COTTON DIVISION

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

February 17 - 20, 2004

As expected, after the specs have withdrawn their support of the market, these days it takes proof of physical demand for US cotton or strong competition from neighboring softs, to lift cotton prices higher. Thanks to a constructive export report released on Friday as well as sharp gains in soybeans, which rallied close to 5 percent this week, the market was able to put in what some perceive as a temporary bottom in cotton. Speculators had reduced their net long position as of Friday, February 13 to 7.6 percent from the previous week’s 17.6 percent and although that figure worried some since it left room for further liquidation, it appears this position nonetheless represented some type of equilibrium since we have not yet seen the market dropping further. Meanwhile, the weekly USDA export report fulfilled general expectations of solid business to overseas’ destinations with net Upland sales reaching 566,700 bales, which was 19 percent below the week earlier, but 87 percent above the prior 4-week average. The dominant buyer was once again China with 309,200 bales followed by Turkey and its purchases of 84,000 bales. Actual shipments came in a little weaker at 287,100 bales, which represented a drop of 18 percent from the previous week and 6 percent from the prior 4-week average. Preparing for the next crop, most growers in the US so far have been enjoying decent conditions with adequate subsoil moisture in the East and Southeastern states and some colder temperatures in the Southwest, helping to control the impact of insects by springtime. Only West Texas is once again in dire need of precipitation to permit timely planting in about 6 to 8 weeks, yet even the longer-range forecast is not showing any major system moving across that region in the foreseeable future. On Friday the USDA predicted during its annual outlook forum that

domestic mill use and exports of U.S. cotton will decline in the 2004/2005 marketing year despite an expected weaker US Dollar and less foreign quota barriers. While domestic mill use will fall below 6 million bales for the first time in 20 years, exports will drop by as much as 1.7 million bales in 2004/2005. The current projection places U.S. cotton mill use between 5.5 million and 6.0 million bales for the coming season or roughly half the level seen in the mid-1990s while export sales are expected to drop to between 11.5 million and 12.5 million bales in 2004/2005. Despite such robust sales, ending stocks are sure to increase barring any unforeseen inclement conditions.

Though the range has been widening, US cotton prices continue to be range-bound between 65 and 75 cents for time being and technically it will take a break out above 72.00 cents for the trading month of May 2004 to establish an up-trend again. Unfortunately, with the spec community having exited their long position, it now more than ever takes continuous strong sales to overseas buyers and/or general improvements in the CRB or spec position to prohibit cotton values from quickly falling back down towards the lower end of the current scale.

Some attention in the ‘Pima world’ has been diverted to San Diego this week, where the Supima Association is holding its fifth US Pima Industry Seminar. Though most participants remained upbeat about US Pima and the ELS sector in general, it was evident that the sudden and sharp rise in prices last year, especially once the US subsidy seized to exist, caused grave concern for fine-count textile mills all around the world including the US, as the global economic recovery, still stuck in its infancy for the most part, could not sustain such raw material cost while yarn prices show little to no improvement whatsoever. Even the very successful users of US Pima cotton just last year in the South Eastern region such as Bangladesh and Pakistan had to halt their purchases as prices simply rose too much to justify additional inquiries.

At this time, with weekly exports hovering right between 3,000 – 6,000 bales it takes especially the participation from these buyers in order to achieve the USDA export target envisioned for the current marketing year. The same is holding equally true for the coming harvest as it is clear that American Pima producers will do their utmost to boost ELS acreage for the 2004/2005 season as Upland values are drifting lower. Pima sales for the week ending February 12 came in at 6,600 bales for the current marketing year and 3,500 b/c for the 2004/2005 season. This is pushing total sales now to 429,200 bales for the present marketing year versus 492,000 at the same time last year of which 367,600 b/c have already been shipped thus far compared with 331,000 bales respectively. Judging from

discussions with mill buyers in San Diego, it will take significant discounts to current ELS prices in order to move the coming crop. Although this is a logical conclusion one cannot forget about the fact that US Pima growers have been virtually enjoying near ideal conditions for the past 4-5 crop years, producing one top quality crop after another, a cycle, which one of these days will be interrupted. Most sellers of new crop Pima have therefore been rather cautious in marketing this coming harvest too aggressively just yet.

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