COTTON DIVISION

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

January 12 - 16, 2004

Despite an overall lethargic trading pattern and little news on the fundamental front, New York futures prices were able to move ever so slightly higher on the week. The USDA Supply/Demand and Production Report this week provided no major changes to the previous month’s figures. U.S. cotton 2003/2004 projections were virtually unchanged this month. Production was estimated at 18.2 million bales, up 9,000 bales from last month. Domestic mill use, exports, and ending stocks were all left unchanged. World projections for the current season also reflected only marginal changes this month as production was raised slightly due to increases for Brazil and the African Franc Zone, which were, however, mostly offset by a reduction for Pakistan. World consumption was revised down marginally, as decreases for India, Russia, South Korea, and other countries were nearly offset by increases for Brazil and Mexico. World trade remained likewise largely unchanged, with ending stocks raised slightly from 32.19 mio bales in December to 32.36 mio bales in January. Though there was some debate among private analysts over the production cut in Pakistan of 300,000 bales, which had been expected to be larger and likewise for China, most observers accepted the few adjustments the USDA made in this month’s estimate. Meanwhile, the arrival of Chinese Lunar New Year festivities has kept the demand side of the equation on the defensive. As US corn sellers

were excited about new commitments entered into with a Chinese delegation visiting the US, similar sales are anticipated by US cotton merchants to occur during the forthcoming weeks. The weekly USDA export report showed new upland sales of 135,100 bales or 31 percent more than the prior week, however, 12 percent below the prior 4-week average. Exports of 293,600 bales were actually double the previous week and 63 percent more than the 4-week average. Though the report was viewed in line with expectations, shipments have to start to ramp up in order to reach the USDA's current export projections of 13.20 mio bales. Tuesday morning's speculative and hedge report from the New York Board of Trade confirmed the further expansion of the speculative long position, which increased to 42.1 percent versus 36.9 percent net long from the previous week. Spark’s Commodities announcement of acreage increase for the next season by 1.40 mio acres was greeted with little excitement by the market as most private analysis have been pointing towards similar increases, although the final verdict about any increase remains very much unclear as cotton will have to compete quite heavily with the soybean acreage, a commodity which has been also been enjoying a more than 40 percent gain in its value throughout 2003.

Although the market has certainly not been displaying overwhelming conviction for either direction in the past week, the general sentiment is for prices to once again move higher. While expectations on the upside are more subdued now than just a few months ago, the target area of 78 to 80- cents still remains very much alive. Massive buying from China could do the trick.

Although the USDA made numerous changes to this month’s 2003/2004 US Pima estimate, the final change in production amounted to a decrease of just 3,000 bales from 432,000 b/c to 429,000 b/c. Interestingly, government officials chose to decrease yields in Arizona to 960 lbs/acre (from 1,108 lbs), New Mexico to 880 lbs/acre (from 1,040 lbs) and California, as had been widely anticipated, to 1,192 lbs/acre (from 1,278), however, yields in Texas were lifted from last month’s 985 lbs/acre to 1,008 lbs. Likewise, the USDA corrected harvested acreage in the various states. Arizona was decreased from 3,900 acres to 3,000 acres while Texas saw only a minor change from 19,500 acres to 20,000 acres, yet it was in California, where the more significant change took place as total harvested acreage was surprisingly increased from 139,000 to 149,000 acres (New Mexico remained unchanged at 6,000 acres). These changes in acreage and yields ultimately brought production in

Arizona from 9,000 to only 6,000 bales, New Mexico from 13,000 b/c to 11,000 b/c, Texas from 40,000 b/c to 42,000 b/c while California remained unchanged after all at 370,000 bales. Meanwhile, US Pima prices in the interior have softened ever so slightly as a result of the unavailable subsidy and sluggish demand over the past 2 weeks, which in part has to be attributed to the Holiday Season, yet also high prices, shying buyers away from US Pima purchases. Whether this remains a temporary occurrence or will extend further remains to be seen. Present off take, however, is subdued as merely 3,900 bales sold for export during the week ending January 8, which brought total commitments to 412,800 b/c with 340,100 b/c already shipped compared to last year’s 418,100 b/c sold and 211,400 b/c shipped.

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