COTTON DIVISION

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

June 14 - June 18, 2004

So much for cotton moving towards 60 cents! While technical and chart-based considerations during the second week of this month still looked promising, cotton reached a new one-year low this past week. Futures broke down at the New York Board of Trade with the spot month of July hitting limit down on repeated occasion. December also registered fresh contract lows as the spreads collapsed with traders taking a bearish approach both in the futures and options pit. Speculators apparently had reduced their speculative net short position as of June 11 to 28 percent down from the previous week’s 32.3 percent, which provided ample room for fresh selling. The largest short position the speculators have held in this string was on July 16, 1999, registering 43.5 percent and a total of 30,074 net short contracts, however, open interest at that time was smaller at 69,237 lots. This time around, the speculators may attempt to accumulate a similar short position, yet with greater open interest, the impact of their position on futures may not be as profound as it was back in 2001 or 1999. Rainfall predicted and partially received in West Texas as well as the Southeastern region of the US cotton belt was equally bearish news for the market and coupled with generally favourable growing conditions forced prices yet lower again. The USDA reported on Tuesday that 95 percent of the US cotton acreage had been planted as of June 13 versus 92 percent at the same time last year and the five-year average of 95 percent. Meanwhile, 25 percent of the crop was squaring versus 19 percent last year and the five-year average of 23 percent. Crop conditions were rated 14 (21) percent “very poor to poor”, 27 (32) percent “fair” and 59 (47) percent “good to excellent” (last year’s figures). Weekly USDA export data came in largely as expected with net sales for the week ending June 10 of 118,600 bales for the current crop year, which was 31 percent

below the previous week and 5 percent under the prior 4-week average. Exports of 386,100 bales arrived 39 percent stronger than the previous week and 44 percent above the 4-week average, which was mildly supportive to prices.

Despite the minor bounce in values during the last two trading days of the week, the previous switch and spread activity prior to First Notice Day coupled with generally bearish fundamentals kept the market in a downward spiral. As the technical analysis now has once again reverted from mildly positive to negative, however, the market has not yet reached oversold conditions, one has to expect more selling in time to come. Picking a bottom for this market is as difficult as forecasting the weather for West Texas, so how does a range from mid 40’s to mid 50’s for December ’04 sound?

US Pima export sales for the week ending June 10 added another 6,300 bales to the total 2003/2004 commitments, reaching the cumulative total of 512,200 b/c versus 619,500 b/c at the same time last year. New crop sales were a very modest 100 bales or 40,200 b/c for the 2004/2005 season versus 57,700 bales the previous marketing year. While the crop continues to progress well and sales are somewhat sporadic, focus now remains with the upcoming USDA Crop Report, due to be released on June 30. It seems certain that the previous estimate of 226,600 acres for all four US Pima growing States combined will be surpassed, however, to what extent remains the big question. Private estimates are reaching as far as 285,000 acres, which would mean total production of around 650,000 to 675,000 bales or close to 250,000 b/c more than harvested during the 2003/2004 crop year. While such an increase at first glance may appear very burdensome, especially in light of the increasing production in Egypt, it needs to be considered that the beginning stocks as of August 1, 2004 are expected to be close to zero and therefore total availability of US Pima will actually be less than during the preceding season. Judging from the very slow pace of new crop sales, obviously, this does not represent a main concern for Pima buyers these days.

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