COTTON DIVISION

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

March 24 - 28, 2003

Cotton made a 180-degree turn this week as it announced that it had enough of gradual price increases and rather moves in the direction of the least resistance, which has been lower. Despite decent trade buying that continues to support the market on its downturn, it simply was not enough to evade the call of the speculators and fund houses beginning to liquidate their enormous long position that has been accumulated over months now. Falling through certain key support levels as well as crossing some of the shorter term moving average (50-day) added fuel to the fire and as such the bulls wrote this week off pretty quickly. Much uncertainty continues to loom over the situation in Iraq, with a war that is more and more likely to last for months at first that could turn into years of cumbersome rebuilding thereafter, which does not bode well for the US economy. Other key data released this week could hardly have been more bearish with new housing starts down significantly for the month of February and consumer confidence figures supporting that very move. All of this has to be viewed as bearish for cotton and so it could not escape but give into the inevitable. This happened albeit still decent demand for US grown cotton, which was dampened in recent weeks due to the constant rise in prices, however, still managed to compete quite well in the global marketplace. For the week ending March 20 net new sales reached a respectable 276,200 bales, which was 22 percent less than last week and 15 percent under the 4-week average. Exports on the other hand reached 260,500 b/c equaling the previous weeks shipments and were 19 percent above the 4-week average as exporters cashed in on the relatively high step-2 payment rate offered

this past week. Export shipments, though considerable, however, remain a point of contention, as they are still not high enough to reach the U.S. Department of Agriculture's export target of 10.8 million bales. The weekly speculative hedge report released Tuesday morning had very little impact on the market, even though it showed that despite last week's fall in cotton prices, speculators continued to hold onto their longs. As of last Friday, the speculative net long position stood at 50.0 percent compared with 50.5 percent the previous week. Their gross long position had been reduced only marginally from 64,685 to 64,667 lots. The US Census report on domestic consumption likewise made no lasting impression on market participants as U.S. textile mills used cotton on a seasonally adjusted annual rate 7.29 million 480-pound bales during the month of February. This figure is lower than the 7.64 million bales registered during February 2002. The NCC also revised its January estimate to 7.38 million, up slightly from the previous 7.35 million bales. These figures were all well within market expectations. On Monday of next week the USDA will then publish its monthly planting intention report. Private estimates at this time range from 14.2 to 14.65 million acres, which compares with 13.96 million acres this past crop year. The survey was conducted by the USDA between late February to mid March of this year. The higher price of cotton versus competing crops, subsidies granted by the Farm Bill program and favorable weather conditions in cotton planting areas all point to an increase in acreage. It is once again interesting to note that although cotton futures prices are not currently at a level that will benefit farmers - they have to reach the mid 70.00-cent level to do so - it is the US Farm Bill and the subsidies that it offers that should encourage plantings and will ensure adequate acreage. Direct payments and counter-cyclical payments are program tools that will help farmers. The direct payment, for instance, is fixed and

farmers will be able to collect payment whether cotton is planted or not. Although the release of the planting intention report may have little bearing on prices in general, it should begin to distinguish more accurately between the front and further forward trading months as the nearby period will be dominated by the immediate customer demand yet the prices of forward months will be mostly influenced by the usual weather conditions.

It appears at this stage that futures trading in the past week and a half has hit a seasonal top. May reached a 2-year and contract high of 60.55 cents on March 17 and has been down ever since. Although the market was able to rally back in December, January and February after any breaks, the situation is now beginning to be different. Questions over demand both in the US and abroad have unfortunately grown more complex now and that will ultimately not benefit the price of cotton in the near future.

Plantings of US Pima fields are slowly beginning to take shape. Most growers will be entering their fields in the coming days, especially in the central and northern section of the San Joaquin Valley, where both temperatures and precipitation have reached a nearly ideal level. The biggest question that remains at this stage is the
 

seize of next year’s crop and whether the initial NCC planting intentions of 184,000 acres down sharply from the previous season’s 244,000 acres will prove to be too conservative. California’s drop to 159,000 acres has been at the forefront of debates as a decrease of roughly 50,000 acres from the 2002/2003 season had left many local observers in disbelief. What impact current demand for US ELS cotton will have on growers’ decision and how much impact last year’s Upland yields will ultimately carry is yet to be determined, however, listening to the experts in this field, a modest increase in plantings of about 20,000-40,000 acres almost has to be expected. Meanwhile, sales of both current and last year’s crop are progressing well as the USDA reported in its weekly export registrations, reaching 7,500 bales for the present season and 4,200 bales for the 2003/2004 crop year. Total sales now stand at 551,500 b/c and 10,000 b/c respectively. Current sales from the USDA inventory support these figures as another 15,380 bales or about 75 percent of the last catalogue offering has found a home at prices ranging from the low 70 cents per pound to the mid 80’s. Simultaneously, the USDA offered another 20,168 bales of 2001/2002 crop California Pima.

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