COTTON DIVISION

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

January 6 - 10, 2003

In anticipation of the monthly USDA Supply and Demand Report released today, the New York market remained relatively quiet for the most part of this week. In thin volume, prices had trended lower throughout the week only briefly interrupted by Mr. Dunavant’s bullish speech during the annual Beltwide Cotton Conference, during which he predicted new crop cotton values may well rise to 65 cents per pound and China will continue to expand its cotton consumption up to 27 million bales for the current season. Contrary, the market was not impacted by the weekly spec/hedge report released Tuesday morning, showing that as of January 3, speculators had increased their net long position to 45 percent of the open interest, near record levels.  Weekly Export sales received more attention as sales for the week ending January 2, 2003 arrived at only 116,500 bales or 35 percent less than during the previous week and 48 percent below the 4-week average. Actual shipments totaled 241,000 bales, a marketing-year high, were 65 percent higher than the prior week and 31 percent above the 4-week average. Private estimates for this week’s USDA report crop report had been averaging 17.20 million bales for production, 10.60 million bales for exports and 7.5 million b/c on domestic usage, bringing the ending stocks to 6.4 million bales or 100,000 bales less than the USDA had forecast in their December ’02 estimate. The USDA went along with these estimates as far as the supply side of the equation is concerned, reducing all US cotton production to 17.1 million bales, down 1 percent from last month and 16 percent less than last year's record high production. Yield is expected to average 663 pounds per harvested acre, down 42 pounds per

harvested acre from a year ago.  The Harvested area of 12.4 million acres is down 3 percent from December and 10 percent below 2001. The reduced production resulted in a direct decrease of the cotton ending stocks in America, which were lowered to 6.3 million bales for this month, down 200,000 bales from the December 2002 estimate. Meanwhile projections for domestic mill use at 7.50 million bales and exports at 10.80 million bales were left unchanged. World 2002/2003 beginning and ending stock projections were also reduced this month, although production figures were largely left unchanged, while consumption and trade data was raised only marginally.  Beginning stocks were reduced 750,000 bales in China, as revisions in the Chinese government's estimate of yarn production for calendar year 2001 had raised consumption for 2000/01 and 2001/02.  This season's world production remained unchanged, as increases in Pakistan and Kazakstan offset a decrease for the United States.  Imports by China were forecast higher based on tighter supplies and recent strong import demand, but the impact on world trade was offset by small adjustments in several other countries.  World ending stocks of 37.9 million bales came in 3.1 percent below last month's projection.

With the above figures in hand, the market was able to tweak out a minor advance today, however, the big pictures remains virtually unchanged. There is still too much cotton available and although prices between 50 – 55 cents will hopefully attract sufficient business, any significant and prolonged advance over and beyond such level remains difficult to imagine. Short of any major crop problem going forward, which could come in form of the ending El Nino cycle, the current range with gradual improvement, ought to remain in place.

US Pima sales continue at steady pace as another 11,100 bales sold during the week ending January 2, 2003, lifting the cumulative total to 406,100 bales versus 306,100 bales at the same time last year. Undoubtedly, the step-2 payments have provided the necessary stimulus to sell more than 200,000 bales since the step-2 payment rate began to be available towards the end of September 2002. After especially strong sales registrations occurred during the month of December, Egyptian officials declared an official price increase for their growth thereby effectively reducing the subsidy payment made available by the US government. Nonetheless, expectations run high that the US can sell a record high of 500,000 bales into the export markets this season as predicted by the USDA’s latest Supply/Demand Report. Such sales would represent a 26 percent increase over last

year’s exports. Crop production has been raised slightly this month from 645,000 bales to 649,000 b/c primarily as a result of yield and production increase in Arizona (from 908 lbs/acre to 972 lbs/acre) and Texas (from 987 lbs/acre to 1,023 lbs/acre). Meanwhile, offering prices for 2002/2003 crop Pima are beginning to tighten in anticipation of a suddenly disappearing step-2 payment once the USDA commences the sale of its own inventory, which is currently scheduled to start in the next few days. Hence, Pima buyers may end up having the option to purchase US Pima at significantly different prices: old crop Pima at respective discounts and quality limitations and current crop at an increasing rate as subsidy payments subside.

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