COTTON DIVISION

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

August 30 - September 3, 2004

Sparked by persistent fears of the potential damage possibly caused by hurricane Frances, cotton prices moved up sharply especially at the beginning of this week. Market observers commented that while concerns over hurricane Frances may have been the spark, a bevy of technical factors including several rounds of buy stops and option-related activity once prices crossed the 20- and 40-dfay moving average were also behind the recent gains. The path of hurricane Frances, which is expected to approach the southeastern U.S. Atlantic Coast this weekend, according to Global Weather Services, has weakened somewhat yet it still is a category 4 storm, which carries the potential for major damage as it makes its way inland. Since the hurricane’s path cannot be predicted without difficulty once ashore, it remains to be seen whether cotton fields in Georgia, Alabama and the Carolinas particularly will be affected and to what degree, however, considering the market’s action this week, few participants are willing to take any chances. Further support for cotton prices this week came from the CRB Index, which gained value consistently during past trading sessions as especially soybeans showed strong gains due to weather concerns in the Midwest. The weekly US Crop Progress Report did not show much of a change as 19 (19) percent of the entire crop were rated as “very poor/poor”, 29 percent (30) “fair” and 52 (51) percent “good/excellent” (last year’s figure). Meanwhile, as of Sunday August 29, 25 percent of cotton bolls were recorded as open versus 21 percent one year ago and the five-year average of 32 percent, which is something to keep in mind when judging the potential impact of hurricane Frances. The weekly USDA export report added further value to cotton as it showed net upland sales of 205,800 bales, which was 78 percent above the week earlier and well above private estimates. Exports of 171,700 b/c were slightly better than expectations as this figure represented a 6 percent increase over the previous week, but was 29 percent below the prior 4-week

average. With prices advancing so rapidly, even the bearish-construed outlook published by the International Cotton Advisory Committee could not spoil the party. The ICAC reported that higher prices have been boosting world cotton acreage by an estimated 8 percent in 2004/2005 after the Cotlook A Index averaged 68.30 cents per pound in 2003/2004, a six-year high. As the harvest has begun in the Northern Hemisphere without incident, world yield has been forecast to climb to a record of 663 kilograms per hectare in 2003/2004, up 26 kilograms from last season, said the ICAC. As a result, world production is expected to increase by 13 percent, from 20.5 million tons last season to a record of 23.1 million tons, which would be the largest year-to-year increase in absolute terms since 1984/1985 according to the ICAC. Expectations of rising stocks and of lower imports by mainland China in 2004/2005 caused the Cotlook A Index to fall from 75 cents per pound in January of 2004 to 52 cents per pound in August of this year. World cotton consumption in 2004/2005 will be stimulated by lower prices, as cotton is currently price competitive with polyester, suggested the ICAC. Although global mill use is forecast to be up 400,000 tons, nearly 2 percent, to a record of 21.6 million tons this season, world ending stocks are projected to increase as well from 7.8 million tons last season to 9.2 million tons in 2004/2005. Such market fundamentals suggest that the season-average Cotlook A Index will decline further towards 52 cents per pound in 2004/2005, which would be 16 cents or 24 percent below the average in 2003/2004. It is important to note that for the fifth consecutive season, mainland China will capture most of the increase in world mill use. Cotton mill use in mainland China is projected by the ICAC to increase to 7.5 millions tons in 2004/2005, up 400,000 tons, or 5 percent, from last season. Mill use in the rest of the world is projected to be unchanged at 14.1 million tons, the same as in 1998/1999, when consumption in mainland China was only 4.3 million tons. Nonetheless, the shortfall between production and consumption in mainland China is expected to shrink by 1 million tons this season from an estimated 2.2 million tons in 2003/2004. Depleted stocks, including government reserves, need to be replenished, said the ICAC yet Chinese imports are expected to decline from a

record of over 1.9 million tons in 2003-04 to about 1.5 million tons this season.

It does not take much to figure out that further price direction now depends on the path of hurricane Frances as well as the next USDA Supply/Demand Report due to be published next week Friday. September 10.

With summer vacations coming to an end and with “the cat out of the sack” in terms of the marketing of this year’s Egyptian crop, some buyers have returned to their desks with a degree of optimism, locking in some purchases at this time. Most suppliers have cut their prices to the rock-bottom in order to stimulate business and compete in what most perceive to become one of the most aggressive marketing seasons in history given global ELS supply. Weekly export sales for the week ending August 26 reached 11,200 b/c, pushing the total for the 2004/2005 season to 95,500 bales compared with 96,800 b/c at the same

time last year. If not outright discounted in anticipation of a step-2 subsidy, many merchants are providing their buyers with a participation scheme that will permit the sharing of any U.S. Pima subsidy at time of shipment, which in return is enticing purchases. Meanwhile, the crop is receiving its finishing touches, now that a truly spectacular growing season is coming to an end. As reported last week, defoliation equipment is about to run through the fields to cut the plant’s growth and prepare the bolls for harvesting. Another 3 weeks and the US should see first quality and yield indications, which are expected to be once again well above average.

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