COTTON DIVISION

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

May 5 - 9, 2003

Cotton futures collapsed for the most part of this past week, burdened by the pressure of speculators not only liquidating their previous long position but establishing a new net short position. After 75 weeks of continuously being long, speculators took note of the weakening in the technicals, forcing the market to shed 11 cents in just a little over two weeks, cutting through uptrend lines, turning down long-term moving averages and ultimately causing a big trend reversal. On Tuesday of this week, the speculative net long position still stood 20.6 percent of the open interest versus 41.5 percent the week before, yet with the hefty selling that has occurred since then these numbers are already redundant. Meanwhile, the second component that keeps circulating as reason for the sharp price correction are the continuous worries about SARS, especially in China, where buyers have been much of a catalyst to the market in past months. While it seems conceivable that this illness may ultimately force a drop in demand, at this stage it is much more likely that contract cancellations and renegotiations in any country occur due to the recent price deterioration. Most traders had been expecting significant cancellations to show up in this week’s USDA export report yet were pleasantly surprised not only to find relatively strong sales but China as a net buyer of 23,000 bales. Released by the U.S. Department of Agriculture Thursday morning, the report showed that as of last week net upland sales of 185,300 running bales were three and four-fifths times the previous week and 43 percent above the four-week average. The top three

buyers were Turkey, China and India, indicating to traders that buyers would be there as prices fell. Exports of 273,300 bales were equal the previous week with China the major destination. The sales were so strong that some anticipate exports could now exceed the USDA's export target of 10.8 million bales for the current season. Meanwhile the USDA Crop Progress Report for the past week is showing 32 percent of the estimated US cotton acreage planted versus 18 percent last week, 37 percent at the same time last year and 31 percent as per five-year average. Just like Virginia, South and North Carolina, California is still lagging behind its usual schedule with only 68 percent planted versus 89 percent at the equivalent week last year and the five-year average of 80 percent. Looking ahead, analysts are eagerly awaiting the release of the U.S. Department of Agriculture’s monthly supply and demand report to gain some insight into the fundamental direction of the market. Few changes are seen for the 2002/2003 - season, but what is keenly anticipated in this report will be the first glimpse of the USDA's projections for the 2003/2004 season. Private estimates are varying widely for the new crop with an average estimate of 17.6 million bales with a range of 17.05 million to 18.2 million b/c. Equally interesting will be the figures for the 2003/2004 world crop production as last month the USDA cut world stocks to their lowest level in eight years, which has been providing underlying positive sentiment in the market.

After the significant drop in prices, there was little surprise to see a rebound towards the end of the week as selling dried up and merchants began to pick the bottom, hedging previous sales. Whether the market will be able to maintain and build upon these gains, confirming a bottom has been in place, or continue to fall remains now the predominant question.

In US Pima news, it is much of the same as the USDA is offering another 20,268 bales of old crop California Pima for sale via auction by Tuesday of next week, May 13, 2003 while on May 6, the USDA announced that it had accepted bids on yet another 20,096 bales of 2001/2002 crop production, which will reduce the government’s remaining inventory for that crop year to roughly 45,000 bales, a quantity the market may easily absorb in the coming weeks. The continued interest in old crop Pima is particularly supportive of the overall price direction for ELS cotton as the USDA subsidies have now virtually come to an end. Weather conditions in California continue to add to the bullish scenario as damp and cooler than usual

temperatures still keep plant development well behind schedule. As a result, most suppliers have decided not to offer any new crop for time being, however, the writing for considerably higher prices is on the wall once new crop offers will re-emerge. Weekly export figures revealed 7,200 bales of current crop sold during the week ending May 1, pushing cumulative export commitments to just over 590,000 bales, while new crop Pima sales increased by another 7,600 bales for a seasonal total of 52,000 bales versus 19,000 b/c at the same time last year.

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