COTTON DIVISION

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

July 7 - July 11, 2003

This past week’s activity in New York was very much dominated by the anticipation of the monthly Supply and Demand Report, released by the USDA on Friday. Private estimates had placed the US crop at 16.70 mio. bales, with a relatively wide range from 16.20 mio. to 17.0 mio. as it remained uncertain, how much of the recent acreage and production loss in Texas would be factored into the USDA analysis. Ultimately, the US government went with a safe compromise as expected, placing this month's U.S. projections for the 2003/2004 crop year to include lower production and domestic mill use, however, larger exports, and lower ending stocks. Beginning stocks as of August 1, 2003 were reduced 100,000 bales while U.S. production was reduced 3.5 percent to 16.6 million bales, reflecting planted area in the June 30 Acreage report combined with historical average abandonment and yields. Domestic mill use was cut more severely than had been expected to 6.8 million bales, as indicators of both current mill activity and textile trade suggest reduced prospects for next season. U.S. exports in retrospect were raised 2.6 percent due to increasingly tight foreign supplies relative to demand, causing ending stocks to drop to 3.9 million bales or 21 percent of total use. For the current crop year 2002/2003, U.S. mill use was reduced by 100,000 bales based on recent activity, exports were raised 200,000 bales to 11.6 million bales, reflecting atypically strong end-of-season shipments, which put ending stocks down 100,000 bales to 5.80 mio. bales. In contrast the USDA figures for global supply and demand in 2003/2004 showed little change from last month.  An increase

in beginning stocks was about offset by a reduction in world production, which mainly reflected the reduction in the U.S. crop.  Likewise, world consumption was altered insignificantly as the reduction in U.S. mill use was more than offset by higher consumption overseas.  The world trade forecast showed a minor adjustment downward. World ending stocks, at about 33.0 million bales, were nearly the same as last month and the lowest since the 1994/1995 season. As much of these figures had been well envisioned and the market had positioned itself respectively, there was little to none price movement as a result of the release.  Options-related action at the beginning of the week coupled with concern over tropical storm Claudette had provided participants with something to talk about, boosting values mildly, yet the arrival of the speculative/hedge report, showing an increase in the speculative net long position from 8.8 percent to 23.8 percent took the wind to a certain degree right out of the sails again. With the market having failed repeatedly in previous sessions to reach the contract high on December of 62.75 cents per pound some observers had anticipated a pullback, however, the market did not give into this easy temptation either and instead maintained its range-bound activity. Weekly export sales for the week ending June 26 came in slightly better than the prior week at 64,800 b/c, however, were 35 percent under the previous 4-week average. Shipments of 242,900 bales came in 9 percent above the prior week and 1 percent over the 4-week average. It seems the newly revised USDA target of 11.60 mio. bales for the current crop year may actually be achieved, aided largely by the payment of the step-2 subsidy. Meanwhile the percentage of cotton squaring across the entire US as measured July 6 showed an overall improvement with the usual pockets of delay, primarily in the Midsouth and Southeast such as Arkansas, Louisiana, Mississippi and Missouri.  

On average 57 percent of the entire US crop was squaring versus 45 percent the previous week, 72 percent at the same time last year and the five-year average of 74 percent. Similarly, the percentage of plants setting bolls as of July 6 revealed the same delay in the South versus previous years. On average 18 percent of the US 2003/2004 cotton crop has been setting bolls so far compared with 10 percent last week, 25 percent at the same time last year and the five-year average of 24 percent. Crop conditions meanwhile have shown some improvements as 19 percent of the entire crop are now rated as “very poor to poor” versus 20 percent the previous week, 30 percent as “fair” compared with 31 percent and 51 percent as “good to excellent” versus 49 percent the prior week.

Though technically cotton looks like it should be able to extend its recent move higher, fundamentals are only partially supporting such development. One has to assume that it will take some additional time and positive signs from the demand side before the funds will be willing to extend their long position and the trade has become convinced of the sustainability of higher values.

The condition of the US Pima crop continues to improve as temperatures and overall weather pattern is currently conducive to its development. Though there is no doubt that this year’s crop will require the entire duration of the ordinary season in order to provide adequate yields and quality, the odds for growers to achieve such results are improving.

While heat units in the West continue to build up, growing conditions in Arizona, New Mexico and Texas have remained beneficial for plant growth and fruit development. After sparking widespread debate whether the most recent USDA acreage estimate for the coming Pima crop is accurate, reflecting 150,000 acres for the state of California, the Supima Association is expected to soon announce the results of its survey questionnaire, which usually is sent out not only to farmers but ginners and seed retailers as well. The track record of the Supima-data has proven to be more reliable in passed years than those of the US government and as such its publication is highly anticipated. Actual business these days seems to be confined primarily to 2002/2003 crop sales, partly defined as “optional contracts”, permitting the seller to supply either current or new crop bales on sales written for shipment commencing in October of this year. This structure has permitted merchants to offer not only on a firm basis but at prices more attractive than what is speculated will represent asking rates once 2003/2004 firm offers resume to circulate in a more widespread manner. Weekly USDA export sales for the week ending June 26 showed 6,400 b/c of current crop sales, bringing the seasonal total to 629,600 b/c while new crop sales grew by only 2,300 b/c to 63,700 bales compared with 65,800 bales at the same time last year.
 

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