COTTON DIVISION

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

September 7 - 10, 2004

This shortened trading week in the US was dominated by the ‘fight’ between hurricane “Ivan” versus the latest set of USDA data. While most market participants, at least during the first part of this week, felt encouraged to buy cotton in anticipation of the second, potentially dangerous hurricane, threatening the increasing percentage of open bolls in the Southeast, the equally devastating set of data released by the U.S. Department of Agriculture on Friday took values once again lower. While assessments of damage from hurricane “Frances” are still ongoing, the State of Florida as well as a the rest of the Southeast is preparing itself for the next round of high winds and flooding, expected to hit its shores early next week. So far, most local observers are looking for a loss of around 200,000 to 250,000 bales in Georgia alone, which might easily be doubled based upon the final path hurricane “Ivan” will take. Of course, against the backdrop of improving crop conditions elsewhere and global cotton production at its peak, it remains to be seen, what if any impact such losses may have on the market. Prior to hurricane “Frances” US crop condition had been reported at 8 (19) percent “very poor to poor”, 22 percent (31) “fair” and 70 (50) percent “good to excellent” (last year’s data) while 35 percent of US cotton bolls were open as of September 5 versus 32 percent last year and the five-year average of 45 percent. The U.S. Department of Agriculture reported Tuesday that 51 percent of the bolls were open in Georgia as of Sept. 5, compared with 39 percent the previous week. No cotton had been harvested yet, compared with the five-year average of 3 percent picked at this point in the season. The on Thursday, the cotton market began to crumble in anticipation of yet another potential increase in the seize of the US crop to be announced by the USDA in its monthly Crop Production report out on Friday. Traders were not ‘disappointed’ as the USDA’s latest figures for

the 2004/22005 season reflected upward revisions in supply and demand. Forecast production was raised 712,000 bales to a record 20.9 million bales, however, beginning stocks were reduced by 100,000 bales to 3.5 million bales based on a preliminary Bureau of the Census report for the 2003/2004 crop; thus, the total supply was raised to 24.4 million bales.  Domestic mill use was raised simultaneously by 200,000 bales in both 2003/2004 and 2004/2005 to reflect additional mill use not included in previous Census reports.  Adding exports, which were increased as well by 200,000 bales for the 2004/2005 crop year to 12.2 million bales, ending stocks were revised up modestly to 6.1 million bales. Unfortunately for the bulls, world cotton projections for 2004/2005 also included higher production and stocks compared to last month.  Global production was revised up to 107.3 million bales, as increases for the United States, India, and Uzbekistan were only partially offset by reductions for China and Australia. A slight increase in world consumption reflected the anticipated improvements for the U.S. textile mill industry.  Changes to world trade included largely offsetting adjustments for several producing countries, most notably an increase of 350,000 bales in imports by China due to smaller forecast production, which was reduced from 30 mio. bales to 29.50 mio. bales.  World exports were raised slightly, as increases for the United States, Uzbekistan, and India were partially offset by reductions for Australia and Brazil, leaving world ending stocks with a 2 percent increase to 40.0 million bales. Completing the bearish sentiment towards the end of this week, the weekly SUDA export report revealed sales of just 90,500 b/c or 56 percent less than the week earlier. Exports of 80,200 bales were equally disappointing as it represented a drop of 53 percent below the previous week and 64 percent under the prior 4-week average.

As assessment of crop damage in the US will be ongoing for quite some time, unless “Ivan” creates significantly more destruction in US cotton fields than presently feared, prices will likely have to move lower still in order to ignite significant buying interest.

Pima sales for the week ending September 2 came in at 2,800 bales, bringing cumulative sales for the 2004/2005 season to 98,300 bales compared with 111,900 bales at the same time last year. Given the publication of the Guiza 70 price in the Liverpool Cotton Outlook a week ago, US exporters can now begin to estimate the initial step-2 subsidy rate that ought to become available for physical shipments commencing October 1, 2004. Though there are no guarantees of any kind, motivated nonetheless by the potential of such payments and the overall availability of US Pima- and global ELS stocks, most American merchants are reducing their overseas prices in order to attract fresh business. Buyers, however, are very much aware of the distortion the US subsidy payments bring to the ELS market and as a result are holding off with any purchases until the cargo is truly needed, thereby attempting to maximize their benefit of any step-2 rate. Meanwhile, the monthly production report released by the USDA today showed a slight increase in the estimated harvested quantity from 703,000 b/c to 710,000 b/c. The adjustment came from an improved crop outlook in New Mexico, where estimated production was moved from 14,000 b/c to 21,000 b/c. Pre-harvest conditions in

California remain ideal with pickers expected in the fields by the last week of this months while temperatures in New Mexico and Texas have been somewhat cooler than preferred, though aside from isolated and minimal yield reductions, there is no significant impact expected. The general anticipation at this time is for business to continue on a spot-basis until the exact seize of the step-2 subsidy becomes known. While the current calculation reveals an estimated figure of some 35 cents, this number can drastically change in the coming weeks leading up to the announcement by the USDA on September 30 should US Pima growers decide to reduce their asking prices or Egypt increase its sale prices. What the degree of likelihood of either event is, we leave up to the reader. For those, however, who expect significant reductions in overseas US Pima prices, it needs to be born in mind that any subsidy payment will be incorporated in growers’ offering rates, thereby diminishing to a certain degree the reductions in US Pima prices going forward.

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