COTTON DIVISION

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

June 16 - 20, 2003

After the recent ups and downs, the market found itself largely in a consolidation phase this past week. In anticipation of more decidedly bullish or bearish news for the cotton market, traders have been watching the weather, focusing on the size of the new crop and debate whether or not the US will export 11.4 million bales this season after all. The spec/hedge report did not provide any stimulus as it arrived pretty much as expected with a reduction in the speculative net short position from 11.1 percent to 2.2 percent of the open interest illustrating some of the short-covering by speculators last week. As this group continued to cover their short position further, their orders kept hitting buy-stops, pushing the market to move higher. Meanwhile, crop conditions have not been showing any sign of improvement as the USDA reported field conditions as follows (last week’s figures in brackets): 9 percent as “very poor” (8 percent), 12 percent “poor” (12 percent), 32 percent “fair” (34 percent), 38 percent “good” (39 percent) and 9 percent “excellent” (7 percent). The USDA furthermore reported that as of the week ending June 15, 20 percent of the US cotton crop has been squaring versus 13 percent last week, 29 percent at the same time last year and the five-year average of 29 percent. States that noted a significant delay in plant development were California with 4 percent versus the five-year average of 27 percent, Louisiana at 35 percent squaring compared to 57 percent under the five-year average and Missouri with 7 percent, lagging behind its five-year average by 24 percent. The ambiguity of direction for the market was further exacerbated as speculative buying,

partially in futures well as options, repeatedly hitting buy-stops met with trade selling that increased in intensity as prices moved higher, only to cause their ultimate collapse to unchanged levels or beyond. The weekly USDA export report failed also to provide some further sense of direction as it had been expected to arrive short of last week’s figures. New commitments for the week ending June 12 increased a modest 71,600 bales or 52 percent less than during the previous week as well as 46 percent below the previous 4-week average. Shipments amounted to 211,100 bales or 30 percent less when compared to the previous reporting week and 21 percent behind the 4-week average.

Although lacking considerable excitement, when combining technicals such as the trading above the 40-day moving average with fundamentals still warranting positive interpretation such as the export commitments, one is hard pressed to become too bearish about cotton prices, albeit a chart composure that leaves much to be desired. It seems most participants are beginning to favour the long side and citing with the majority at times of market uncertainty may turn out to be the safer route.

US Pima fields continue to suffer from the late and unfavourable start the crop has had this year. While some fields display shorter than usual plants with regular squaring, on others the plants are of normal height, however, with limited, squaring all a result of the detrimental conditions in April and May in the San Joaquin Valley. Yield reductions seem inevitable and the spread between those still believing in decent production figures and those pointing towards much lower than usual results is widening. General anticipations are now indicating a maximum of about 285,000 bales from California with Arizona, New Mexico and Texas adding 50,000 b/c for the coming harvest.

Meanwhile, current USDA Loan inventory of 2002/2003 crop is both diminishing rapidly where farmers still have access to their production or remains in very firm hands, which understand well the value they possess. Widespread offering of new crop Pima has yet to resume, although limited availability and sales activity has been reported, especially in the Far East market. While the element of uncertainty prevails, those buyers that cannot circumvent ELS purchases of some kind, will have little choice but to pay up, while the non-traditional consumer will most likely have to turn

away from consuming Pima cotton for this coming year, which ultimately will be hurting Pima producers worldwide. Weekly export sales came in at 1,400 bales for the current season, lifting cumulative sales 619,500 bales, while new crop sales increased marginally by 800 bales to 57,700 b/c. Last year at this time, the US had registered exports of 425,000 b/c for the then current crop year and 59,900 b/c for the new season.

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