COTTON DIVISION

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

May 24 - 28, 2004

Cotton futures on the New York Cotton Exchange continued their gradual descent this week as volatility remained high aided in part by heavy option activity. Most traders are shifting their attention towards the weather in cotton growing regions in the U.S. and in China while eyeing, as usual, cotton consumption data as well as the US export figures. With the arrival of the extended Memorial Day weekend, market participants bought the usual protection against any unforeseen weather events that may arise while the market will be closed this coming Monday, although present forecasts had not been calling for any detrimental developments. Contrary, rain in West Texas cotton-growing regions weighed on the market as that area had experienced a dry patch and according to Global Weather Services, scattered areas of showers and thunderstorms spread from New Mexico into some of the cotton-growing areas of West Texas providing much needed moisture. The other area of growing concern is the U.S. Southeast region, which hopefully will see some rain early next week. Meanwhile, general crop progress in the U.S. stands at 75 percent planted versus 66 percent a year ago and the five-year average of 72 percent. As for the weekly U.S. export report, expectations had been for new sales of around 100,000 b/c and shipments anywhere from 300,000 to 600,000 bales, the latter being boosted by the step-2 subsidy for U.S. upland cotton in excess of 6.00 cents per pound. Data for the week ending May 20 showed net upland sales of 108,600 bales or 60 percent more than during the previous week and 12 percent over the prior 4-week average with an additional 134,800 bales sold for delivery in 2004/2005. Exports of 249,900 bales were up 32 percent from the week earlier, but down 10 percent from the prior 4-week average. Domestic consumption according to this week’s Census Bureau statistics does not look as promising as seasonally adjusted annual consumption currently runs at 6.179 mio. bales, which compares with 6.30

mio. bales as per the USDA’s May Supply/Demand Report. Meanwhile, the weekly spec/hedge report revealed that speculative accounts had increased their net short position as of May 21 to 27.9 percent up from the 25.9 percent the previous week. Although cotton is seemingly trying to hold on to its value above 60 cents for the spot month, short of any significant catalyst, one cannot be too surprised to see prices eroding another 4 to 5 cents. U.S. Pima export sales for the week ending May 20 arrived at a strong 22,000 bales pushing total commitments to 499,300 bales for the current season and 1,300 b/c for the new crop year or cumulatively 34,500 bales. While current crop sales are moving along well aided by the continued availability of significant step-2 subsidy payments, it is new crop sales that are lagging behind historical averages as textile mills’ buying pattern has changed dramatically over the past few months. Since neither the seller nor the buyer are aware of any US government subsidy payment that may or may not become available by the time the next harvest will be shipped, buyers are approaching 2004/2005 crop sales with great caution in fear of potentially missing out on a sizeable discount. The respective drawback, however, of this particular approach may well be that this purchasing pattern will create a respective vacuum later on this year that will need to be filled with quick shipments, which may well raise prices when most buyers ordinarily least expect it. Granted, this is an isolated review of a much more complex decision process, yet considering that many merchants are presently offering new crop production at or near the USDA Loan level, the downside risk for mill buyers ought to be considered as limited. Meanwhile, Pima fields from the Far West to Texas currently enjoy virtually ideal growing conditions. Adequate moisture and close to seasonal temperatures are keeping plant development right along expectations in California while the El Paso area is considered two weeks late due to cool temperatures early in the growing season. Primary grower concern at this time is revolving around the usual control of insect infestation and weeds, neither of which have been reported to be of extraordinary significance. More of the same is on the near-term horizon and the usual unknown remains solely in the weather pattern for the months ahead.

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