COTTON DIVISION

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

May 31 - June 4, 2004

Cotton suffered another week of seemingly relentless selling, pushing prices to a new 2-year low, sparked among others by the influx of bearish fundamental news. Drawn into the pool of other declining soft- and industrial commodities, fibre prices followed the likes of soybeans, bean-oil and cocoa into new lows without any sign of sudden resurrection as underlying fundamentals remain negative, pressuring primarily the new crop trading months. Aside from continued speculative selling, influencing especially the front months and manifested via outright sales in the futures’ ring on some days and bearish option trades on others, cotton values also suffered further setbacks in China, the US single, largest customer and competitor, primarily as a result of expectations of an improving domestic cotton crop in 2004/2005. Likewise crop conditions in the US itself are quiet satisfactory with additional precipitation having arrived in the key area of West Texas and the US cotton crop rated at 86 percent planted versus 78 percent a year ago and the five-year average of 82 percent. Cotton squaring has been reported at 7 percent as of Sunday, May 30 compared with 8 percent a year ago and the five-year average of 7 percent. The speculative position itself is not yet burdensome enough to call for a correction of prices, although it increased moderately as of Friday, May 28, from 27.9 percent to 30.4 percent net short. The International Cotton Advisory Committee echoed these developments in its monthly Supply and Demand Report this week, which highlighted that the previous climb in cotton prices has led to increased world production in 2004/2005 with world production forecast to surpass 22 million tons for the first time, up 1.6 million tons (8 percent) from this season. Production in Mainland China alone is projected to increase by 1.2 million tons, representing three-quarters of the total global increase, rising to 6.1 million tons, the highest since 19841985 as per ICAC records. 

Simultaneously, world cotton consumption is forecast to increase only 1 percent to 21.3 million tons in 2004/2005, despite the expectation for China's consumption to climb 5 percent next year from an estimated seven million tons this season to 7.35 million tons in 2004/2005. Mill use in the rest of the world is expected to fall 100,000 tons to 14 million tons, the lowest since 1994/1995, which is reflective of the shift in both consumption and manufacturing towards China. With production expected to exceed mill use in 2004/2005, world-ending stocks by July 31, 2005 are projected to rise to 8.6 million tons, an increase of 700,000 tons from the current season. Accordingly, the Cotlook A Index is expected to average 65 cents per pound during the next crop cycle, down six cents from the average anticipated for the current season. Despite some minor adjustments, high prices of crude oil are cited as another impediment for cotton as higher gasoline prices reduce disposable income, which consumers may well try to offset by reduced spending on apparel and home furnishings. So far, weekly export sales do not reflect this sentiment as new sales for the week ending May 27 arrived at 149,400 bales or 38 percent above the previous week and one-third over the prior 4-week average. Exports totaled 358,200 bales, a stunning 44 percent above last week and 42 percent above the previous 4-week average.

While prices reacted mildly favourably to the export figures this week and the technical picture is crying for a correction, cotton may have another 5 cents to go before finding true support.

There is little new to report about the US Pima crop, which continues to flourish well under good conditions. In California plantings are showing good growth and development while irrigation and cultivation are underway in many fields. Herbicide and insecticide have been applied as needed while daytime temperatures were in the mid 90s and mid 70s at night, an ideal combination for further plant development. The Pima crop is being considered by many growers as one of the best they have seen in the recent past and is generally described as well ahead of schedule.

Likewise in Arizona, New Mexico and Texas daytime temperatures of 80 to 90 degrees in combination with nighttime temperatures in the mid 60s have permitted plants to well emerge with stands of 10 to 12 inches tall in most areas. The Arizona crop is also called ahead of schedule while New Mexico and Texas are considered on-schedule with some concern for proper irrigation in Texas only. Meanwhile, weekly exports added another 5,500 bales to seasonal commitments, now reaching 504,500 bales total. New crop sales of 3,500 b/c brought the total to 38,000 bales, which compares with 56,900 bales at the same time last year. It seems difficult at this stage to conceive anything else but further reduction in prices to  

attract enough business to move a good portion of the new crop come harvest time. Surely, the anticipation of another step-2 payment will be one motivation as well as the somewhat limited availability of stocks over the next few months (USDA Loan stocks are already at a low 29,900 b/c), however, short of a significant weather problem or an unexpected development in Egypt, prices on C&FNC terms between 95.00 – 100.00 cents can be expected to remain with us for a while longer.

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