COTTON DIVISION

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

September 13 - 17, 2004

While cotton prices were able to still capture some gains earlier in the week on fear of hurricane Ivan causing major damage to cotton fields in the Mid-South, it was back to the usual losses in values as it became more and more evident that this latest hurricane would not be as destructive as originally feared. While weather remains one of the main driving factors of the cotton market at this time, market participants apparently grew weary of basing their trading decision entirely on the weather forecast. As other factors began to enter the scene such as initial reviews of losses due to hurricane Ivan as well as the still upbeat crop condition report and the quite disappointing weekly USDA export report, traders felt more comfortable selling the market as the burdensome production estimate both for the US as well as the rest of the world was weighing on their minds. The USDA reported on Monday of this past week that as of September 12, only a slight deterioration of crop conditions had occurred with 9 percent of the US cotton crop reported as “very poor to poor” compared to 8 percent last week, 23 percent “fair” versus 22 percent one week ago and 68 percent “good to excellent”, which is just 2 percent below the prior week of 70 percent. Meanwhile, 46 percent of cotton bolls were counted as open versus 43 percent last year and the five-year average of 57 percent and only 7 percent of the entire cotton crop had been harvested, which compared with 7 percent last year and the five-year average of 9 percent. Reviewing these conditions, most analysts felt comfortable that even with more severe losses caused by both “Frances” and “Ivan”, estimated to be around a combined total of 500,000 bales, the US crop would still yield around 20.0 mio. bales and as such represent an abundance of supplies, especially when combined with the positive crop outlook in the rest of the world. Another bearish factor in this week’s trade were weaker-than-expected weekly U.S. Department of Agriculture export sales figures. In the latest week, net upland sales totaled merely 37,800 bales versus private, pre-report expectations of sales between 50,000 and 100,000 bales. Focus

is now beginning to shift towards hurricane “Jeanne”, near the eastern parts of the Dominican
Republic, which is expected to approach the U.S. southeastern Atlantic Coast by early next week. While the market was able to gain back some value on Friday in a relatively thinly traded session, it appears that from a technical perspective the December contract has violated through some important levels of chart support, which has opened the door for additional selling pressures in the days ahead, leading back all the way down to the August low of 42.60 on August 12. Then again, there is always the wildcard of China…
The anticipated USDA Step-2 subsidy, expected to be available as of October 1, is doing its job as a whopping 22,400 bales of US Pima sold during the week ending September 9. These sales occurred once the Egyptian Guiza 70 quote appeared in the Liverpool Cotton Outlook as the one missing element that was needed to trigger the known US subsidy payment. Although there are no guarantees of any kind about seize and ultimate availability of this payment, exporters are evidently feeling confident that they can bank on such government payment and as such have reduced their prices to a level enticing fresh business, which is most encouraging to US Pima producers. At this time, cumulative sales for the 2004/2005 season stand at 120,400 bales, which compares with 119,000 bales at the same time last year. This is the first time so far that the rapidness of sales for the present season has outpaced that of the previous year. It remains to be seen, whether foreign producers will respond with the obvious yet inconsequential alternative of lowering their prices further, which will only increase the US subsidy, thereby keeping the advantageous edge for US Pima in place as will every further reduction of the foreign quote. One should expect that at some point growers of overseas ELS producing countries will stop selling their ELS cotton as prices may simply fall too far, yet if and when that happens remains to be seen. In the meantime, this should call for lower ELS offering prices in the near future. Pre-harvest conditions in the US could not be better as farmers are applying defoliation material in large volume now while prepping their pickers for the task at hand. There have been no detrimental developments reported in either US State that would point towards significantly lower yields or quality than previously anticipated.

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