COTTON DIVISION

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

April 12 - 16, 2004

This has been another volatile week for the cotton market. Amidst demand concerns and an overall frosty climate for commodities, cotton suffered a severe drop in prices prior the May ’04 option expiration this Friday, only to see some of the losses partially mitigated before the end of the week. It appeared as almost inexplicable losses at first when cotton declined to a 10-month low on Monday only to “top” that performance on Tuesday when falling to fresh 1 1/2 –year lows. Recognizing a lack of demand from North America’s largest cotton buyer, China, over a number of days, once again highlighted the dependence on this major consumer, whose internal prices also suffered setbacks earlier this week. Despite the drop in prices, fresh sales were hard to come by and the lack in physical activity was mirrored in the market’s overall behaviour. Simultaneously, the rise in the US Dollar and growing concern over a looming increase in US interest rates has been shying investors away from commodities in general and cotton has been no exception. The liquidation mode many speculators seemed to have entered, especially in some of the industrial commodities but also the grain complex and its related products, clearly affected cotton this week as well. The follow-through selling, though, that had been generally expected, came to a temporary halt as an unexpectedly constructive export report provided a new albeit short glimmer of hope. Net Upland sales of 186,300 RB were down 27 percent from the previous week and 16 percent from the prior 4-week average, however, exports of 476,000 bales represented a marketing-year high and were 8 percent above the previous week and 24 percent over the prior 4-week average. Considering such strong shipments, it appears likely that the US will reach its export target of 13.8 mio. bales for the

season as it now requires sales of 350,000 to 400,000 bales per month for the balance of the season to meet the current USDA estimate. Meanwhile crop progress has to be considered as healthy as 11 percent of the entire US cotton acreage had been planted as of April 11 versus 8 percent last week, 7 percent at the same time last year and the five-year average of 7 percent. The one state notably ahead of schedule is California, where already 60 percent of its estimated cotton acreage has been planted versus 16 percent at the equivalent time last year and the five-year average of 23 percent.

Considering the ever declining demand for raw cotton in the US itself, American producers will have to seek alternative markets aside from China, where the economy (GDP +9.3% for the first three months of 2004!) unavoidably will suffer some setbacks in months to come. Though many are beginning to call for cotton to have seen the bottom in prices here, which is very well possible, one at least has to expect a volatile ride as the environment for commodities remains difficult due to some very uncertain economic and political developments.

Overall progress throughout the US Pima belt has been described as very satisfactory and among the best in years as conditions particularly in California have been conducive to the growth of the young plants. About 80 percent of the expected Pima acreage has been planted and early fields are showing some strong stands. Unusually cool temperatures for the season are expected for this weekend, possibly combined with some precipitation yet widespread replanting is not expected to be required thereafter. Likewise, field condition in Arizona, New Mexico and Texas are generally to growers’ liking and the new production seems to be off to a very good start so far. Meanwhile, weekly Pima export sale for the week ending April 8 came in at 3,000 bales for the current crop year and 1,600 b/c for the next season, lifting total commitments to 449,400 bales for 2003/2004 and 23,200 b/c for 2004/2005.

Thanks to the presently available US Pima subsidy, pace of current crop sales appears to be growing while new crop sales are still lagging behind, primarily due to a shift in mill buyers’ purchasing pattern, which in part is also due to the US ELS subsidy payments of past seasons as well as fine-count yarn inventories, which worldwide are more than adequate. Undoubtedly, the excellent progress enjoyed so far for the new production will entice many merchants to become more aggressive with

their offerings and it is generally expected that a price level of below $1.00 C&F will stimulate especially buyers in the world’s southeastern region, which in return ought to lift values again as supplies for 2004/2005 must still be considered tight on balance.

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