COTTON DIVISION

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

August 11 - 15, 2003

This week’s price movement in New York was primarily influenced by the release of the monthly USDA Supply and Demand Report. While the market traded in its usual pre-report fashion on Monday, the rather bearish sentiment exuded by the release on Tuesday put some pressure on prices, which came off another 100+ points, despite their previous, gradual drop of more than 6 cents, since the release of the previous month’s report. Once the surprise had worn off, New York attempted a modest recovery. The USDA report, which was based on data gathered on or before August 1 of this year, revealed all cotton production at 17.1 million 480-pound bales, down 1 percent from last year's 17.2 million bales, however, about 400-500,000 b/c higher than private estimates had indicated. Yields were surprisingly raised to an average of 667 pounds per harvested acre from 635, which ultimately would lead all Upland cotton production to 16.7 million 480-pound bales or including American-Pima production of 450,500 bales to 17.1 mio bales in total, harvested off 12.30 mio acres. The USDA supply/demand forecast for 2003/2004 included therefore higher production and lower domestic mill use, resulting in higher ending stocks relative to last month. While total available stocks for the new season of 22.65 mio bales represent only a marginal increase when compared to last month’s report, domestic mill use was reduced 200,000 bales to 6.60 mio b/c, as rising textile inventories and mill closings indicate a more pessimistic outlook. Ending stocks of 4.3 million bales arrived therefore 400,000 bales above last month. The world 2003/2004 forecast also included
 

higher production and stocks compared with last month. Beginning stocks were raised about 650,000 bales as increases for China, Australia, Mexico, and India were only partially offset by a reduction for the United States. World production included increases for the United States and India, partially offset by a reduction for Australia while global consumption and trade remained nearly unchanged. The consumption forecast included a significant increase for China, though, which was offset by decreases in the United States, India, Taiwan, and others. World ending stocks were raised 3.7 percent from last month or from 32.96 to 34.29 mio bales. Meanwhile, the upcoming crop is progressing reasonably well. As of the week ending August 10, 80 percent of the US cotton crop was setting bolls versus last year’s 90 percent and the five-year average of 91 percent. This delay in the crop was also evidenced via the 8 percent recorded as opening bolls compared to last year’s 12 percent and the five-year average of 11 percent. US cotton crop conditions, however, contrary to most private estimates, improved marginally (last week’s figures) with 16 percent (16 percent) rated “very poor to poor”, 30 percent (31 percent) “fair” and 54 percent (53 percent) “good to excellent”.
Weekly exports came in at 61,000 b/c, 13 percent less than the prior week. Exports of 295,000 b/c were down 11 percent from the week earlier and 3 percent from the 4-week average. These figures were rather disappointing as most market observers had anticipated another good week in exports as the high step 2 subsidy was still in place during the first week of August. Next week’s figures will become the real test as the Step 2 payment for the new marketing year in effect has been substantially lower. In addition August is traditionally seen as a slow time for sales because of the summer holiday period during the month. The need for prompt shipment of cotton has in either case been erased because of the surge of exports in July.
 

After all was said and done, the negative elements of this past trading week overwhelmed and forced the market to close lower for the week. Technical considerations seem to have gained the upper-hand for time being as the crop seize remains under much debate. Range-bound trading will most likely be the result for time being.

The USDA this week forecast American-Pima production at 450,500 bales, down 34 percent from last year's output yet noticeably above private estimates ranging from 365,000-425,000 bales. The decrease in production is attributed to a decrease in acreage, a reaction to abundant supplies and weaker than usual prices, experienced this past season. Yields were placed by the USDA at an average of 1,212 pounds per harvested acre, 130 pounds below the record high set the previous year, however, once again above the yield expected by private observers, who are indicating from 1,000 to 1,100 lbs/acre at the most. Particularly noteworthy are the figures the USDA established for California with yields of 1,256 pounds per acre, down 130 pounds from their record high established in 2002, as the cool, wet spring in California delayed some of the planting and led to substantial replanting.
 

However, the USDA is trying to justify its data by citing the hot, July weather, which to them accelerated development of the late planted cotton, allowing the Pima crop to catch up to normal maturity by the end of the month. As always, only time will tell, who was closest to the actual production figures. Though market participants may argue this information, it does not change the general outlook on global ELS availability, which will be much tighter this after this coming harvest. Reviewing last year’s exports, however, one would want to caution those, who believe Pima prices will undoubtedly skyrocket in coming months. It remains our belief that unless the crops will suffer yet another detriment development either here in the US or overseas, the reduced supply will be met by reluctant buyers, carefully evaluating their true needs for ELS cotton. The weekly USDA export report revealed new sales for the 2003/2004 marketing year of 2,600 bales, most likely of 2002/2003 production, bringing cumulative sales for the season to 90,900 b/c versus 157,200 b/c at the same time last season.

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