COTTON DIVISION

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

May 2 - 7, 2004

The market’s volatility once again came through this week as strong, almost daily ups and downs dominated the scene. While the market performed well on some days, boosted by spec buying after the announcement of the relatively high spec short position, on other days, the usual demand woes caused prices to tumble. With China advising of its efforts to tighten money supply and the commodity markets fearing for lackluster demand from the one customer, who has been aggressively purchasing raw materials in the recent past, there appeared to be little hope that significant demand will come in from some of the US other traditional customers. Meanwhile, the ICAC added to the bearish sentiment as it announced that world production is expected to rise by 8 percent next season and will likely be 600,000 tons above world consumption. While world production rises, net imports by China (Mainland) are projected to decline from an estimated 1.7 million tons this season to 1.5 million tons in 2004/2005. As a result, the Cotlook A Index is expected to average 67 cents per pound in 2004/2005, or 3 cents lower than the average of 70 cents per pound anticipated for the current season, the ICAC said. World production is estimated at 20.2 million tons this season, up 900,000 tons or 5 percent from 2002/2003, but still 900,000 tons less than mill use. Consequently, world-ending stocks are expected to shrink from 8.6 million tons last season to 7.7 million tons as of July 31, 2004, the lowest since 1994/1995, according to the ICAC. However, cotton's market share continues to erode because polyester remains cheaper than cotton, which may soon change, however, as oil prices continue to soar. World cotton mill use is projected up 1 percent only or 200,000 tons throughout the 2004/2005 season, climbing nonetheless to a record of 21.3 million tons. Tuesday’s announcement of the speculation and hedging 

report from the New York Board of Trade showed an increase in the spec short position to 31.3 percent net short, compared to 24.3 percent net short the previous week. The significant increase as well as the relative seize of this position provided some underlying support for the market throughout the remainder of the week as mentioned above. Likewise, the weekly USDA export report was largely deemed as supportive, especially as China was seen as entering the international market again more noticeably in the coming days once the National May Day celebrations came to an end. For the week ending April 30 net Upland sales reached 130,000 bales or two and seven-tenths times the previous week, but were 21 percent below the prior 4-week average. Exports of 281,000 b/c came in one-fifth below the week earlier and 29 percent under the prior 4-week average.

Trying to predict the market’s next move has been quite cumbersome and the best assumption for time being is to expect a rather volatile trading pattern over the coming weeks as prices will try to adjust between the constant concern over demand and the growing spec short position, not just in cotton alone.

US Pima fields in California enjoyed daytime highs in the mid to upper 90s for most of the week, which was about 10 degrees warmer than normal for this time of the year. As a result, some producers began irrigating earlier than expected. A cool front late in the period returned temperatures to a more seasonable range. In Arizona, Texas and New Mexico’s Pima region plants have likewise established good stands and made good progress. Gusty winds dried out topsoil moisture in some locations, however, no significant damage was reported. Weekly US export sales also reached satisfactory levels as another 4,800 bales were committed to overseas markets bringing the seasonal total to 468,400 b/c while new crop sales of 1,700 b/c to Thailand pushed the cumulative total to 28,900 b/c compared with 52,000 bales at the same time last year. Though sales continue at fairly steady pace, the current buying pattern, which is still well behind last year’s level, shows that mill

customers are delaying their purchases as long as possible, in order to take advantage of the declining ELS prices worldwide, sparked among others  by the ever increasing step-2 subsidy payment offered by the US government. Meanwhile, the US Department of Foreign Agricultural Service announced this week that Egypt’s 2004/2005 cotton production is forecast to reach 274,000 metric tons (6.5 million Kentars), or about 44 percent more than during the present marketing year 2003/2004. The total area committed to cotton for the coming crop year is expected to reach 750,000 feddans (315,000 HA) compared to 519,000 feddans (218,400 HA) in marketing year 2003/2004, which represents a substantial increase, mainly attributed to the increase in prices throughout the past season. Farmers felt encouraged to plant cotton rather than other summer crops such as corn and rice. As a result, a larger cotton crop is expected for the coming season with industry sources estimating that cotton production may increase to 274,000 metric tons or 6.5 million Kentars, or about 44 percent higher than in the present season. For the coming year, approximately 77,000 HA or about 25

percent of the total Egyptian cotton crop is expected to be of extra long staple (ELS) varieties, which represents the same percentage as seen during the current marketing year. Traditionally, Egyptian export prices have been set by the Alexandria Cotton Exports Association but, according to traders, ALCOTEXA may well abandon this long standing policy at the beginning of the next season in September of 2004. If this policy comes into fruition, trading companies will be in a position to sell their cotton at prevailing market prices. Moreover, individual firms will have the flexibility to price their cotton freely. However, Egyptian cotton exports in the coming season are expected to reach 150,000 metric tons or double the quantity that was exported in 2003/2004. This is mainly due the expected increase of both production and imports. Considering such estimates from the main competitor for American grown ELS cotton, it is difficult to foresee prices, at least in the international market, to rise any time soon.

• Previous Report