COTTON DIVISION

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

August 18 - 22, 2003

Influenced by the previous week’s bearish USDA Supply and Demand Report, the New York cotton market traded mostly sideways to lower this past week. As usual, when there is little in terms of fresh news, the issue of Chinese imports was pulled out of the drawer again. Rumours flared about supposedly strong sales to this large US cotton importer as some merchants appeared to be executing respective hedge trades both in the futures’ and options’ pit. Moreover, market participants looked towards the weather situation in Texas, where cotton plants are still facing a lack of rain and heat-stress as a result of the prolonged and uninterrupted hot temperatures and little to no precipitation. Simultaneously, the spec community has been reducing its net long position significantly down to 9.7 percent as of the previous Friday with most analysts believing that this group is either flat or has gone even net short by now, providing the market with the potential for further buying should the technical picture improve. Another supportive factor to the cotton ring has been the strength in some of the soft commodities with soybeans and wheat posting considerable gains this past week also as a result of deteriorating crop conditions. The USDA, however, painted a slightly different picture in its weekly crop progress report, as they cited an overall improvement in the US cotton belt. As of August 17, 87 percent of the crop was squaring versus 80 percent the previous week, 94 percent last year and the five-year average of 95 percent while open bolls were counted on 12 percent of the crop versus 8 percent the previous week, 19 percent at the same time last year and the five-year average of 18 percent. Surprising was the fact that the USDA announced crop conditions once again had improved marginally as 16 percent were rated as

“very poor to poor”, 29 percent as “fair” and 5 percent as “good to excellent”, which is up one percentage-point from the previous week. Nonetheless, the market was able to squeeze out a rally on Wednesday to a 1½ week high although traders remained torn between focusing on a stronger dollar and its impact on demand for U.S. cotton in the longer term or the short-term adverse weather in west Texas and the Southeast. Further consideration will also have to be given to the immediate gap that lies between 56.75 and 57.11 as well as 54.85 and 55.10 cents per pound in the December contract. Some chart-led speculators may still attempt to fill this with the market in close vicinity. Weekly exports came in about as expected to slightly better with net Upland sales of 140,000 bales, two and one-quarter times the week earlier and shipments of 240,300 b/c, down 19 percent from the previous week and off 25 percent from the 4-week average.

The market remains undecided between the trading of technicals and fundamentals, with the technicals apparently winning for time being. Clearly, the trade has to be more concerned over the fundamentals and seems to prefer to stay long rather than short, given the uncertainty surrounding the crop seize. Despite the stronger US Dollar, the long-term prospects for the cotton market still point higher with stocks-to-use ratio for the coming year projected at still-tight levels and current values for the trading month of December gradually approaching the 20- and 40-day moving average respectively.

Pima plants continue to prosper under ideal conditions, enjoying the appropriate swing between warmer day- and cooler nighttime temperatures. Though it is too late for the crop in California to catch up to the level required to meet current USDA yield estimates, growers are expecting a high quality crop, should present conditions prevail. The USDA is currently considering 85 percent of the San Joaquin Valley crop in “good to excellent” condition

while 88 percent of Arizona, New Mexico and Texas’ production is rated “good to excellent”. Producers are still withholding firm new crop offers and it is expected that it will take another couple of weeks of these good growing conditions, before they will submit fresh offers again. Current estimates are calling for asking prices to arrive at 110-115 cents, uncompressed, FOB interior warehouse for Grade 2/46, G.5. Although firm offers of 2003/2004 crop are hard to come by, export sales nonetheless continue, as previously mentioned, most likely of 2002/2003 production, at decent pace. Since last year’s crop, now being actively redeemed out of the USDA Loan program (about 75,000 b/c remaining), is currently being offered at prices perceived to be lower than cotton that will become available in November/December of
 

this year, buyers are looking towards these stocks to reduce their raw material cost. For the week ending August 14 new export sales amounted to 4,500 bales, moving total commitments to 94,500 b/c, well behind last year’s pace of 162,500 b/c for the corresponding week. While it appears to be a big question mark whether ELS prices will be able to hold the aforementioned level of ard. 110-115 c/lb in the interior, current indications of mills still not having covered an adequate percentage of their needs are already pointing at prices, which will be closer to 120-125 c/lb, FOB interior warehouse in the US. Let’s just hope the weather will play along in the coming weeks to secure top quality production.

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