COTTON DIVISION

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

March 8 - 12, 2004

Despite a supportive USDA Supply/Demand Report released this week, prices in New York continued to tumble, primarily under the pressure from the funds further liquidating their remaining long position. The trade, trying to stabilize values, was no match for the onslaught of selling that came from the funds and the speculative camp this week, which had found little enthusiasm for cotton after reading the latest spec/hedge and weekly USDA export report (96,200 b/c fresh sales and 316,400 b/c in actual exports) as well as rumours of contract cancellations from China (which remained unconfirmed in this week’s USDA export report). The spot month tumbled to a level not seen in the past 6 months after continuous days of aggressive selling, some forcing the market limit down, sparked also by lack of fresh business despite the constant price decline. Tuesday's spec/hedge report from the New York Board of Trade showed that the specs with 18.9 percent of the open interest have remained "surprisingly" long compared to 22.5 percent the previous week. The minimal percentage change in the spec net long position was viewed as bearish especially after last week's lower market performance. Meanwhile, the monthly Supply and Demand Report issued on Wednesday was widely regarded as bullish as it reflected expected increases in U.S. exports and domestic use along with a rise in Chinese numbers from February, in line with most analysts' expectations. Analysts billed the report as "bullish" and "friendly" for the market, however some said the increases in U.S. numbers may be a stretch for a market that was already trying to meet an aggressive U.S. export figure of 13.22 million bales, reported in February. U.S. cotton output stood at 18.22 million bales in March, with pre-report estimates ranging between 17.6 million and 18.22 million. The U.S. export figure was raised to 13.8 million bales for March compared with the USDA's February estimate of

13.2 million bales, which represents an aggressive increase, especially in light of rumours of Chinese buyers’ cancellations of cotton purchases concluded some time ago when prices were above 70 cents. In order to meet this latest USDA estimate, U.S. shippers will have to sell and ship close to another 3 million bales between now and July, which is a rather ambitious task. U.S. domestic usage was also increased, in line with analysts' expectations from 6.2 million bales as reported in February to 6.3 mio bales as slower growth in textile imports has stabilized American mills' share of the U.S. retail market. Further rise of domestic consumption remains feasible should the U.S. economy strengthen. U.S. ending stocks were lowered from 4.25 million b/c to 3.55 million bales or their lowest level in 8 years. World numbers saw increases across most of the board with the USDA raising world production, imports, domestic use and exports. World production was raised to 92.86 million bales in March from 92.65 million bales last month, while world beginning stocks dropped to 36.37 million bales from 36.77 million bales reported in February. World production was slightly higher, as increases for Australia, Brazil, and Iran were partially offset by reductions for India and Sudan. World imports rose to 33.86 million from February's 32.37 million and increases were also noted in domestic use, which rose to 97.88 million from 97.24 million in February, and exports, which increased to 33.44 million from 32.02 million last month. World consumption was raised in both 2002/2003 and 2003/2004 based on new data indicating that China's consumption in calendar year 2003 was larger than expected. Consumption was also raised for Turkey and the United States, but reduced for India and Europe. Ending stocks, reflecting a reduction of 2 percent from the previous month, were dropped to 31.73 million from 32.49 million in February. China specifically saw increases in imports, domestic use and ending stocks while beginning stocks were lowered. Imports were raised 1.5 million bales to 8.5 million bales in March. Domestic use was estimated by the USDA at 31.50 million, up from 30.50 million in February. Ending stocks were 100,000 bales higher at 6.88 million.

Futures on the New York Cotton Exchange clearly continue to reflect the battle between trade buying and spec selling. While there remain some fundamentally supportive factors, it will once again take the confirmation of actual, fresh physical business concluded to lift prices higher again. Short of that the specs are destined to maintain the upper hand for time being.

Weekly U.S. Pima export sales stayed the course with 4,900 bales of new sales, bringing cumulative sales to 439,700 b/c versus last year’s 524,100 bales. Activity has clearly slowed down in recent weeks as offering prices are being met by stiff resistance from buyers, who continue to face sluggish off-take for their production and yarn prices that simply have not improved significantly enough. The sputtering global economic recovery is one of the main culprits as well as the weaker US Dollar and the constantly increasing competition also in the fine count yarns/fabrics from manufacturing countries in the Far East, especially China. While buyers are contemplating their purchases for nearby deliveries, they are being tempted to delay their decision as long as possible due to the lure of

noticeably lower new crop prices and although the usual uncertainty regarding new crop production will keep prices from eroding too much at this stage, it seems safe to assume that even next season’s prices collectively will have to come back lower to entice fresh interest. Given the overall limitations of total production for this coming year, however, such a dip in prices ought to be seriously considered as buying opportunity of 2004/2005 crop Pima. The recent slowdown in sales has been reflected in this month’s sole change to the Pima balance sheet as per the USDA Supply/Demand Report released this week, which showed export sales for the 2003/2004 season reduced by 25,000 bales to 500,000 b/c, effectively increasing ending stocks from 109,000 to 134,000 bales or 23.1% stocks-to-use ratio. Meanwhile, planting preparation are in full swing and past week’s daytime temperatures having been in the mid to upper 80’s in the San Joaquin Valley are considered very beneficial to ensure an early planting date.

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