COTTON DIVISION

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

January 13 - 17, 2003

This has been one of the less exciting week’s for the cotton market as prices continued to gradually erode, hitting a two-week low on Friday as local selling triggered several speculative sell stops. Losses in other commodities such as grain, meat and food also put pressure on prices after the market had remained relatively resilient upon the publication of the bearish-received crop report for the month of January. The weekly spec/hedge report released Tuesday morning appeared to have had limited impact on the market despite the speculative long position growing to a record-high level of 45 percent net long of the open interest. The New York Board of Trade confirmed Thursday that the long position of cotton futures held by speculators on the New York Cotton Exchange was in fact a record level, the highest since NYBOT's data begins in 1988. The new contract change on the NYCE coming into effect with the May 2003 contract will mean higher specifications for cotton to be certified and penalties to be applied to old cotton. Traders have estimated that there are currently 75,000 bales that will not meet the new minimum requirement, making a large portion of stocks available for delivery on the March contract.

Along with this issue of deliverable cotton is the large speculative long position cited above with 58 percent of the total open futures contracts held in the month of March, which will either need to be rolled or liquidated, ultimately leading to a pullback

in March prices. Meanwhile, according to the U.S. Department of Agriculture, for the week ending January 9 net upland sales of 271,000 running bales were recorded, two and a third times the previous week’s volume and 58 percent above the prior four-week average.  Exports of 240,000 bales equaled the previous week and were 26 percent above the prior four-week average. The USDA export target for the 2002/2003 season remains at 10.8 million bales and China, which was conspicuously absent as buyer this past week, is expected to surface as a key buyer in the next few months, which many are anticipating will help the market to meet the USDA's estimate. Looking historically at sales and shipment figures, from 1994 through 2001, the vast majority of sales were already on the books by the mid point of the season around late January. At this stage, in order for US exporters to reach Washington's figure, monthly sales at a minimum must average 553,000 bales from heron forward.

The bulls are having a tough time with prices above 50 cents as evidenced again this week. Should March futures ultimately fall below 50 cents the recent up-trend will be severely questioned and may well pull prices further towards 48 cents, the next support level, where large buy-orders are expected. Additionally, an increase in export business can be anticipated at such rates, allowing the market to recover, continuing its prior move towards 55/60 cents.

Pima gins are now beginning to shift back to 8-12 hour shifts with most of the modules having been delivered to the gin-yards for processing. Ideal weather continues have permitted farmers to cultivate their fields, shredding plants and applying weed control.

The decision-making process of what to plant for the coming season will kick into high gear soon and the general assumption remains that US Pima acreage as a result of record high Upland yields this year will shrink by about 15 percent in 2003/2004 in California while remaining virtually unchanged in Texas, New Mexico and Arizona. Such plans would bring the cumulative acreage to about 205,000 acres or a total US production of 500,000 bales, down significantly from this year’s 645,000 bales. Should the combination of step-2 export subsidies and “catalogue-cotton” in fact spur further demand overseas during the coming months, it is conceivable that the US may end up with stocks around 275,000 bales or a stock-to-use ratio of below 40 percent. While it remains difficult to imagine ELS prices to move sharply higher in the foreseeable future, one should never underestimate the importance especially of the first portion of the season, when during the meticulous planting time much can go wrong should a late El Nino pattern cause continued precipitation for example. After the last two seasons have virtually provided ideal planting and growing

conditions, the pattern is about to break. Meanwhile, the USDA contrary to general expectations decided to publish its first auction of 2001/2002 Pima cotton today. It is expected that interest in this cotton will be high based upon recent sales and offering prices, which means that the local spot prices won’t change dramatically in the US just yet, keeping the step-2 rate at about its current level. Additional catalogues, though, may not be as heavily bid, ultimately pushing prices lower, thereby erasing the step-2 availability. How much of this cotton can be sold remains the key question, yet the possibility of continued strong sales ought to be considered, validating the above mentioned stock-to-use ratio. Weekly Export Sales of 12,200 bales for the week ending January 9 had already brought the cumulative total of sales to 418,100 b/c for the current season, which compares to 310,200 bales at the same time last year and the USDA target for 2002/2003 of 500,000 bales.

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