COTTON DIVISION

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

May 17 - 21, 2004

Cotton prices gradually trended lower this week amidst the usual concern of demand, the sluggish global economy, neighboring softs such as soybeans depreciating rather rapidly and generally favourable growing conditions both in China as well as the US. The news that China's National Cotton Reserve Corp. will increase its stockpile of high-grade cotton by 100,000 tons, or 459,000 bales did not prove friendly to the market either as such purchases would merely comprise cotton that has already been shipped there. Also, the China Cotton Association confirmed its expectation on Tuesday that China's cotton production in the October 2004-September 2005 marketing year should reach total 6 million metric tons or 23 percent more than the estimated production the present crop year. The report further stated that China is expected to enter the 2004/2005 season with a carryover stock of 810,000 tons, which means the country will have a total supply of 6.81 million tons next year, thereby limiting the amount of cotton it will need to import among others from the United States. Adding to the general uneasiness in the world markets was the biggest one day drop in the history of India’s stock market, which coupled with the weakness of the rupee made US cotton purchases that much more expensive and unlikely. The release of the weekly spec/hedge report took another element of support away from the market as it showed funds had reduced their net short position from 27.9 percent the previous week to 25.9 percent as of Friday, May 14, reducing the likelihood of a short covering rally. Last but not least, U.S. cotton exports were lower than market expectations in the weekly sales report released Thursday. Although still sufficient to reach the USDA target of 13.80 mio. bales for the season, sales of 67,800 bales were 53 percent below the previous week and 45 percent under the prior 4-week average while exports of 188,700 bales were

down 35 percent from the week earlier and 39 percent from the prior 4-week average. With the increase in step-2 payment for the coming seven calendar days, higher level of shipments are expected for the next week. All of the above occurred while crop progress here in the US can only be described as ideal with 60 percent planted versus 53 percent a year ago and the five-year average of 59 percent.

It continues to be difficult to envision this market to move significantly higher in the near future as it is lacking a catalyst to renew traders’ confidence to go long. Instead, range-bound trading between 60 to 65 cents in the spot month may well be here to stay for a while longer.

Crop conditions remain ideal for US Pima from California to Texas and most growers are portraying an unusual level of optimism regarding this coming crop both with regard quality as well as yields. Although there remain some crucial periods before the 2004/2005 crop will be harvested by starting in October/November of this year, many producers seem to think that this is one of the best crops they have seen so far in many years. The ideal and timely combination of precipitation and temperature has provided the plants with virtually perfect growing conditions and little ought to affect the progress in time to come given current longer-range forecasts. Though it appears risky as always to assume the best, many merchants have become quite aggressive in marketing next year’s production, presumably also under consideration of a potential step-2 subsidy at time of shipment later this year, which clearly remains unpredictable. Nonetheless, the gap between current and new crop prices is being covered quite rapidly and much to the delight of the mill buyers, further price reductions cannot be excluded. The relative interest in US Pima is once again reflected in this week’s export figures, which revealed that for the week ending May 13 new sales arrived at 5,700 bales for the current crop year and 4,300 bales for the new season, lifting total commitments to 477,400 b/c for the present year and 33,200 b/c for the coming season respectively.

The fact that both figures are somewhat behind last year’s level can be explained among others by the access to the significant government subsidies presently available. This pattern can be expected to remain with us for some time to come and while some sellers are making an anticipatory adjust to their current prices in order to attract fresh business, it does not seem too far fetched to expect a good amount of purchases that traditionally may occur at this time of the year are kept aside, only to

surface later this year, when the exact amount of subsidies will be known. We expect both the rush of inquiries as well as the amount of Pima sold up to that point coupled with the limited carry-over to cause a noticeable increase in values towards the end of this year/at the beginning of the next year.

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