COTTON DIVISION

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

February 18 - 21, 2003

The already shortened workweek due to the President’s Day Holiday was further diminished by the Tuesday’s closing of the New York Cotton Exchange due to the excessive snowfall the city had experienced over the preceding weekend. Once open again, the market took its direction from the prior week by drifting rather aimlessly within its familiar range. Amidst the lackluster performance, center stage has been given to the rolling of March longs into May as evidenced by the ever widening switch. The question remained whether the spread had finally been wide enough to discourage delivery on the March contract or to ensure a taker. It needs to be taken into consideration that the changes made by the New York Board of Trade to the cotton contract, which come into effect with the May contract, may have made the March delivery a possibly unique event. The changes primarily affect the age and quality of cotton that can be tendered onto the Board and a portion of the cotton that is currently held in certified stocks will not meet the new specifications, hence cannot be carried forward. There are questions over who will want to risk taking delivery of the cotton on the Board because of the poorer quality bales. The weekly speculative/hedge report was released Thursday morning, having been delayed by the Monday and Tuesday closure of the NYCE, and it showed speculators with a new record long position. As of last Friday, speculators had increased their net long position to 48.6 percent, up from 42.8 percent the week earlier. Speculators gross long position climbed to 57,863 lots while open interest swelled to 91,363 contracts. This extremely hefty speculative long

position continues to overshadow the market, making it very vulnerable to a significant downside correction in the near future. Despite the widening March/ May switch (or maybe because of it) export sales this week arrived at (only) 205,700 bales, which was up 1 percent from the previous week but 9 percent under the 4-week average. Exports amounted to 228,900 bales or 5 percent more than during the prior week as well as 11 percent over the 4-week average. Interestingly, Cotlook Outlook reported on Thursday in its February world supply/demand report that it sees a sharp recovery in world cotton output for the 2003/2004 season but that stock levels will nonetheless decline. In its first estimate for the new season, Cotlook said it anticipates world production will expand by 9 percent from 2002/2003 to reach 20,672,000 tons yet world raw cotton consumption is expected to grow by slightly over 1 percent in 2003/2004. World stocks will fall by over 2,000,000 tons during 2002/2003, and Cotlook said that its initial forecasts indicate that a decline of a further 600,000 tons can be anticipated during 2003/2004.

Undoubtedly, the cotton market is facing a tough challenge in months to come. While fundamental issues suggest a possibly gradual recovery of prices, a near-term correction as a result of the massive spec-long position has to be anticipated as well. There seems absolutely little, though, that will stir up the market sufficiently at this stage, allowing it to obtain significant momentum to either direction.

The situation surrounding the old- and current-crop Pima market has shown little change this past week. While the USDA continues to actively sell its grower-forfeited inventory from the past season, current crop production is now more or less doomed to enter the same fate as growers are

delivering their present harvest also to Uncle Sam. The Kansas City Commodity Office of the Farm Service Agency sold another 10,300 bales of Pima 2001/2002-crop Pima cotton on February 18. All of the bales were located in California and Arizona. The lowest bid awarded was 78.64 cents per pound and the highest bid award was 87.34 cents per pound. With the step-2 payment providing yet another week of right around 12 cents of export subsidies, sales continue to flourish. The USDA reported another 6,700 bales had sold during the week ending February 13, which brings the cumulative total for the season to

492,400 bales of 525,000 bales estimated by the USDA to be sold before the season is over. Not having to worry much about selling their bales into the free market, growers concentrate on field-preparations. The official deadline of March 10 in the San Joaquin Valley is now fast approaching and at this time weather conditions are somewhat less than ideal as repeated precipitation is being watched as potential cause for planting delay. The situation will require close monitoring.

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