COTTON DIVISION

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

April 19 - 23, 2004

Cotton’s saving grace this week came among others in form of switch activity, primarily the shifting out of the May ‘04 and into the July’04 position as First Notice Day is fast approaching on Monday, April 26. The active buying of the May’04 month was able to lift the further forward positions alike and permitted the spot month to close higher for the week. Simultaneously, the spec/hedge report released by the New York Board of Trade on Wednesday showed a substantial rise in the speculative short position, growing from 7 percent the previous week to 21.6 percent, providing some general support for the market. Despite the missing Step-2 payment for export, which is expected to return around May 7, weekly registrations nonetheless arrived at 171,900 bales, 8 percent less than the prior week but 11 percent above the 4-week average. Export shipments of 323,400 bales came in at 32 percent below the previous marketing year high and 23 percent under the 4-week average, however, still verified that the US is well on its way to achieve its seasonal target of 13.8 mio. bales during the 2004/2005 season, requiring just 278,000 bales of shipments per week from hereon forward. Further support for the market came from the April edition of the 2004/2005 Supply/Demand Report published by Cotton Outlook this week. The Liverpool group lowered world production surplus by 218,000 tons to 634,000 tons as world consumption was raised 190,000 tons, primarily the result of further expansion in China while production was reduced for the U.S. as well as Argentina. Meanwhile, dry weather is moving into the U.S. Southeast, beginning to affect growers’ planting decisions as the soil may simply become too dry to plant cotton. Average crop progress as of April 18 stands at 15 percent versus previous week’s 11 percent, last year at 11 percent and the five-year average of 11 percent. The only State that stands noticeably out of the crowd is California, where 85 percent of the estimated acreage have already been

planted versus 60 percent the prior week, 26 percent at the same time last year and the five-year average of 43 percent.

While the market appears as though it may have found a temporary bottom or at least remain within a relatively close trading range, it remains unclear whether one can expect prices to move gradually beyond current resistance points or rather drop through the present support line. Given the fundamental as well as technical picture, though not too negative near-term, it appears prices may well drift lower in the longer range, barring any unforeseen weather problems in producing countries.

Crop progress for US Pima at this stage can only be described as extraordinary as ideal conditions in California are aiding the young crop to advance very quickly. Temperature, which have remained above average and less precipitation than usual have paved the way for a fantastic start into the new season to grower out West and similar comments are heard from producers in Arizona, New Mexico and Texas. Meanwhile, weekly sales despite the significant Step-2 contribution highlight the underlying malaise in the fine-count market. New sales arrived at a mere 2,400 bales, bring the cumulative total for the season to 451,700 bales versus 578,300 bales at the same time last year. New crop commitments gained 4,100 bales to 27,200 b/c compared with 31,900 bales the previous year. While one would safely assume that the present US subsidy in excess of 23 cents ought to be sufficient to sell a substantial amount of US Pima, sales so far are only trickling in slowly as interior prices have remained virtually unchanged over past weeks. Though there are certainly more than adequate stocks of this season’s high quality production left, it is as always not quite clear how much of that is held by the various suppliers. As unsold stocks that had been previously shipped overseas must be just about firmly committed by now, one has to expect either a price drop and subsequent sales of American ELS cotton or heavy movement of Pima bales overseas in the coming weeks while the Step-2 rate is applicable, both of which with the same effect of limiting supply, even if it is just on the surface.

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