COTTON DIVISION

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

July 6 - 9, 2004

Cotton prices went through another week of rather dismal performance. Improving crop conditions not only in the US coupled with the outlook of a rather bearish USDA Production and Supply/Demand Report to be released Monday of next week, kept prices under pressure. The market has shown that it has no technical fortitude at this time and for a turnaround it requires an unexpected balance sheet-altering event, however, with the new crop growing like it should there is no real reason for the market to take a turn. A problem with production could alter the market, but according to the latest USDA Crop condition report as of July 4, there is no such event on the horizon. US cotton is showing setting bolls on 20 percent of its entire acreage versus 16 percent a year ago and the five-year average of 19 percent. Likewise, 70 percent of US cotton is squaring compared with 53 percent last year and the five-year average of 67 percent. Equally impressive 11 (19) percent of the US crop has been rated as “very poor to poor”, 24 (30) percent as “fair” and 65 (51) percent as “good to excellent” (last year’s figure). As for the Weekly Export Report, it failed as well to ignite some noticeable reaction from the market, although the figures came in better than expected. While most market analysts had anticipated sales near last week's figure of 126,300 bales, and shipments at or above the previous report of 231,500 bales, new commitments for the week ending July 1 arrived at 221,900 b/c or 76 percent above the previous week and 60 percent over the prior 4-week average while the new crop year accumulated sales of another 150,400 bales. Export shipments for the same reporting week came in at 266,000 bales, which meant 15 percent more than during the preceding week earlier, but 16 percent under the prior 4-week average. For Monday's

supply and demand report, average industry sources estimate a 2004/2005 US crop of 18.01 million bales, up from the USDA's previous June figure of 17.6 million bales. On June 30, the USDA projected 13.947 million cotton acres in its US planting acreage report, lower than its March intentions figure of 14.4 million acres, but higher than most market estimates. As for US exports for the 2004/2005 season most market observers expect a figure right at the USDA's recent estimate of 11.50 million bales. Considering sales of new-crop plus old-crop rollovers should be close to 3 million bales by August 1, or about 25 percent of total projected shipments, such annual exports appear most feasible at this stage. Domestic use in the United States is pegged at an average of 5.85 million bales, according to analysts. Estimates range from 5.7 million to 6.0 million bales, which runs very close to the USDA's recent figure of 5.8 million bales and would leave ending stocks at 4.27 million bales, which is somewhat higher than the USDA's current figure of 3.9 million bales. As for the world data for 2004/2005, after raising its world production figure to a record 102.88 million bales in its June report, some market analysts expect the USDA to use a lower figure in its July report.

Overall, Monday's report is largely expected to be already priced into the market, judging from the market’s bearish stance, its extent of price drop in the trading month of December and the collapse on the continuation charts. As cotton is, however, notorious for over-extending a move, the market is presently heavily oversold on a daily and weekly basis and as such one may expect a move higher, albeit temporary in nature. 

Very much like its Upland counterpart, the US Pima crop is progressing very well. Especially in California, expectations are already running very high for a top quality and high yielding season. As available stocks of 2003/2004 production dwindle,

producers would be glad to see equal interest in their upcoming 2004/2005 harvest, however, buyers remain largely on the sidelines. Anticipation of increased availability from the two key ELS suppliers, Egypt and the US, plus the uncertainty over any step-2 subsidies, unarguably keep buyers at bay. While some suppliers are trying to lure mill buyers with ever decreasing offers in an effort to secure fresh new crop business, some of the larger participants have yet to cut their prices, following the more aggressive competition. Weekly US export sales for the week ending July 1 remain stable but without any major surprises as exporters sold 4,000 bales of current

crop and 5,300 bales of 2004/2005 production, bringing the cumulative total for the new season to 48,500 b/c versus 63,800 b/c at the same time last year. The current crop year now shows a cumulative total of 533,100 b/c compared with 633,000 b/c at the same time last year. For time being there is little change expected in the global ELS environment and one will have to move closer to the harvesting period in order to discover the true value and direction of the Pima market.

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