COTTON DIVISION

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

August 9 - 13, 2004

In anticipation of the monthly USDA Crop and Supply/Demand Report, cotton prices and trading action remained relatively subdued prior to Thursday’s estimate. Though tropical storms “Bonnie” and “Charley” captured traders’ attention earlier this week, it was brief and of little consequence as any landfall was not expected to cause much destruction to cotton fields in the South and Southeast of the United States. Reports of hail hitting Lubbock over the past weekend was considered an equally uninteresting event, which was immediately shrugged off by traders. Meanwhile, the weekly spec/hedge report, which was feared to show too much of an increase in the net spec short position revealed an actual decrease from 37.3 to 34.8 percent as of Friday, August 6. Guided by the continuously impressive crop condition report, expectations for historically low abandonment and high yields, private estimates for this week’s USDA reports pegged US production at an average of 18.84 million-bales for the 2004/2005 crop, higher than the USDA figure of 18 million bales published in its July’04 report. Analysts' estimates ranged from 18.25 million to 19.3 million bales with U.S. carryout anticipated to rise to around 5.4 million bales compared with the USDA carryout set at 4.5 million bales in its most recent report. The world crop was considered to also be one of the largest in history with private estimates ranging from 103 million to 105 million bales in production versus last month’s USDA estimate of 104.73 million b/c and the official June estimate of 102.88 million bales. Final USDA figures for this month were quite a surprise as they arrived at 20.2 million 480-pound bales, up 11 percent from last year's 18.3 million bales. The yield is expected to average 727 pounds per harvested acre, down 3 pounds from 2003. Upland cotton production alone is forecast at 19.5 million 480-pound bales, 9

percent above 2003 as producers expect to harvest 13.1 million acres or 1.24 million acres more than a year ago. As for this month's U.S. 2004/2005 Supply/Demand projections, they included near-record production, and sharply higher exports as well as ending stocks. Projected domestic mill use for 2004/2005 was increased marginally to 5.9 million bales, as recent levels of cotton textile imports are lower than previously anticipated. Exports were raised 700,000 bales to 12.0 million, due to a combination of higher U.S. production and slightly stronger foreign demand.  Based on these revisions, ending stocks are anticipated to reach 5.9 million bales, more than 30 percent above last month and the highest level in three years. The world cotton situation for 2004/2005 featured higher production, consumption, trade, and ending stocks compared with last month. World production is now estimated at 106.6 million bales, 8 percent above the record set in 2001/2002.  Production was raised mainly for the United States and India, partially offset by decreases for Brazil and Australia.  Consumption estimates were raised mainly for China, India, and the United States.  Higher world trade is responding to larger global supplies and increased import demand by China, Pakistan, and others.  Exports were raised for the United States and Brazil, but lowered for Australia, Syria, and others.  World stocks were revised up nearly 4 percent to 39.22 mio. bales. Meanwhile, weekly exports for the first trading week of the new season were 263,000 bales. Outstanding sales of 1,161,400 bales as of July 31 were carried over to 2004/2005 while accumulated exports of 12,807,800 bales, a marketing-year record high, were 17 percent greater than the 10,955,500 b/c exported during the prior year.

While the initial reaction to this week’s USDA reports was unexpectedly mild with a loss of 161 points in the trading month of December on Thursday of this week, the obvious question now remains whether cotton has in fact established a bottom, or for example market participants, doubting the USDA figure, merely felt comfortable buying the market on the initial break lower.

As per this month’s USDA Production Report, American-Pima production is anticipated to reach 703,000 bales, up 63 percent from last year's output. Out of planted acreage of 252,000 acres or 73,400 acres more than last year, American-Pima harvested area is now expected to total 250,000 acres or 41 percent more than in 2003. The U.S. Pima yield is expected to reach an average of 1,350 pounds per harvested acre, 180 pounds above the previous year. If realized, this would be a record high U.S. yield. California growers alone expect to harvest 219,000 acres up from last year’s 149,000 acres with yields averaging 1,403 pounds per acre, up 209 pounds from last year and up 17 pounds from their previous record high established in 2002, which would result in a production of 640,000 balas compared to 370,500 bales last year. Arizona is weighing in with 3,000 acres and 960 pounds in yields producing 6,000 bales; New Mexico will harvest 8,000 acres, assuming yields of 840 pounds, which should provide 14,000 bales while Texas is anticipated to harvest 20,000 acres with 1,032 pounds in yields producing 43,000 bales. The key behind the significant increase in production is obviously California, where growers, aside from the advantageous price comparison between Pima versus Upland cotton, were motivated by ideal growing conditions. The weather in California has been unseasonably warm the first few weeks of March of this year, permitting growers to plant most fields by the first week in May, thereafter benefiting from most favourable weather conditions throughout the following months, promoting rapid growth and development with no major insect pressure.

Considering the sharp increase in production coupled with the potential of significant step-2 subsidy payments, most buyers remain comfortable purchasing their needs on a just-in-time basis. Weekly exports continue to reflect this approach as sales for the first week of the new season amounted to another modest 3,200 bales, bringing the cumulative total for 2004/2005 to 76,600 bales, which includes 16,100 bales of carry-over from the just completed 2003/2004 season. Export sales for the past crop year showed a final tally of 522,200 bales, which is slightly shy of the USDA estimate of 530,000 b/c and 15 percent below the prior season’s 615,700 bales. With the step-2 payments now subsiding, one has to assume that US Pima prices can only fall so much further as the USDA Loan program will once again provide the respective floor price for farmers. Considering the present offering level, this may leave just about 3 or 4 cents on the downside before producers will rather deliver their harvest into the Loan than sell it into the free-market. Participants will surely be watching the Liverpool Cotton Outlook for the resurgence of any respective foreign ELS quote to possibly spark another step-2 calculation and in that same respect any decision taken by Egyptian officials in coming weeks concerning the marketing of its upcoming production.

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