COTTON DIVISION

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

February 24 - 27, 2004

Short of some surprising news rumoured to be coming out of China at some point in the (near) future, cotton prices drifted aimlessly, once again tracking the performance of some of the other industrial and soft commodities this week. Though it appears the majority of market observers believe or want to believe in rising prices for cotton, underlying fundamentals as well as the technical picture can be construed as suggesting differently. Although exports came in weaker than generally expected, anticipation is running high that once step-2 subsidy payments are becoming available again, weekly commitments will increase sharply. For the week ending February 19, net Upland sales of 198,800 bales were 65 percent below the week earlier, and 51 percent under the prior 4-week average. The major buyer was once again China with smaller quantities sold into Turkey, Indonesia and Hong Kong. Exports of 271,800 b/c were 5 percent less than the previous week and 6 percent under the prior 4-week average. The primary destinations were China, Mexico, Turkey and Brazil. U.S. cotton prices continue to trade at a sizable discount to Chinese internal prices, and market sources said

rumors that the Chinese government will issue an additional import quota of 1 million tons of cotton (4-1/2 million bales) has put further pressure on China's spot trade. Meanwhile, the National Cotton Council pegged annualized cotton mill use in the U.S. at 6.49 million bales in the month of January 2004, down 11 percent from the January 2003 figure of 7.36 million bales. The December figure was revised to 6.67 million from a previous estimate of 6.62 million bales. Speculators in the meantime had altered their position very little up to this week as the spec/ hedge report as of Friday, February 20 indicated. Speculators at that time were 7.9 percent net long, compared to 7.6 percent the previous week, according to the report. It should be noted that by now, this percentage ought to have once again increased to well over 10 percent.

Although the macroeconomics for cotton look quite good, as for many other commodities at the present time, it is becoming difficult to convince oneself of a steady incline in values. Though cotton acreage this coming season will have to compete head-to-head with soybeans here in the US, the latter having enjoyed an amazing rally over past months, it will take more than that to push traditional cotton growers into alternative crops. Adding to that a global economic recovery that with some exception is still stuck in its infancy and one wonders how much higher cotton prices can rise without the help of the specs.

Pima exports for the week ending February 19 stood at 2,700 bales for current crop, lifting the total commitment to 431,000 b/c of which 370,700 b/c have already been shipped. This compares with last season’s 508,000 bales sold and 343,400 b/c shipped. Meanwhile, early planting preparations continued. Recent precipitation in the San Joaquin Valley and snow in the mountains has improved the water outlook for the spring planting significantly and the overall moisture situation looks very good. It is expected that producers there will begin planting around the last of March. As usual at this time of the year, much consideration is being given to acreage figures and estimated production for the coming season. Though the known uncertainties linger with regard to weather and general climate

conditions, it is safe to assume that next year’s production will come in right between 600,000 and 650,000 bales, assuming 205,000 to 225,000 acres for California. Beginning stocks for the new season, should sales to domestic mills and overseas buyers continue at the current pace, will most likely be less than 50,000 bales, which means total availability of roughly 30% less than seen for the 2003/2004 season. Though limited offering prices for 04/05 crop at the current time suggest growers receive around 90 cents per pound, such level remains most difficult to envision for the remainder of the season.

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