COTTON DIVISION

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

August 2 - 6, 2004

Cotton prices in New York were able to gain some minor ground this week as some market participants are trying to pick a bottom. Option related buying coupled with general positioning prior this month’s USDA Supply/Demand Report to be released on August 12 caused some trade buying and spec short covering. Hurricane “Alex” off the shores of North Carolina aided the positive development of the market further, although general crop conditions in the US can only be described as ideal with 96 percent squaring versus 93 percent one year ago. Meanwhile, 77 percent of the crop was noted as setting bolls versus 65 percent at the same time last year. Out of the entire crop, 8 (16) percent was said to be in “very poor/poor” condition, 22 (31) percent “fair” and 70 (53) percent in “excellent” shape (last year’s figure). Likewise, the much anticipated precipitation finally occurred in India, especially in the northern-central and northwestern portions of the country. The monsoon season had eluded key cotton growing regions of India, where soil moisture levels have now been boosted. The major growing regions of northern India, which include farms throughout the states of Haryana, Punjab and Uttar Pradesh, all saw beneficial rain starting earlier this week with the heaviest rains occurring around Patiala in the southeastern section of Punjab. Comments from the ICAC, published in its monthly Supply/Demand report this pas Tuesday, were largely considered to be already absorbed in current values although they reflected once again the stark increase in production for the coming season. Higher prices are expected to boost world cotton production to a record high in 2004/2005 as per the ICAC, exceeding consumption and leading to an increase in world ending stocks. World cotton production is forecast to rise by 2.2 million tons, or 11 percent, to 22.6 million tons in 2004/2005, 1.1 million tons above the record set in 2001/2002. World consumption is projected to reach a record of 21.5 millions tons, up 350,000 tons from 2003/2004. The report further noted that net imports by China

skyrocketed to a record of 1.8 million tons these past months, up sharply from 520,000 tons in 2002/2003. As a result, the Cotlook A Index averaged 69 cents per pound in 2003/2004, 13 cents, or 24 percent, above the previous season and the highest in six seasons, however, slightly shy of the 30-year average of 70 cents per pound. Undoubtedly, the textile industry in China will continue to serve as the locomotive for world mill use, however, the growth rate of mill consumption in China is forecast to abate from an estimated 8 percent in 2003/2004 to 6 percent this season.  Consumption in China is expected to reach 7.4 millions tons, up 400,000 tons from 2003/2004. Consumption in the rest of the world is expected to stagnate at 14.1 million tons as continuing declines in developed countries will offset increases expected in South Asia. Supply and demand forecasts suggest that the season-average Cotlook A Index will decline to 57 cents per pound in 2004/2005, 12 cents below the average in 2003/2004. The net speculative short position meanwhile grew from 35.3 percent to 37.3 percent as of last Friday, July 30, 2004, lending some support to the market just like the weekly USDA export report, which albeit some further cancellations (61,100 b/c) from China showed stronger than expected sales for the 2004/2005 season, which started on August 1. New sales for the 2003/2004 crop year actually turned negative with -18,600 bales, representing a marketing-year low, yet net sales of 319,200 b/c for delivery in the 2004/2005 marketing year negated the bearish implication. Physical exports of 242,800 b/c were not as strong as expected, dropping 12 percent below the week earlier and 5 percent under the prior 4-week average, which should prompt the USDA to revise its annual export figure by about 100,000 bales from 13.80 mio. bales to 13.70 mio. bales.

The last week of this season provided little excitement in terms of export sales as US Pima sales for the week ending July 29 arrived at a very modest 900 bales for the present crop year and 6,700 bales for the new season with the primary destination of the United Arab Emirates. Total commitments for the 2003/2004 season thereby amounted to 538,100 bales versus the USDA estimate of 530,000 b/c, which compares to 635,900 bales for the 2002/2003 season. As there are presently no applicable foreign ELS quotes in the Liverpool Cotton Outlook, the step-2 payment subsidy in effect for the following week has already been reduced to 28 cents and a further reduction, possibly to 0.00 is feasible should there be no quotes in the next few days. This may create a temporary distortion in American Pima values

between the old and new crop, pushing 2003/2004 production to prices, which will render fresh business even less likely. Meanwhile, the crop continues to progress well and short of any unforeseen weather complications, the 2004/2005 growing season may well go into history as one of the best ever seen, especially in California. Most growers focus on irrigation, weed and insect control with only average white fly populations recorded in the San Joaquin Valley to-date.

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