COTTON DIVISION

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

August 23 - 27, 2004

After the market had the ability to rally 8 cents upon one of the most bearish USDA Crop Production reports in the recent past, it cannot be too surprising to see prices retrace during these past few trading sessions. With speculators covering a good portion of their short position and taking a fresh approach, there has been little else to give the market a new sense of direction. While some observers cite the possibility for weather concern in the US with potential hurricane activity by next week and ultimately lower production than estimated by the USDA in its August report, buyers do not seem convinced to take action at this stage and the physical business remains undeniably quiet. This week’s spec/hedge report was a graphic depiction of what happened last week as speculators have reduced their net short position from 40.4 percent to 33 percent as of August 20 and while some believe this figure may once again increase others suggest it could well be turned into a net long position in the not so distant future. Meanwhile, Monday afternoon's weekly crop progress report from the U.S. Department of Agriculture had little impact on the market as the data showed that Texas had more of its crop in the very poor-to-fair category and less in the good to excellent. However, California's crop in the excellent category increased to 75 percent from last week's 70 percent. Likewise, the weekly USDA export report failed to instill confidence as net upland sales of 115,600 running bales were 50 percent below the week earlier while exports of 161,700 bales came in 34 percent below the previous week and 40 percent under the prior four-week average. As though the export figures were not already disappointing enough, the US Census Bureau reported the monthly U.S. textile mill consumption of raw cotton at a seasonally-adjusted annual rate of 6.37 million bales during the month of July, which was lower still

than the 6.618 million bales of consumption seen in July 2003.

While the recent rally has provided some analysts with hope that cotton may soon find comfort at above the 50-cent level, it appears that the verdict is not so clear just yet and prices may well have to retrace first before staging another attack on this key resistance. 

Half of the present Pima situation is summed up in the Weekly Export Report showing zero sales for both current as well as new crop production for the week ending August 19. The other half can be found in the talks with US Pima growers, describing ideal conditions in the San Joaquin Valley, where the present weather is putting the finishing touches on an apparent record crop. Irrigation to the fields has been cut off and defoliation is about to begin, permitting pickers to enter the fields the last week of September in the southern end of the valley and in early October in the northern section. Unfortunately, the Texas and New Mexico crop, though reported in fair to good condition, has experienced cool temperatures of late, which has slowed plant growth. More of the same is expected for the coming week and the average yield forecast by the USDA for these two States of 1,032 and 840 pounds per harvested acre respectively may not hold true. As the export figures reveal, it is evident to the buyers that purchasing decisions can well wait until the new crop is closer to being picked and the question of when and how significant of a step-2 payment will become available has been answered. Adding to ELS buyers’ present comfort level is the Egyptian LS and ELS crop, which also appears to be available in abundance under a revised marketing structure, enabling private as well as public firms to freely negotiate sales prices and contract terms. While the continued decline of prices may seem never-ending, one may need to recall the fact of virtually no carry-over stock both in the US as well as other ELS producing countries as well as the demand in excess of 700,000 bales of US Pima cotton alone just two seasons ago, when prices had become equally attractive.

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