent less than available at the beginning of the 2003/2004 crop year of 1,035,000 bales. This begs the question whether ELS prices as a result of the reduced availability will remain at the current range between 130.00-140.00 c/lb C&F NC or drop significantly below. Obviously, at this stage it is simply too early to tell as a number of factors remain unclear, among others the crop seize from

alternative ELS suppliers, potential for US subsidies etc., however, what this brief analysis does show is that due to this year’s sharp global off-take, availability will be reduced even with significant efforts to increase acreage, which ought to limit the downside potential for ELS price.

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