COTTON DIVISION

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

February 2 - 6, 2004

The interrelation between the various agricultural commodities has been very evident this week as cotton fell and rose in almost perfect alignment with some of the other soft commodities such as soybeans, coffee and cocoa. Gradually trending lower throughout the week, the hopes of the bulls hung onto a strong weekly USDA export report, which had been estimated to show as much as 500,000 bales of fresh sales to China plus another 200,000 – 500,000 b/c to other destinations. Likewise, there remained some sense of anticipation for the monthly USDA Supply and Demand Report, expected to be released next Tuesday, February 10. Meanwhile, the speculators went about their business, sharply reducing their net long position, which had stood at 43.9 percent and came down to 33.2 percent as of Friday, January 30. This position is likely to show a much lower figure once released this coming Tuesday. The ICAC announced on Monday that cotton plantings in the Northern Hemisphere are about to start with international prices at their highest level at this time of the year since 1997. Preliminary indications suggest that the cotton area in the Northern Hemisphere will increase 5 percent in 2004/2005 surpassing 31 million hectares for the first time since 1995/1996. Cotton area in China (Mainland) is expected to increase by 10 percent and assuming the return of normal weather, production in China (Mainland) is expected to reach a 20-year high of 6.2 million tons, up 1.3 million tons or 27 percent from the final official estimate of the 2003/2004 crop released in January. World production is projected to reach a record 22 million tons in 2004/2005, up 1.9 million tons, or 9 percent, from this season. Affected by higher cotton prices, with polyester fiber noticeably less expensive, world cotton consumption is expected to remain flat throughout the coming season at 20.9 million tons. China (Mainland) will remain the driving force behind world mill consumption while cotton mill use will

continue to drop in developed countries. Due to higher production in importing countries and stagnating world mill use, world cotton exports are expected to stumble to 6.5 million tons in 2004/2005, down 300,000 tons from the record expected this season. As world production is expected to outpace mill use by 1 million tons, world-ending stocks are projected to increase to 8.9 million tons in 2004/2005, which will push the stocks-to-use ratio outside China (Mainland) to 58 percent, up 3 percentage points from this season and the highest since the 1950s. Noteworthy, especially for the US export business, trade with China (Mainland) is projected to decline to just over 1 million tons, down 300,000 tons from the estimate for 2003/2004. These market fundamentals suggest that the Cotlook A Index will average 59 cents per pound in 2004/2005, or 12 cents below the projected average for the current season. The weekly USDA export report showed net upland sales of 283,900 bales or four and three-quarters times the week earlier and two and two-fifth times the prior 4-week average. Exports of 320,400 b/c were 63 percent more than the prior week and 29 percent above the prior 4-week average. The primary destination was once again China with 134,300 bales.

After suffering from massive fund liquidation over the past two weeks yet receiving some confirmation of good export business, the market appears to expand its previous range-bound trading pattern from 65 to 75 cents. Technically support in the spot month remains at the bottom end of this range with resistance starting at 70 cents. While some expect a further flush out of the remaining speculative long position, which could force the market down to 60 cents, others think that physical demand will support the market adequately keeping it from eroding beyond 65 cents.

Ginning of Pima cotton continued both in California as well as Texas, however, is expected to come to an end by the middle/end of February. Weather conditions meanwhile have been practically ideal throughout the region, permitting growers adequate field preparation for the upcoming planting season. California experienced some welcome precipitation midweek and though it is too early to

anticipate conditions around March 17, the official date after which Pima planting in California is permitted, long range forecasts are calling for warm weather and less than normal precipitation, which ought to be conducive for timely plantings. Provided the 5-day heat units will hit the required target around mid March and a rain-free window can be established at the same time, most farmers will be able to plant early this year. Possibly motivated by such opportunity, new crop offering prices in isolated instances have dropped quite significantly. A few growers are rumoured to have sold some acreage for the upcoming season at around 90-92

cents, which is permitting merchants to sell their production below 110.00 cents on CIF NC terms. Whether this trend will continue remains to be seen, however, despite a relatively bullish supply/demand analysis, there are few things more compelling to a grower than cash-flow requirements. Meanwhile, exports for the week ending January 29 came in at a very modest 1,300 bales for the current crop (418,000 b/c total for the season) yet another 900 b/c were sold for the new crop.

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