COTTON DIVISION

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

April 26 - 30, 2004

This has not been a very good week for the cotton bulls. Plagued by underlying concern over additional purchases from Chinese purchases, the new main customer for American cotton producers, coupled with an overall liquidation in the industrial commodities this week by speculators equally affected cotton values. Meanwhile, the lack of significant production worries either in the US or China continues to highlight the abundance of supplies, substantiating the market’s direction lower. As Chinese officials announce that it is time to take steps, controlling the current economic growth rate by tightening money supplies, increasing interest rates and other measures aiming to reduce among others the risk of inflation, global suppliers are beginning to worry to whom else they can sell their raw- and semi-finished products. With the economic recovery in most other regions of the world still lagging behind, the concern is real that despite low interest rates in the US and a Dollar value still well below past levels, demand for commodities will suffer and as such prices will deteriorate. Simultaneously, the ongoing discussion about agricultural subsidies and the WTO panel's 350-page ruling in favour of Brazil’s original claim, does not bode well for the stability of cotton prices, though it is far from clear whether and more importantly when such decision may favour higher or lower cotton prices. While the WTO criticized and called into question such payments as the Step 2 subsidy as well as most other U.S. export guarantees, which usually cover around $4 billion in shipments per year, it all depends on whether and when the U.S. may decide to comply. By appealing the decision and asking for a generous amount of time to put it into practice, Washington could delay compliance for years. By then, world-trade talks known as the Doha Round could be completed, including provisions on agriculture under which all nations would commit themselves to reducing subsidies. The weekly spec/hedge report released

by the New York Board of Trade on Tuesday showed a rise in the speculative short position with y well continue for time being, it seems that further speculators 24.2 percent net short compared to 21.6 percent net short the previous week yet this was apparently not short enough as the market staged a limit-down close immediately following. The US Dollar gaining in strength this week was also not the most helpful feature for the market as it may well curtail future export sales. For the week ending April 22, fresh commitments already came in weak at only 48,200 bales or 71 percent less than the previous week and prior 4-week average. Shipments of 351,000 bales were 9 percent above the prior week yet still dropped 14 percent under the 4-week average. On Thursday the U.S. Census Bureau reported also that domestic textile mills used cotton on a seasonally adjusted annual rate of 6.16 million 480-pound bales in March, which is much less than the rate of 7.23 million bales of consumption seen in March of 2003. The Census Bureau also downwardly revised its February figure of US consumption to 6.22 million bales from a previous estimate of 6.30 million bales. Although this figure was lower than generally expected, it still keeps the US textile industry on track to meet or even exceed the USDA's 6.3 million b/c U.S. consumption figure for the 2003/2004 season. Meanwhile, crop progress throughout the American cotton belt reported as of Sunday April 25 showed that US farmers in most States are well within their usual five-year average, with the entire US revealing 23 percent planted as of April 25 versus 15 percent the previous week, 17 percent at the same time last year and the five-year average of 17 percent. While California growers have nearly completed their planting process with 90 percent sown versus the five-year average of 60 percent, producers in the Mid-South are beginning to make excellent progress as well as both Louisiana and Mississippi are moving ahead of their respective target.

Fighting against the seasonal trend of usually firmer prices throughout the initial planting stage, cotton prices are having a tough time erasing the obvious demand concerns both in China as well as on a truly global scale. Though this trend may well continue for time being, it seems that further

significant deterioration of prices ultimately ought to cause interest to return to this natural fibre, increasing demand and thereby consumption. Moreover, the increase in the speculative short position may well soon reach a critical level from where to expect at least a temporary correction to relieve any oversold condition.

With the planting stage well passed for US Pima, growers are shifting their attention to present weather conditions as well as the marketing of any additional portion of the crop to be harvested later this year. While the weather pattern has been largely favourable so far this year, temperatures in the San Joaquin Valley are already reaching in excess of 100 degrees Fahrenheit and though not worrisome at this stage, producers are looking for cooler nighttime conditions to alleviate any heat stress for the young plants. Marketing efforts meanwhile are paying off well as new export commitments for the week ending April 22 reached 12,400 bales for the current crop year or 464,100 bales for the entire season. This figure compares with 585,000 bales at the same time last year.

Albeit behind last year’s level, the strong sales for the week came in thanks to another increase in the step-2 payment rate to 25.08 cents per pound. New crop sales on the other hand, although cotton is widely offered at rates approximately 10 cents below current shipment prices, a difference, which has decreased noticeably in past weeks, are very slow. Although this development may ordinarily motivate sellers to reduce their asking rates further, it seems unlikely we will see much lower prices in the near-term as most growers prefer to see their young crop develop further before making more aggressive offers. At that time, the current dilemma of abundant yarn inventories in the Extra Long Staple segment, which is currently also depressing prices, may well be alleviated and permit values to appreciate further rather than deteriorate as most buyers are currently anticipating.

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