COTTON DIVISION

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

July 21 - July 25, 2003

Once again the best cure for low prices were low prices. The cotton market remained under pressure for the most part this past week, as improving crop conditions, a larger than expected spec long position, low trading volume and uncertainty in the area of global demand kept prices moving consistently lower. The USDA reported for the week of July 20, that 40 percent of the crop has set bolls compared with 55 percent a year ago and the five-year average of 57 percent. Meanwhile 83 percent of US cotton is squaring versus 90 percent a year ago and the five-year average of 90 percent. US crop conditions were reported as of July 20 at 14 percent “very poor to poor”, 31 percent as “fair” and 55 percent as “good to excellent”, which all-in-all represents a further gradual improvement from the previous week. The weekly speculative/hedge report, released this past Tuesday morning, showed speculators with the biggest long position in recent weeks at 38.8 percent of the open interest compared with 37.1 percent the week before. Knowing that a further increase of this long position would be quite unlikely, cotton values got under pressure as both the trade and the speculative community kept a steady flow of fresh sell orders in front of their brokers. It was noted that new physical business was difficult to be concluded as buyers worldwide at this time of the year are rather trying to stretch their inventories/rely on existing purchases than add to their book before the new crop becomes available. As such also export sales for the week had been expected to arrive in thin volume only.

Hence the surprise and the market reaction was quite pronounced as the USDA released its figures for the week ending July 17 with net upland sales of 150,000 bales, 29 percent above the prior week and 98 percent above the four-week average. Exports of 310,000 running bales were equally strong, showing 35 percent more than during the previous reporting week and 28 percent more than the prior four-week average. In addition, net sales of 124,000 bales were concluded for delivery in the 2003/2004 marketing year, which was viewed as particularly bullish. The pullback in prices in New York as well as the recent slide in the US Dollar value were cited as main reasons for the impressive sales volume. Also aiding the positive market tone was the release Thursday of Cotlook Ltd.'s Cotton Outlook report for the month of July. The group made adjustments to its supply and demand forecasts for 2003/2004 that implied a further tightening in world cotton stocks.

After having fallen to three-and-a-half week lows earlier in the week, the market found good support thanks to improving demand and technical considerations. Prices appear to be stuck in a wider trading range from 57 to 62 cents until further confirmation of stable demand and reduced global supplies will be received.

While growing conditions for California’s Pima production had been described as somewhat “uneven” due to continuously high daytime temperatures in excess of 105 degrees in the San Joaquin Valley during past weeks, the situation seems to have normalized now. Cotton plants are showing good growth and blooms and squares are developing on earlier-planted crops, according to the California Crop-Weather report. Though still about 2 weeks behind its normal pace due to the wet and cold spring, practically all the crop was rated in fair to good condition.

Cotton fields were cultivated, fertilized, and treated to control weeds and insect pests. Pima fields in New Mexico and far west Texas were reported as in mostly fair to good condition according to the New Mexico Crop-Weather report with eighty-seven percent of the cotton squaring and 21 percent setting bolls. Weekly US Pima export sales came in as weak as expected with net 1,200 b/c of current crop sold, bringing cumulative sales to 637,300 b/c for the season versus only 900 bales sold for the upcoming crop year, which is now trailing sales more significantly compared with the same time last year at 64,800 bales for 2003/2004

versus 86,900 bales in 2002/2003. Most suppliers are still withholding firm offers of new crop Pima, which are not expected to resume for another 3 to 4 weeks. Current and old crop offers find regular buyers, albeit in lower volume, at gradually increasing prices. Recent sales have been concluded upwards of 110.00 c/lb CIF NC. Sales are being partially filled with bales redeemed out of the USDA Loan, which is showing a steady decline in inventory.

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