COTTON DIVISION

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

February 9 - 13, 2004

Cotton prices at the New York Exchange continue to be volatile, falling limit down one day only to recover a good portion of its losses on the following trading days. The predominant features this week were the liquidation of long positions by speculators on the one side, battling strong physical demand for US cotton on the other. Although the monthly USDA Supply/Demand Report released on Tuesday was largely neutral, some analysts used its release to explain the sharp losses that occurred during the first half of this past trading week. In fact, U.S. 2003/2004 supply and demand projections were left unchanged this month while global figures included slight adjustments to production, consumption, and stocks. Lower beginning stocks mainly reflected a reduction for Pakistan. World production was raised about 450,000 bales, including increases for China, Australia, and Central Asia, which were partially offset by reductions for Greece and other countries. World consumption came in marginally higher, as increases for China, Pakistan, and Syria were nearly offset by reductions for Europe, Russia, and Hong Kong. World ending stocks were raised slightly. Simultaneously, the weekly spec/hedge report showed another healthy dose of speculators shedding another portion of their previously quite hefty net long position. As of Friday, February 6, the New York Board of Trade showed that the speculative long position had been sharply reduced to 17.9 percent net long, compared to 33.2 percent the previous week. Meanwhile, projections published recently by the U.S. Department of Agriculture indicated on Wednesday that U.S. farmers will bring an extra 2.4 million acres of land into crop production this season, pushing plantings up to 252.7 million acres, according to industry experts. Experts have predicted strong market prices will lead to increased plantings of corn, cotton and rice in the South during 2004 and it will be interesting to see, which crop will obtain the lion

share of this coming season’s acreage increase. Brushing these bearish news for the new season aside, the market was able to renew some confidence, albeit briefly, when it rallied on Thursday after the release of the weekly USDA export report, which highlighted very strong sales of 703,100 bales, a figure well ahead of analysts' expectations. The primary buyer, as had been anticipated, was China with 363,200 bales. Shipments reached an equally impressive 348,400 bales, 9 percent above the prior week and 20 percent above the previous 4-week average. Clearly, the recent drop of New York futures prices to a low last seen 4 and a half months ago, combined with higher prices in the interior in China as well as the further weakening US Dollar provided the adequate backdrop for such substantial sales. Whether a similar figure can be reached for next week’s report, as some observers are forecasting, or not remains to be seen, however, confirmation of such strong demand ought to push prices back to mid 70’s cent range for the spot month.

Further price direction will once again have to be determined by physical demand and with speculators by now having returned their position close to neutral territory, the possibility for significant price advances is high, at least for the nearby positions. On the other hand, should Mother Nature play along for the new season, given the serious commitment to acreage both in the US as well as abroad, and one may have a difficult time anticipating cotton prices in the 70’s or even 80 cent range, yet the ever weakening US Dollar coupled with steadily growing demand could achieve such levels after all.

Weekly US Pima exports for the week ending February 5 came in at 4,800 bales for the current crop and another 1,300 bales for next year. Presently, 422,800 bales have been committed to the export markets of which 365,700 b/c were already shipped. This compares to 485,700 bales sold at the same time last year, of which 308,900 b/c had been shipped during the comparable time period.

The lack of the US subsidy is evident and one has to assume that prices will come under further pressure until renewed demand can be encountered. As for new crop, it appears that the few sales committed so far were concluded at prices well below the asking rates for current crop production and it seems as though growers are contend, at least for time being, to lock in a portion of their upcoming harvest at modestly better prices than last year at the same time. Pre-planting conditions all throughout Arizona and California are

quite good, especially with the recent precipitation experienced in the California valleys and snowfall in the mountains, which has improved the outlook on water availability for the coming season. Meanwhile, western Texas remains in critical need of rain, which may also impact the El Paso region at time of planting.

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