COTTON DIVISION

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

February 10 - 14, 2003

The tug of war between the bulls and the bears continues. Although the New York futures market has been able to gradually inch higher, any major advance continues to be met by almost equally aggressive selling. Case in point this past week: The USDA issued its latest Supply and Demand Report on Tuesday, calling for 2002/2003 U.S. projections to include higher mill use and lower ending stocks. Domestic mill use was raised 100,000 bales to 7.6 million bales, based on increases in the reported usage-rate for November and December. Exports were left unchanged at 10.80 mio. bales, causing ending stocks to drop only marginally to 6.2 million bales. The USDA will release its final 2002/2003 ginning figures as well as final upland and ELS production data on May 12th of this year. World projections for 2002/2003 included slightly higher production of 87.64 mio. bales as multiple sources suggested that estimates for China ought to be raised due to higher yields than previously anticipated, however, this increase was partially offset by reductions for Australia and India. Domestic consumption, mainly due to adjustments in the US and Pakistan, was also increased from 96.45 million to 96.77 million bales, leaving ending stocks at 37.85 million bales, down from 37.92 million b/c posted in the previous report. Possibly partially as a result of this report, cotton futures on the New York Cotton Exchange soared on Tuesday to a 21-month high as trade buying took hold amid a void of selling. March settled up 259 points at 53.27 cents, having rallied 300 points to 53.68 cents, its highest level since May 17, 2001, when March rallied to

53.85 cents. Another factor cited as responsible for this move was talk of a lot of export business that supposedly had been concluded over the prior night and over the weekend with purchases especially from China, just having returned from its Lunar New Year festivities. Maybe more important than the rumours was the fact that there were simply fewer sellers around on Tuesday, allowing prices to move higher without the usual interruption that had been witnessed in so many sessions prior. The weekly speculative hedge report was not released until Wednesday morning because of the expiration of March options last Friday. The sharp reduction the market had expected to see, though, in the speculative net long position did not become true. As of last Friday, February 7, speculators held a net long position of 42.8 percent of the open interest, down only marginally from 43.4 percent the week before. The gross long position of 57,115 lots was slightly lower than last week's record level of 57,675 lots. Even Joe Nicosia’s, chief executive of Allenberg Cotton Co. in Memphis, friendly outlook on cotton prices presented during his speech at the Ag Market Network Outlook Conference early Tuesday afternoon was unable to hold prices at their weekly high. Mr. Nicosia’s main prediction was to for the December futures price to rise to between 63.00 to 68.00 cents. Meanwhile the weekly USDA export report revealed that as of February 6 new upland sales of 202,800 running bales had been registered, which was 20 percent short of the week earlier and 16 percent under the prior four-week average. As anticipated, China was a major buyer, yet the volume was at least 50- to 75,000 bales behind general expectations. Exports of 217,100 bales were 2 percent below the previous week and only 3 percent above the prior four-week average.

Cotton prices clearly have a long uphill battle ahead of them, yet this week once again showed that nothing is impossible. As alluded to by Mr. Nicosia, when combining even very slowly decreasing inventory with a steady decline in world production, prices ultimately will have to find their way back towards the mid 60 cent range and beyond, yet only a major announcement can get us there much faster.

American Pima once again registered outstanding sales this past week with new export commitments of 37,900 bales and weekly shipments of 20,100 b/c. Total commitments for the season now stand at 485,700 bales versus 324,100 bales the prior year. The USDA estimate of 525,000 bales therefore remains within close reach, which would leave ending stocks on July 31, 2003 at 352,000 b/c with a stocks-to-use ratio of 55.9 percent. These figures compare with last season’s ending stocks of 328,000 b/c (total production was 700,000 b/c) and a stocks-to-use ratio of 65.5 percent. The Kansas City Commodity Office of the Farm Service Agency announced this past week further sales out of its Pima catalogue of 10,100 bales of 2001/2002-crop California and Arizona Pima as of February 11. The lowest bid

award was 77.61 cents per pound and the highest bid award was 87.02 cents per pound. Though the price average remains on the high side, the USDA immediately cut its interior spot quotation price by Friday on average 2 cents per pound, which will pull the step-2 payment rate once again lower come next Thursday. Growers in the meantime, continue their planting preparations for the coming season, bedding up their fields, repairing and improving irrigation systems where necessary and pre-planting herbicide treatments. Ginning of Pima from modules continued at two gins and was expected to remain active for a few more weeks. Long-range weather forecasts are already advising of possibly wet and windy conditions by April of this year especially in the San Joaquin Valley, which may become a crucial issue, especially for Pima growers. Should the acreage intentions as measured by the National Cotton Council of 184,000 acres hold up in months to come and sales continue at a brisk pace, prices may well move considerably higher than what mills are currently experiencing. Then again, would it be that incomprehensible to see Pima values above a Dollar again or still represent a fair value for mill buyers?

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