COTTON DIVISION

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

March 15 - 19, 2004

Cotton futures generally moved higher this week, supported by the latest spec/hedge report, the weekly USDA export report, considerations concerning the acreage intention report to be released March 31 by the USDA as well as other commodities both soft and industrial gaining noticeably in value. The New York Cotton Exchange began rallying at the close on Monday, pulling up from 6 1/2-month-lows as trade buying converged on the market late in the day. Sources said there was a divergence in cotton prices as grain as well as industrial prices rallied, lifting the CRB 1.5 percent on the day alone thanks to the performance in cocoa, coffee, copper, crude oil etc. Meanwhile, there remains a great deal of uncertainty concerning the U.S. Department of Agriculture's planting acreage data that is due for release on Wednesday, March 31. The majority of analysts expects that report to show lower cotton acreage in favour of soybeans due to the much more favourable cost/price ratio for soybeans versus cotton. Not only are soybeans trading above $1.00 as of Thursday of this week, but the cost to grow this crop is considerably lower than for cotton. Of course, growers switching at this time have to consider their loss of federal allotments and respective subsidies as well as the nearly ideal planting conditions that presently exist for cotton whereas weather conditions in May/June, when the majority of soybeans are to be planted is obviously unknown. Last but not least, those growers enticed merely by the potential reward of high prices have to contemplate the obvious effect on values once higher soybean acreages are announced not only in the US but elsewhere in the world as well as the high cost of seeding- and harvesting equipment purchase or rental. At this time, average estimates range from 14.0 – 14.20 mio. acres versus the National Cotton Council’s early 2004 analysis of 14.76 mio. acres for 2004 up 9.5 percent from last

year’s 13.5 mio. acres. Tuesday's spec/hedge report from the New York Board of Trade showed a decline in net long position held by the spec community over and beyond general expectations after last week’s disappointing drop of only 3.6 percent. For the week ending Friday, March 12, the net long position held by speculators was reduced to 4.7 percent versus last week’s 18.9 percent. Likewise, the weekly export report arrived with a bullish figure of net upland sales of 458,600 running bales, which were 4 3/4 times the week earlier and 82 percent above the prior four-week average. Exports of 320,200 bales were 1 percent above the previous week and 7 percent above the previous four-week average. Observers had anticipated export sales of 100,000-250,000 bales - based on lower futures prices, however, for next week's export sales report, the same sources say that they expect a number closer to last week's data when sales totaled only 96,200 bales as sales have been dismal this week. Shipments, nonetheless should remain strong as the Step 2 export subsidy goes into effect.

This week’s move higher in cotton was primarily due to an improved outlook in fundamentals and technicals yet the question remains whether such direction can be maintained especially after the release of the acreage intention report.

Due to a change in the USDA transportation adjustment factor and a simultaneous drop of the CIS Cotlook quote, the likelihood of an American ELS subsidy payment for domestic consumption and shipments occurring during the week from April 2 to 8 is once again improving. At this stage, after completion of the second of the four week process the theoretical value stands at 17.73 cents per pound, however, it needs to be noted that the USDA interior spot quotations have also increased in recent days, reflecting the higher prices growers are demanding to sell their remaining 2003/2004 production. This means that prices offered overseas may not see much of a decline at this time as the benefit of the subsidy payment will be offset by the higher purchase price to be paid to American farmers. Meanwhile, pre-planting conditions in

particularly in California but also in Arizona, New Mexico and Texas are virtually as good as can be expected and producers are gearing up to plant their Pima acreage in the coming days. The longer-range forecast is equally encouraging and it seems the new crop production, so far, is off to a very good start. Export sales for the week ending March 11

came in at net 3,800 bales for the present crop year, bringing total commitments to 443,500 bales versus last season’s 545,000 bales. No new sales were reported for the 2004/2005 crop year.

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