COTTON DIVISION

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

June 28 - July 2, 2004

Cotton prices once again went continuously lower this past week, establishing new contract lows almost daily. The exuberant production outlook for the majority of the northern hemisphere producers is facing limited buying interest from the majority of consuming nations, which left prices in a free-fall. While the market by now is technically oversold, the charts continue to point towards lower values still and until some more significant buying interest is uncovered, inevitably it is difficult to become bullish here. The improving crop condition report coupled with the CRB Index, struggling itself to hold on to some of its previous gains, forced cotton lower and lower this past week. The US crop condition report as of June 27 showed a total of 12 (20) percent “very poor to poor”, 24 (31) percent “fair” and 64 (49) percent “good to excellent” (last year’s figure). Eleven percent of the crop is setting bolls versus 9 percent year ago and the five-year average of 12 percent while 54 percent are squaring compared with 42 percent year ago and 54 percent as the five-year average. Equal attention had been devoted to the USDA acreage report that was released on Wednesday of this week. While general expectations were calling for acreage of 14 million or more to be bearish for the market, 13.5 million acres were expected to be friendly to prices. Ultimately, the USDA announced that according to their review all cotton plantings for 2004 are expected to total 13.947 million acres 3 percent above 2003. Upland acreage alone is expected to total 13.7 million
acres, which also represents a 3 percent increase. In eleven of the seventeen States, upland growers decreased planted acres from their spring intentions and seeded alternative crops. The largest declines in cotton acreage occurred in Arkansas, Louisiana, and Texas where each was down 100,000 acres

from March. Although the total acreage figure arrived within expectations cotton futures nonetheless crumbled on Wednesday under pressure from aggressive fund selling, which continued on Thursday and Friday as export sales, despite the substantial step-2 payment, were not as high as has been hoped. Net Upland sales of 2003/2004 production for the week ending June 24 of 126,300 bales were 8 percent below the previous week and 13 percent under the prior 4-week average. Exports of 231,500 bales were 37 percent below the week earlier and one-third under the prior 4-week average. Particularly detrimental to market sentiment was the fact that the report showed cancellations of 13,600 b/c from China. Topping of the bearish news for the week was the ICAC’s monthly Supply/Demand Report, highlighting world cotton production expected to climb to a record of 22.2 million tons next season. The Advisory Committee said Thursday that production in 2004/2005 is forecast at 800,000 tons above world consumption, resulting in 2004/2005 world ending stocks to rise from 10.5 million tons in 2001/2002 to an estimated 7.9 million tons at the end of this season, a nine-year low. World production is expected to increase by 1.8 million tons in 2004/2005, with 65 percent of the increase expected to occur in China. After increasing by 2.7 million tons between 1998/1999 and 2002/2003, world cotton consumption is stagnating in 2003/2004 due to rising prices. The growing world economy and declining prices will sustain cotton consumption in 2004/2005. Mill consumption is forecast to increase by 300,000 tons to a record 21.4 million tons in 2004/2005. China’s share of world mill use is expected to reach 34 percent in 2004/2005, up from 23 percent in 1998/1999.

It might be a simplified view of the present development but with supply anticipated to exceed demand in 2004/2005, prices will remain under pressure and as the market has been entering relatively unchartered territory this past week, it’s anybody’s guess how low prices will go.

The USDA acreage report this week revealed that according to the government, US growers planted 247,000 acres (226,600 acres estimated in March 2004) of American-Pima cotton. This figure represents an increase of 38 percent from last year's crop and is slightly above the acreage planted two years ago. California shows the largest increase, planting 220,000 (200,000) acres, a
47 percent increase from last year and a 5 percent increase from two years ago. Planting in California began earlier than normal due to unusually warm weather during the first two weeks of March. Texas' producers planted 17,000 (16,000) acres, while Arizona and New Mexico plantings
were 2,000 (2,600) and 8,000 (8,000) acres, respectively. Though there will be a lot of debate over the California acreage figure in weeks ahead, undeniably producers have had the best of opportunity to plant early and as much acreage as they wanted to due to the ideal weather conditions. Unlike previous years, starting as early as March 7, most areas from the Rockies westward endured dry weather and record-high temperatures, which averaged as much as 10 degrees Fahrenheit above normal. The warmth promoted spring fieldwork and melting of high-elevation Western snow-packs to provide more than adequate irrigation water. Meanwhile, weekly exports arrived at 9,400 bales or

529,200 bales in total commitments for the present season thanks to the ever-increasing subsidy payment, which for the coming week stands at an astounding 32.69 cents per pound. Similarly striking is the absence of new crop sales as buyers foresee no reason to conclude any purchases here despite prices in some regions already below $1.00 on C&F terms. While the present price decline surely cannot be conducive to sales efforts, it simultaneously begs the question how much lower prices can possibly fall before more significant new crop purchases will be concluded. As the ELS crops in Egypt, CIS etc. continue to flourish and ought to become available at prices well below those offered during this past season while total availability out of the US will in either case be less than last year, one could easily fathom for US Pima prices to drop further (another 5 cents or so) in competition with their foreign counterparts until American growers decide to rather deliver their harvest into the USDA loan program than sell it in the free market. Once this development becomes evident, interior prices in the US will rise, triggering a US ELS subsidy payment, which depending on how far foreign ELS growths may fall, could become quite substantial. So, the answer to the aforementioned question might be that there won’t be any significant Pima sales until first quarter 2005.

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