COTTON DIVISION

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

September 2 - 5, 2003

Price direction in New York was seemingly mesmerized by the magic pull of reaching and surpassing the 60-cent mark for the trading month of December ’03. While the market briefly captured this level and despite some positive fundamental considerations, values were unable to remain above 60 cents by the week’s end and settled right at it. Speculative buying provided key support to the market while the trade and producers turned out to be the biggest seller. Crop conditions per the weekly USDA report surprisingly showed yet another gradual improvement for the US cotton crop (previous week) with 19 percent (19) rated as “very poor-to poor”, 29 percent (30) rated as “fair” and 52 percent (51) rated as “good to excellent”. Despite the overall improvement, Texas crop conditions deteriorated further with 39 percent of that crop in “poor-to-very poor condition.” The lateness of the crop was once again illustrated as only 24 percent of the crop is showing open bolls. This was higher than last week’s 16 percent but less than the 38 percent recorded at the same time last year. The release of the weekly speculative/hedge report, which had been delayed until Wednesday morning following the U.S. Labor Day holiday on Monday, revealed that speculators, as widely expected, had increased their net long position from 6.2 percent the previous week to 12.1 percent as of Friday, August 29. Thanks to the familiar wildcard “China” some market participants were willing to extend their long position further after they had learnt of what has been widely perceived as excessive
 

precipitation in some of the key cotton growing regions of China, increasing the likelihood of cotton imports into China, preferably from the US. Simultaneously, one major Memphis merchant was seen recognized with the massive rolling of December’03 and March ’04 calls what some interpreted as possible hedge for physical export sales to China. So far, such sales have yet to surface on the USDA weekly export sales report, which for the week ending August 28 showed only a modest increase of commitments by 77,400 b/c or 22 percent less than during the previous week. Shipments for the same reporting week came in at 129,300 bales, the same as the previous week but 48 percent below the 4-week average. It is worthwhile noting that exports of all cotton from the United States totaled 1,512,000 bales during the month of July 2003, according to the Foreign Agricultural Service, USDA. This was the largest July volume shipped on record. A month earlier, 993,000 bales were shipped and 679,000 bales were exported in July of last year. Shipments for the 2002/2003 marketing year ending July 2003 totaled 11,571,000 bales, the largest volume of shipments during a single season since records began in 1927.

The main focus at this time of the year remains the weather and its impact on quality, yields and total production. All eyes will now once again be directed towards the upcoming USDA Supply/ Demand Report, which is scheduled for release next week Thursday. While speculators seem eager to move prices higher, current fundamentals do not yet warrant a significant improvement in values. Should US prices be able to rally further, foreign growths will largely have to follow suit or else the US may well find itself isolated in the export markets, risking to temporarily lose its biggest outlet.

While mostly favourable weather conditions continue to prevail in Arizona, New Mexico and Texas as well as California, growers find themselves using all available means to hasten maturity. Despite its original planting delay the US Pima crop remains largely in “good to excellent” condition, yet the majority of producers are not interested in extending their commitments in consideration of the crucial stage the crop just entered as well as the anticipation of gradually rising prices. Currently, the majority of farmers at least in the San Joaquin Valley are not anticipating to commence harvest until the very end of October or early November. Meanwhile, most merchants continue to offer either old crop production via seller’s option of delivering 2001/2002 or 2002/2003 crop or are beginning to test buyer’s interest in new crop Pima at prices, however, significantly above last year’s level. While old crop offers appear to arrive anywhere from 115 to 120 cents, new crop is being offering at around 125.00 c/lb, C&F NC, Grade 2/46, G5. At this comparatively lofty level, most buyers still find it

easy to resist taking additional cover and prefer to await Egypt’s official opening of their sales season, which is expected for the middle of October. Though it is easy to argue the pros and cons of buying American ELS cotton of 2003/2004 crop, the fact remains that the far majority of current sales are comprised of last year’s production. As of August 31, 64,100 bales remain in the USDA Loan inventory and it seems safe to assume that this quantity together with any other unsold stock will first find its way to customers, before premiums of 5 cents plus will be paid for 03/04 production. For the week ending August 28, another 7,800 bales were sold to overseas customers, bringing the cumulative total for the season to 106,800 b/c compared with 168,400 b/c at the same time last year. It seems unavoidable that we will have to await the Egyptian opening prices before any further evaluation of new crop prices can take place.

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