COTTON DIVISION

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

August 16 - 20, 2004

Brushing aside virtually all fundamental developments, cotton prices shot considerably higher this past week. Ignoring the previous week’s USDA Production figures as well as ideal growing conditions both in the US as well as most of the other major producing nations, values gained without interruption, reaching and overcoming levels of key resistance. Possibly sparked by the somewhat larger than expected speculative net short position, which had grown from 34.8 percent to 40.5 percent as of last week Friday, it appears that some market participants are believing that cotton prices have reached their bottom. Even the arrival of further precipitation for the important growing districts of northern-central and northwestern India, further boosting soil moisture levels and irrigation reserves throughout the region were not considered of importance to reconsider present price direction. In other news, Pakistan being possibly capable of producing a larger-than-expected cotton crop this year of 10.72 million bales up from last year’s 10.2 million bales if it successfully crosses September without a pest attack similar to the one that hit last year's crop, represented nothing more than another piece of disregarded news. The steady development of the American cotton crop was obviously also overlooked although only 7 (16) percent were rated as “very poor to poor”, 20 (29) percent as “fair” and 73 (55) percent as “good to excellent” as of August 15. Meanwhile, 92 percent were setting bolls versus 85 percent last year and the five year average of 92 percent while 12 percent of all bolls were open versus 11 percent one year ago and the five-year average of 14 percent. Yet as cotton futures broke through key technical points starting on Tuesday of this past week, nothing was able to stop the price movement, settling limit up on repeated occasion. Seemingly, the fact that cotton values had not declined after this month’s bearish USDA

Production Report, was proof enough in the eyes of some, to liquidate their short position and go long. Certainly, the positive development of a few other commodities such as cocoa and coffee, presently also largely influenced by the speculative community, may have aided cotton prices as well. Access to more than adequate resources among others by the hedge funds, despite gradually increasing interest rates in the US, has been largely viewed as supportive to cotton as well. The weekly USDA export report represented another piece of bearish news, which remained however unnoticed as well. Net upland cotton sales of 232,100 running bales were 12 percent below the week earlier while exports of 244,500 bales came in 22 percent below the previous week and 11 percent under the prior 4-week average.

Has the market truly seen the lows for the 2004/2005 season or just entered a temporary phase, soon to be corrected by the overwhelming fundamentals? After this week’s performance, it will be that much more interesting to watch the market especially in the coming weeks as this question will undoubtedly be answered, yet it is not difficult to comprehend that the trade has been a seller during recent trading sessions.

Pima sales for the week ending August 12 came in at a respectable 7,800 b/c, pushing the annual total to 84,400 bales for the 2004/2005 season compared with 94,500 bales at the same time last year. While buyers’ interest remains largely subdued in anticipation of a further price decline, interior prices have not changed for the past 4 weeks, despite the recent disappearance of the Step-2 subsidy payment. Meanwhile Pima especially in the San Joaquin Valley is showing good plant growth and boll setting as conditions remained hot and dry with temperatures in the 100’s and no moisture reported for the past seven days. This season’s harvest is expected to commence early in an effort to maximize quality and yield potential while avoiding last minute surprised as fall sets in. Unfortunately, cooler than normal temperatures slowed the progress of the crop in Texas and New Mexico where hot weather conditions were needed to ensure proper boll development.

• Previous Report