COTTON DIVISION

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

May 10 - 14, 2004

Primary focus this week has been on the release of the monthly USDA Production and Supply and Demand report, which was expected to provide the market with some renewed sense of direction. As the figures fell only slightly short of general expectations, the market was affected very little by the news. It seemed rather that the market’s somewhat volatile character of late has been sparked by the tug of war between the sizeable speculative position and the usual concern for demand primarily from China. The first U.S. projections for 2004/2005 this week included lower production, domestic mill use, and exports, and a modest increase in ending stocks. Cotton production in the U.S. was projected at 17.6 million bales, nearly 4 percent below the 2003/2004 season, based on the area indicated by the Prospective Plantings report combined with historical average abandonment and yields. Domestic mill use was projected at 5.8 million bales, 8 percent below 2003/2004, as rising apparel imports associated with trade liberalization continue to displace consumption at U.S. mills.
Exports were projected at 11.5 million bales, which represent a reduction of 17 percent from this season's record, as much higher foreign production limits world import demand. Ending stocks were placed at 3.9 million bales, an increase of 300,000 bales from the current season, which raises stock-to-use ration to 22.5 percent. The world projections for 2004/2005 reflect record production and consumption, with sharply higher production boosting stocks. Production was forecast at 102.5 million bales, nearly 10 percent above 2003/2004, due primarily to the effect of higher world prices on planted area. World consumption has been projected to grow by about 1 percent to 99.0 million bales, while economic conditions and trade liberalization are considered favorable to world textile consumption, cotton consumption will be constrained by the lagged effect of the current

relatively high world prices. Projected world trade was reduced to a more normal share of world consumption, compared with record world trade in 2003/2004, which was driven by a production shortfall in China. World stocks were raised nearly 12 percent from 2003/2004 to 36.5 million bales from 32.66 mio bales for the 2003/2004 season. While the cut in US export sales and the increase in ending stocks for the coming season both in the US as well as on a global scale were perceived as slightly bearish, the release of the weekly USDA export sales report provided a better picture than anticipated. Fresh commitments of 143,300 running bales were one-tenth above the previous week and 7 percent over the prior 4-week average while exports of 290,200 b/c were 3 percent above the earlier week and 19 percent under the prior 4-week average. The lack of the step-2 payment had caused most analysts to expect weaker shipments with a significant increase in weekly export sailings for the following week, as the step-2 payment returned at 6.26 cents per pound.

While the US cotton crop is generally progressing very well (45 percent planted versus 41 percent same time last year and the five-year average of 43 percent), focus is now shifting towards the planting report to be published by the USDA on June 30, which may likely contain the anticipated drop in US cotton acreage from the intentions report as of March 31 of this year. The fierce competition between soybeans and cotton this year is believed to become evident in this upcoming report and may provide the market with some bullish impetus while the crop progress in China is being reviewed with equal attention, considering the significance of the world's largest cotton consumer.

Weekly Pima export sales for the current season reached 3,600 bales or a cumulative total of 472,100 bales, which compares with 591,700 b/c at the same time last year. There were no new crop sales reported. Buyers remain reluctant to commit to purchases for the coming crop year as expectations run high of another hefty subsidy payment from the US government, which remains obviously complete speculation at this stage, but as mill buyers might be reluctant, merchants are

trying to secure business by offering 2004/2005 production at prices well below current spot prices, simply factoring into their asking rates the ‘possibility’ of a step-2 payment. Therefore, writing contracts at breakeven or even at a loss becomes explainable to some. Meanwhile, general conditions for the crop remain absolutely ideal in California. After the recent, brief spike in temperatures, which may have caused some yield losses to those farmers, who planted a little bit later this spring, the weather has returned to its seasonal pattern and at this stage, it appears as though nothing can go wrong for the upcoming harvest. Yields are expected to reach a very impressive 2 ½ to 3 bales to the acre, which would produce a Pima crop in the US of around 675,000 bales. Considering the steady string of current crop sales, it appears safe to assume that overall availability next season will still be below this year’s level, though, yet under the assumption of higher production from Egypt compared to this last season, there is little reason

to worry about rising prices, which is just what the fine-count industry might be looking for (if one ignores current, possibly high-priced yarn inventories etc.) in order to boost its business. The USDA this week in its monthly report issued also its final 2003/2004 crop figures, which showed American Pima production at 432,300 bales, down 36 percent from 2002. The U.S. Pima yield was estimated at 1,170 pounds per harvested acre, 172 pounds less than last year's record high yield. Producers planted 178,600 acres of Pima cotton in 2003, down 27 percent from 2002. The decrease in planted acreage led to a similar decrease in harvested acreage. Growers either delayed planting or replanted their damaged fields due to the cool, wet spring while others switched to planting upland varieties. The late-developing crop led to decreased yields.

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