COTTON DIVISION

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

January 21 - 24, 2003

Cotton futures went from uneventful trading the prior week to mostly lower values this week. The primary reason behind the price decline can be summed up by two words: speculative liquidation. The speculators, who had amassed a significant amount of long futures over the past few months, began Friday of last week to sell their stock. Values started to decline although the trade remained a supportive buyer every time the market came off, highlighting among others the merchants’ ability to move cotton into the market place as prices have been or once again became more attractive. The March contract went as low as 49.92 cents, its lowest level since December 18. The weekly spec/hedge report, whose publication as a result of the Martin Luther King Holiday had been delayed by one day to Wednesday, confirmed the adjustment of speculators’ position as the net long position as of Friday, January 17th had been reduced to 44.3 percent of the open interest, reflecting, however, only the first day of speculative selling. The weekly USDA export report provided the second component to the puzzle, revealing fresh sales of 188,100 bales for the week ending January 16, 2003, which was only slightly behind general expectations. Actual exports arrived at 166,500 bales or 18 percent less than the 4-week average. While export sales need to improve to meet the current USDA target of 10.8 million bales for the season, lower prices are once again expected to stimulate fresh sales in weeks to come. Traders are estimating that weekly shipments must average 245,000 bales until the end of the season to hit the USDA

estimate, which does not yet appear to be an impossible task.

Although the cotton market has yet to impress most observers and remains burdened by the imbalance between significant supplies versus demand, the writing appears to be on the wall, that even cotton stands a chance to be swept away by increasing prices partly due to increasing demand and shrinking supplies but also growing question-marks about next season’s production worldwide (weather / competing crops). Equally important, the renewed interest from investors and many other market participants to use funds previously tied up in equities or other short-term investments to explore the soft commodities may well point towards improving values. Both cocoa as well as coffee, soybeans as well as vegetable oils, even industrial goods such as copper, platinum and gold have witnessed this resurgence in the recent past for a host of different reasons. While there can be little doubt that this increase in liquidity will simultaneously increase volatility, the fundamental side of cotton has already been well built into current prices. As sure as the seemingly never changing picture of the cotton outlook lulls the senses, the market will ultimately surprise by moving towards a higher trading range, finding a more adequate balance between supply and demand.

American Pima trading remains very strong as reflected by the weekly export sales data. For the week ending January 16 another 18,800 bales were registered as new sales, while shipments reached 23,600 bales. The cumulative total for the season now stands at 436,000 bales out of 500,000 bales estimated by the USDA for the entire season.

It is noteworthy to mention that while sales remain firm, interior prices for 2002//2003 crop Pima are increasing as well, having jumped to around 95 cents for Grade 2, 1.7/16, premium micronaire, FOT ware-house. Equally interesting to note is the publication of the latest USDA Pima catalogue, which still accepts bidding until Monday, January 27. It s widely expected that this catalogue will be relatively heavily bid as many merchants had sold to overseas clients at prices most likely to be covered through auction purchases of last year’s crop. Once this first wave of demand

dries up, it remains to be seen whether US Pima will see a drop in prices, at least for 2001/2002 crop bales, while the current crop, with a gradual decrease in step-2 subsidies, is becoming more expensive. Meanwhile, ginning at most points is anticipated to last until the middle of February while farmers are beginning to prepare their fields for the sowing of the new season. “Be wary of the weather” seems to become the motto of both growers and local observers at this stage.

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