COTTON DIVISION

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

June 9 - 13, 2003

Cotton prices started the week off very strong and kept pushing considerably higher, at first on not much more than fund related purchases, hitting buy stops on their way up, then also based upon encouraging data released in the monthly USDA Supply/Demand Report. The weekly crop progress report released Monday afternoon had revealed that 89 percent of the estimated acreage had now been planted versus 82 percent last week, 93 percent at the same time last year and the five-year average of 92 percent. There were no longer any significant delays cited from the Midsouth or Southeast unlike during some of the previous reporting weeks, however, the crop condition report showed that 20% of overall cotton conditions were seen as “poor to very poor”. Thirty-four percent of the crop was deemed “fair”, while 46 percent was “good to excellent”. Considering that the entire crop has yet to be planted, the mediocre start of it was noted as disappointing. Meanwhile, the weekly spec/hedge data showed speculators holding a net short position of 9,231 contracts on Friday, up from last week's 7,283 contracts. Open interest increased to 83,027 from 75,434 contracts, bringing the spec net short position to 11 percent. Then on Wednesday, the USDA surprised most analysts, who had expected insignificant adjustments, with an overall increase in demand for American-grown cotton, leading to lower ending and beginning stocks. For 2002/2003, an increase in the U.S. export forecast was only partially offset by a reduction in domestic mill use, lowering ending stocks to 5.9 million bales. Exports were raised 3.6 percent or 400,000 b/c to 11.4 million bales, a new record, as low prices and a declining Step 2 payment rate have stimulated unseasonably strong export sales and shipments in recent weeks. Domestic mill use in

return was reduced by 100,000 bales, as recent months' lower consumption rates reflect competition from textile imports, resulting in higher textile inventories and financial difficulties for some U.S. mills. World forecasts for 2002/2003 included lower production, slightly higher consumption, and lower ending stocks. Production was reduced mainly in India, Uzbekistan, and Paraguay, but raised in Brazil. Consumption was increased mainly in China, partially offset by reductions in Brazil, India, and the United States. World stocks were reduced 1 percent. This month's U.S. projections for the coming season included lower beginning and ending stocks. Projections of production and exports were left unchanged from last month while domestic mill use was reduced 100,000 bales, given the current pessimistic outlook. Projected ending stocks were reduced to 4.5 million bales, or 24 percent of total use. World 2003/2004 projections reflected lower production and stock prospects relative to last month. World production was forecast at 95.5 million bales or 1.0 million bales lower, due to unfavorable early-season conditions in some key cotton-producing regions. The world consumption and trade forecasts remained unchanged, causing ending stocks to drop 4 percent below last month’s level to 33.1 million bales. Weekly export figures were equally supportive as new sales of 150,400 b/c came in 17 percent above the week earlier, though, 12 percent below the 4-week average. Shipments weighed in at 301,900 b/c or 32 percent above the prior week and 9 percent more than the previous 4-week average.

While the fundamental picture is beginning once again to look somewhat better, speculators likewise seem to feel more comfortable with the idea of converting their minor short position back into longs, providing the market with the necessary support to move higher. Though one has a difficult time seeing too bullish of a picture, the coinciding of improving technicals as well as fundamentals cannot be ignored.

Just like Pima in Arizona, New Mexico and Texas gives little reason to worry, the crop in the San Joaquin Valley continue to flourish well under current conditions. Heat Units are building up and plant growth, though behind its usual pace, is showing signs of improvement. Activities in cotton fields include irrigation, fertilization, cultivation, herbicide applications and
side dressing to control insect pests. Most growers and merchants remain reluctant, however, to enter the market as sellers at this stage and prefer to extend their local surveys prior to making additional quantities available. International sales as a result have come to a halt as this week’s USDA export report reveals. Only 3,000 bales of current crop were committed to overseas customers, bringing the cumulative total to 618,100 bales of which

574,200 b/c have already been shipped. There were no additional new crop sales reported, leaving the current balance at 56,900 bales. With nothing but nominal offers of 2003/2004 crop Pima presently around, it is no surprise that business has come to a standstill and it remains doubtful that mills will commence purchases again as vigorously as has been seen just a couple months ago, once US sellers will reenter the market. The disparity between fibre and yarn prices is growing and it will take some time to bridge the two. Considering current ELS developments worldwide, it is expected that values will continue to appreciate, while volume traded diminish.

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