COTTON DIVISION

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

July 19 - 23, 2004

It was more of the same for cotton this past week. The success of bouncing back up higher was short-lived and from the look of it, prices at least in the near future, excluding any unforeseen events, seem poised to move lower. Despite some concern regarding less than ideal growing conditions in China, where too much rain may cause damage to the crop, and India, which contrary has been experiencing the lack of precipitation in its Northern region for over a month now, market players remained primarily focused on demand. The technically inspired rally this past Tuesday delivered some relief to the bulls, however, considering, that aside from China and India, crop conditions in most major producing countries remain nearly ideal, the bulls will have to look elsewhere for help. Here in the United States, the cotton crop continues to fare very well as of July 18 as 10 (14) percent were rated “very poor to poor”, 22 (31) percent “fair” and 68 (55) percent “good to excellent” (last year’s figure) all the while 49 percent of the crop was setting bolls versus 37 percent a year ago and the five-year average of 47 percent and 89 percent was squaring compared with 80 percent last year and the five-year average of 87 percent. Adding to the bearish outlook were option strategies, executed once again this past week, which included the significant purchases of out-of-the-money puts. Likewise, the significant break in prices seen in Chicago’s trading of soybeans and its grain complex coupled with respective losses in the Dow Jones this past week caused additional pressure for many commodities including cotton. Last but not least, the weekly USDA export report did not provide any help to the bulls either, as general expectations of sales and shipments were not quite reached. New sales of current and new crop production for the week ending

July 15 reached a combined 327,500 bales, however, shipments came in at only 270,100 bales, which was particularly disappointing in light of the significant step-2 subsidy payment presently available.

Despite some technical indications, among others the RSI in the 20’s, cotton seems stuck in its downtrend until some fundamental development can shake it out of its current misery. As always, one ought to realistically hope that the best cure for low prices will once again be low prices and given the assumption that most buyers still have not taken on ample coverage of physicals going forward, the opportunity for cotton prices to adequately appreciate again are surely there. As prices find themselves right now in somewhat unfamiliar territory, it is difficult to pick a bottom yet 42 to 43 cents appear not at all out of reach.

The US Pima crop continues to progress ahead of schedule, especially in California, where most fields show an advance of approximately 2 to 3 weeks compared to their usual growth pattern. The condition of the crop was mostly “good to excellent” as humidity levels were slightly above normal with temperatures in the mid to high 90s. Mostly hot, sunny conditions prevailed over the cotton growing region and no precipitation was reported, forcing producers to irrigate as needed. Limited spraying was underway for whitefly and aphids yet growers reported that insect pressure was normal for the advanced stage of the cotton crop. Meanwhile, Pima fields in Texas and New Mexico continued to progress at a normal pace and the lack of moisture was of some concern, but cannot be considered critical at this stage. Weekly US Pima export sales highlighted once again the slow pattern, in which most buyers are seeking cover these days. With sales of 4,200 bales for the present crop year and 800 bales for the 2004/2005 season, activities cannot really be described as busy, causing most analysts to think prices will drop further in time to come.

• Previous Report