COTTON DIVISION

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

September 8 - 12, 2003

Cotton prices received a boost this week thanks to the latest USDA Supply and Demand Report as well as news coming out of China, pointing towards significantly lower production due to inclement weather and increased import needs. As for the US, watchful eyes continue to track the path of hurricane “Isabel” as it may cause damage in the cotton producing states of the Southeast. The weekly crop conditions released by the U.S. Department of Agriculture on Monday already demonstrated the lateness of the crop, which makes it that much more vulnerable to poor weather conditions during the next few months. As of Sunday, September 7, 35 percent of the US cotton bolls were reported as open compared with 24 percent the week before, 49 percent a year ago and the five-year average of 52 percent. As for the crop’s condition, 50 percent was reported in “good-to-excellent” condition compared with 52 percent the week before while 19 percent of the crop remains in “poor-to-very poor” shape. Meanwhile, the weekly speculative hedge report Tuesday morning showed that speculators had increased their net long position as of last Friday to 22.8 percent, roughly in line with market expectations, compared with 12.1 percent net long the prior week. The surprise of the week, however, came in form of the monthly USDA Supply/Demand Report, which showed U.S. 2003/2004 projections with lower beginning stocks and production yet higher exports compared with last month and as a result lower ending stocks. All US cotton production was forecast at 16.9 million 480-pound bales, down 1 percent from last month and 2 percent below last year's production. Yields

are expected to average 667 pounds per acre, which was the same as last month. The lower production, compared to last month, was due primarily to reduced harvested area of 110,000 acres based on administrative data. The September harvested area was estimated to total 12.2 million acres while the yield decrease in Texas, due to poor growing conditions in the High Plains area, was partially offset by yield increases in the Delta States and California. Beginning stocks were reduced based on preliminary data from the Census Bureau. A decrease of 165,000 bales in production reflects lower forecasts for the Southeast and Southwest, partially offset by an increase for the Delta states. Domestic mill use was left unchanged at 6.60 mio. bales while exports were raised to a record 12.0 million bales, as reduced foreign crop prospects, especially in China, are raising world import demand. Ending stocks were reduced 500,000 bales to 3.8 million bales or 20.4 percent of total use. World 2003/2004 cotton supplies and stocks were reduced sharply from last month while consumption was reduced slightly. Lower beginning stocks were the result of adjustments in the 2002/2003 balance sheets for several countries, including Turkey, Taiwan, the United States and Uzbekistan. Production was reduced 1.5 million bales to 25.50 mio. b/c in China, due to the effects of severe wet weather in eastern China and production was also reduced in Argentina, Pakistan, and Paraguay. The sharp increase in China's imports is boosting world trade, however, is being partially offset by small reductions in imports for several other countries. World stocks were reduced 6 percent from last month to 32.2 million bales, the smallest since 1994/1995. Weekly US export sales arrived at only 29,800 b/c while exports of 115,400 b/c were 11 percent less than during the previous week and 42 percent under the prior 4-week average.

With the fundamental picture having changed significantly this week it is safe to assume cotton values will improve further with 70 cents being mentioned frequently as the next resistance point. Despite the euphoria, however, one cannot ignore the technicals, which are showing a heavily overbought RSI as well as two major gaps underneath the market that were established this week. The presently weaker Dollar may assist in improving export sales, however, equally important are the foreign quotes, which may or may not rise in proportion to US prices and as such make further price advances more difficult.

American Pima production for the 2003/2004 season has been forecast by the USDA this week at 430,500 bales or 20,000 bales less than indicated in the August estimate and 37 percent less than last year’s 678,300 bales. The decrease in production from last month is due to reduced harvested acreage in California, which has been cut from 149,000 acres to 139,000 acres. Ironically and very much in disagreement with most private surveys, the USDA raised its yield estimate for California from 1,256 lbs/acre to 1,278 lbs/acre thereby raising the entire US average from 1,212 to 1,227 lbs/acre. All other figures remain unchanged from the previous month. Meanwhile, Pima exports for the week ending September 4 arrived at 5,000 bales, bringing seasonal commitments to 111,900 bales. As evidenced by the actual shipments of 22,100 bales that have taken place so far for the

2003/2004-season already, sales that are being presently concluded are partially being filled with previous year’s production, which is offered at lower prices than the upcoming harvest. It is therefore reasonable to assume that the bales currently remaining among others in the CCC loan inventory of 58,800 b/c will be sold to a large degree before buyers will have to look more aggressively towards this season’s more expensive production, which continues to progress well. As temperatures remain high and in some cases higher than seasonal, farmers are trying to prolong the plants maturing stage to improve both quality and yields. While some growers will start their harvest during the first half of October, others are expected to wait until early November of this year, which reflects the significant differences in plant appearance that can be found when comparing fields that are located even directly next to each other. As a result, most producers are reluctant to offer new crop Pima or when doing so are holding their prices defensively high, especially for top grades/narrow fibre-parameters as they fear the possibly limited availability of high grades by year end. No further forward contracting of US Pima has been reported for the past week and one of the key reason for prices not having escalated further is the understandably limited amount of inquiries received so far from ELS buyers.

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