COTTON DIVISION

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

June 7 - June 11, 2004

While cotton prices earlier in the week were dropping further, pressured among others by improving crop conditions both in the US and abroad, the last two trading sessions brought on decent gains in light of improving fundamental- as well as technical considerations. Although speculators and locals remained aggressive sellers earlier this week, profit taking coupled with reasonably supportive USDA Supply/Demand data and a better than expected export report helped prices to be lifted from their earlier lows. With further precipitation in West Texas on the horizon, the USDA had reported American cotton acreage to be 92 percent planted versus 86 percent last year and the five-year average of 90 percent while crop conditions were rated as 9 percent (20 percent) “very poor-to poor”, 29 percent (34 percent) “fair” and 62 percent (46 percent) “good to excellent” (last years figure). Although this month’s USDA Supply and Demand Report was not expected to hold much news since the acreage figure will not be accurately determined until June 30, when the USDA comes out with its planting report, the final figures did provide some general support as world ending stocks decreased in comparison to the previous month’s calculation. The world projections for 2004/2005 reflected higher production and consumption relative to last month and slightly lower ending stocks. World production was projected at a record 102.9 million bales, marginally above last month and 10 percent above the 2003/2004 season, due mainly to increases for China, Australia, Pakistan, and Brazil, which were partially offset by decreases for India and the United States. World consumption was projected at 99.9 million bales, 1 percent above last month and 1.3 percent above 2003/2004. Continued strong growth in China's textile activity is seen as driving the year-to-year increase in world consumption, as

consumption in  the United States and in many foreign countries outside China was projected to decline. World trade was raised slightly from last month, bringing ending stocks as of July 31, 2005 to 35.35 from last month’s 36.46 mio. bales. The U.S. projections for the coming crop year were left unchanged from last month. Meanwhile, weekly US exports came in slightly stronger than expected as net Upland sales reached 172,300 bales or 15 percent more than during the previous week and were 47 percent above the prior 4-week average. Exports of 278,500 b/c slipped 22 percent from the earlier week, however, increased 3 percent from the prior 4-week average.

Given the performance over the last two days, cotton analysts are pointing towards a technical reversal signal on their charts and with the speculative net short position as of Friday June 4 having grown slightly to 32.3 percent from the previous week’s 30.4 percent, there is some renewed sense of hope that the cotton market may attempt to regain the 60 cents area at which time it ought to be considered a sale, short of any new and significant developments.

Despite the steadily increasing step-2 subsidy, export sales have been tapering off and for the week ending June 3, export sales arrived at a modest 2,300 bales, lifting 2003/2004 crop total commitments to 506,400 bales versus last year’s 618,100 bales. New crop sales increased by 2,100 b/c to 40,100 bales compared with the previous season’s 56,900 bales. Despite rather aggressive pricing by US exporters, the majority of buyers do not display any strong conviction in purchasing Pima at this time, neither current nor new crop production, which is somewhat surprising with prices quoted freely on C&F NC terms of around $1.00 per pound or well below the historic average. Even at the presently modest pace of export sales, inventories of current crop Pima will soon be sold out and the new production is far from being harvested. Also, the availability of the step-2 payment at or above 30 cents is not guaranteed and should it subside could cause a sharp increase in

values. Admittedly, focusing on present events, buyers do not need to feel pressured as planted cotton is showing rapid growth and the crop is ahead of schedule in California, Arizona and New Mexico while Texas fields could benefit from additional precipitation. Farmers are occupying themselves primarily with the continued cultivation of their fields as well as application of herbicides

and insecticides at this time and with daytime temperatures in the mid to high 90’s and nighttime temperatures in the 60’s, Pima plants in California and Arizona/New Mexico are enjoying once again ideal growing conditions.

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