COTTON DIVISION

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

March 10 - 14, 2003

The market continues its gradual move higher, marking a new 2-year high this week as a result of primarily the market’s inability to shake the confidence of the speculators with their sizeable net long position and in response to continuously strong physical business as well as subsequent merchant hedges upon mill price fixations. The release of the weekly spec/hedge report missed its target as market observers largely ignored the ever- rising net long position, which once again breached previous record levels. For the week ending March 7, the speculators again increased their longs, which was expected to make a new record gross position of 64,105 contracts, but the increase in open interest - which at 93,313 contracts was said to be a new 4 1/2-year high - skewed the percentage terms of the speculative group again showing that they held a net long position of 50.3 percent versus 51.7 percent. Likewise the release of the monthly USDA supply/demand report generated no excitement whatsoever, contrary it seemed as though its publication was calming the market’s movement. Going into the report, the consensus had been that there has been a lack of any new information since February's report and that any changes may occur in the April and May reports. This month's U.S. 2002/2003 cotton supply-demand projections included only a slight increase in imports of less than 10,000 bales, leading to an unchanged balance sheet with 17.15 mio. bales of production, 10.80 mio. bales of exports and 7.60 mio. bales of domestic consumption, keeping ending stocks at 6.20 mio. bales. The world cotton 2002/2003 projections included a slight reduction in beginning stocks, largely offsetting increases in production and consumption, resulting in marginally lower ending stocks.
 

Adjustments in beginning stocks from 87.64 mio. bales to 87.99 mio. bales mainly reflected changes in prior years' trade estimates for Europe. The global trade estimates incorporated recent information from China's National Bureau of Statistics, including higher 2002-crop production and higher textile yarn production for calendar year 2002. In addition to the increase for China, production was raised in Brazil, but lowered in Pakistan and Zimbabwe. Consumption likewise was raised in China and Mexico but lowered in Brazil. World stocks were reduced by less than 1 percent from 37.85 mio. bales to 37.57 mio. bales. The next report awaited with a higher level of anticipation is the final ginnings report on March 21, which will tell the final size of the US crop, and the USDA plantings intention survey for the 2003/2004 crop on March 31. Meanwhile, the USDA reported record-breaking sales of current crop sales, the highest so far for this marketing year. China buying 162,800 b/c, the largest weekly purchase since January 18, 1996, was one of the highlights for the market. In the U.S. Department of Agriculture's weekly report released Thursday morning, as of March 3, total net Upland sales of 379,200 running bales were registered, which was an increase of 23 percent over the prior week’s report and 56 percent above the four-week average. Exports of 253,700 bales were 30 percent above the previous week and 26 percent higher than the prior four-week average.

This week, locals have been trying to press the market down all week and failed, being caught between two strong figures - the mills and the funds. The market found itself in a in a standoff between where the mills are forced to buy and where `the funds can be forced to sell. However, it is the mills' need to fix that has forced them to bow first. Though an interim correction of this week’s highs has to be expected, the longer-term picture remains optimistic for further increases towards the mid 60-cent range.

Of some interest especially to the European reader may be the U.S. Department of Agriculture press release this week, in which the EU is expected to consume 4.37 million bales of cotton in marketing year 2002/2003, down slightly from 4.44 million during the last marketing year, but down 21 percent from marketing year 1992/1993. Some of the smaller EU textile countries, such as Finland, Denmark and Ireland, are believed to have dropped below three thousand bales of annual cotton consumption. The largest three cotton consuming EU countries, Italy, Greece and Portugal, however, have held onto, and even increased their share of total EU consumption over the past ten years. The share of EU cotton consumption imported from non-EU countries (primarily Central Asia) has risen slightly. At the same time, cotton exports to non-EU countries (primarily Turkey) have risen faster than EU cotton production. Interestingly, compared to other mature markets over the past ten years, EU cotton consumption has fared relatively well. U.S. cotton consumption is down by 26 percent from 1992/1993 levels and down 33 percent from the high in 1997/1998. Japanese cotton consumption has fallen steadily since 1992/1993 and is down 57 percent from ten years ago.

On Pima related issues, the USDA accepted bids on another 99,798 bales (out of 10,393 bales offered) at prices ranging from 79.11 to 87.56 cents per pound, in warehouse, compression for buyer’s account. Subsequently, the USDA offered additional 10,405 bales of exclusively
 

2001/2002 crop California Pima for sale. Given the speed and the price range at which the last 65,821 bales were sold, it does not seem unrealistic to assume that the remaining roughly 130,000 bales (as per the information obtained from the USDA office in Kansas City) of forfeited 2001/2002 crop will be sold equally fast. Considering the 30 percent reduction in Pima acreage for the coming crop year and subsequent decrease in production to an estimated 480,000 bales, it is not inconceivable that the total availability of American grown ELS cotton may well cause values to increase sharply in months to come. In addition, the weather in California is still wet and relatively cool for this time of the year, prohibiting growers from getting an early start into their planting efforts. The next 2-3 weeks will still provide an ideal window for sowing, yet the near-term weather forecast keeps calling for more of the same pattern at least for the coming seven days. While it remains unknown, what acreage and production figures will look like in Egypt, it does not take much skill to predict that between known reductions in production/availability here in the US and the usual implications possibly caused by the weather, market participants will have to remain on their toes as prices of 2003/2004 crop Pima are moving higher. Weekly export sales as reported by the USDA for the week ending March 6, 2003 were once again impressive with 8,700 bales sold to overseas clients, pushing the cumulative total now to 524,100 bales for the current crop year.

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