COTTON DIVISION

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

May 12 - 16, 2003

Trying to find new direction, the New York terminal market, trading in rather light volume, appeared somewhat directionless this past week. Primary focus had been given to the release of the monthly USDA Supply and Demand Report, which provided participants with renewed confidence as the first U.S. projections for the coming crop year of 2003/2004 included stable production, declining domestic mill use, and record exports, resulting in sharply lower ending stocks. Production in America was projected at 17.2 million bales, virtually unchanged from the 2002/2003 season, based on the area in the Prospective Plantings report, combined with historical average abandonment and yields. Domestic mill use was estimated at 7.3 million bales, a reduction of 2.7 percent from 2002/2003, as rising textile imports continue to erode mills' share of the large U.S. retail market. Exports were raised by 4.5 percent to yield a record of 11.5 million bales, due mainly to tight supplies and rising demand in foreign markets according to the USDA. With lower supplies and higher disappearance relative to the current season, ending stocks would fall 24 percent to 4.7 million bales, their lowest level in 4 years. The world projections for 2003/2004 included sharply higher production, a modest increase in consumption, and lower ending stocks. World production was anticipated to rebound 10 percent from 2002/2003, rising to 96.5 million bales, the second highest level on record. The recovery in production is due mainly to stronger cotton prices, combined with a return to normal weather. World consumption was forecast to rise 1.2 percent to 99.0 million bales, slightly below the long-run average growth rate. While economic

consumption, the recent higher cotton prices are likely to result in lower fiber share vis-à-vis polyester and other man-made fibres. World trade is also expected to rise slightly, moving ending stocks to 34.5 million bales, the lowest since the season of 1994/1995. Market participants viewed this report as friendly and kept buying the terminal especially during the first half of the week, which was also motivated by the expectation of yet another substantial export report due to the recent period of lower cotton values. These expectations were not disappointed as new sales for the week ending May 8 arrived at 306,800 b/c or 66 percent more than the prior week and nearly two and one-quarter times the previous 4-week average. Shipments of 342,300 bales were equally impressive as they were 25 percent above the previous week and 22 percent higher than the 4-week average. The speculative/hedge report released Tuesday morning proved not to be as bullish as had been anticipated, though, as speculators’ net position as of last Friday still showed a net short of 2.5 percent of the open interest against a 20.6 percent net long position the week before. Many analysts had anticipated a level of around 20 percent net short. Meanwhile, the market continues to raise concern over the weather conditions throughout the U.S. cotton belt and its impact on cotton plantings. The weekly crop progress as released earlier by the USDA had shown that overall 44 percent of the anticipated US cotton acreage has now been planted versus 52 percent last year at the same time and the five-year average of 47 percent. While the western States have well advanced over the past week, the South and Southeastern territory remains noticeably behind schedule, especially in South Carolina, Missouri and Tennessee. More wet and unwelcome weather has been forecast in the Delta towards the end of this week, an area that is already said to be seeing some replanting of cotton, which could be hampered. In addition, Texas remains dry and although this has enabled plantings to progress

at a healthy pace, there are worries about the germination of the crop if there is no rain.

Analysts are indicating after last week's collapse, that the market’s main focus will now be on the two key determinants for trade in the next few months: weather and demand. As such prices have been able to hold steady as the crop is facing both the usual uncertainty in climate conditions while inquiries continue to pour in.

The USDA on May 13 announced that it had sold yet another 13,484 bales of old crop California Pima cotton while offering another 21,897 b/c of the same crop year for sale by May 20. It is generally estimated that the USDA is currently holding another 50,000 bales of 2001/2002 crop US Pima, including the 21,897 b/c currently offered, which albeit a more modest interest from buyers as evidenced during the last tender, should still find a quick home within the coming 3-4 weeks. This will leave roughly 140,000 bales of current crop in government hands, which, however, has not yet been forfeited and with further price increases will also soon be redeemed. Meanwhile, crop conditions still leave much to be desired, especially in California, where most merchants are either not offering at all or at defensively high prices. It is expected that it will take another 2-3 weeks of good
 

weather before sellers will re-emerge, yet at what price level they may be offering is widely speculated. Price increases are currently being discussed that place new crop Pima on average at around 115.00 to 120.00 cents/lb for Grade 2/46 style cotton, C&F NC, which sounds expensive, however, considering the potential yield and quality losses yet to be realized, such asking rates may well turn out to be “bargain” rates in months to come, especially when considering the global ELS situation. The overall reduction in US acreage plus the continuous concern over the weather pattern and its impact on quality leave ample room for speculation and for those, who have not yet covered a bale of their new crop needs, the agonizing question of when to accept bitter reality. Although many of the buyers that purchased US Pima this year will not return as a result of these much higher asking rates, there is little fear among growers and merchants that a total available supply of estimated 475,000 to 500,000 bales when combining old and new crop production will not be too difficult to sell in the global marketplace. Weekly export sales are beginning to show signs of price-fatigue as current crop registrations for the week ending May 8 arrived at a modest 900 bales, pushing cumulative sales for the season to 591,700 b/c while new crop commitments grew by 1,500 bales to 53,500 b/c.

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