COTTON DIVISION

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

June 2 - 6, 2003

As is typical for this time of the year, market observers’ focus has been on the weather and the condition of the young crop this past week. While heavy precipitation and high winds caused concern over the weekend for Texas, where parts of the state received as much as 2 inches of rain, the situation in the Delta does not look much brighter at this stage. Showers and thunderstorms had been forecast for most of the week with rainfall expected to hit the 4-inch mark by this coming weekend. While growers in Texas may still have a chance to replant in certain parts of the state, the same option does not exist for producers in the Midsouth and Southeast. It remains therefore rather unlikely that the U.S. will produce the 17.2 million-bale crop currently forecast by the U.S. Department of Agriculture. The weekly crop progress report showed that as of last week, 82 percent of the coming cotton crop had been planted versus 70 percent the prior week, 86 percent at the same time last year and 85 percent when compared with the 5-year average. The only states showing significant delay are still Tennessee and Arkansas. While the market seems to be poised to take that information and form a base from where to move gradually higher should no improvements come into sight, the technical picture remains poor for cotton futures. The spec/hedge report revealed a rather surprising figure with a net short position held by speculators of 7,283 contracts as of Friday, May 30 up from the prior week's 3,081. Local floor traders had expected the speculators to be net short closer to 12 to 15 percent, instead of the reported 9.7 percent. As a result, the market remained under pressure for most

of this past week, however, was able to regain some confidence during the last few days as spread trading began to dominate the ring. Buy stops were hit on the way up and prices were able to gradually shift higher. Fundamentally, market participants considered hail damage in western Texas, where baseball- and golf ball-size hail fell east of Lubbock on Tuesday, as well as rumours that a portion of certificated stocks had been sold. The weekly USDA export report, though somewhat shy of expectations, still showed some constructive results as new sales of 128,500 running bales were reported, up two-thirds from the prior week albeit 30 percent below the previous 4-week average. Shipments of 228,300 bales came in 16 percent under the prior week and 21 percent below the 4-week average.

Though price movement this past week can be construed as supportive, most analysts catch themselves short from expressing too much enthusiasm about further advances. The market remains uncertain about its direction and is looking for guidance one way or another to move ahead with more conviction. It comes once again down to supply (weather conditions/crop seize) and demand (China/SARS?). Some may prefer to toss a coin.

Pima plant development continues mixed although the crop is responding well to the now warmer than usual temperature in the San Joaquin Valley while fields in Arizona, New Mexico and Texas are progressing at steady pace. Forecasts are calling for temperatures to taper off in the coming days, which won’t be welcome by farmers. Meanwhile, the USDA sold its last parcel of previously forfeited 2001/2002 crop Pima of 7,015 bales as announced this past Tuesday. Off-take, though understandably slower than in past weeks, remains stable and the weekly export report registered additional sales of 5,400 bales for the week ending May 29.

The cumulative total now stands at 615,400 b/c, which is not too far from the recently revised USDA estimate of 625,000 bales for the 2002/2003 season and well above last year’s level of 417,000 b/c. Concern remains very high about the ultimate seize of the US Pima crop with some estimates ranging as low as 380,000 bales. Although recent publications have spoken of a beginning balance of 311,000 bales for the US come August 1, 2003, it seems quite clear that truly available supply is limited to the roughly 120,000 b/c of 02/03 crop currently under USDA loan. How many of these

bales will still be available towards the end of this year is just one of many questions. On the other hand, one has to come to the realization that ELS prices unavoidably will jump significantly higher in the coming months and those, who have to have such growth will have to pay whatever price the market will bear, while others will rightfully abstain. In either case, for ELS cotton as well, supply and demand will well regulate the price.

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