COTTON DIVISION

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

September 20 - 24, 2004

Despite the overwhelmingly bearish global supply/demand outlook, cotton prices this week did not continue their slide further down but regained some composure, albeit in a modest manner. As market participants await the USDA’s latest crop data and supply/demand forecast on October 12, cotton futures on the New York Board of Trade initially dropped to their lowest level in a month this past Monday, impaired by the loss of a weather premium as nervousness over Hurricane Ivan dissipated. The force of Hurricane Ivan moved through cotton crops in southern Alabama, northwest Florida and parts of southwest Georgia, but left the heart of the cotton belt unharmed. Although exact figures of crop damage from the two hurricanes that have blown through the Southeast cotton belt remain unknown, it is not likely to exceed the previously estimated total of about 500,000 bales, which means the US is still on track to produce a very sizeable crop of around 20 million bales in the 2004/2005 marketing year. Crop conditions as of September 19 continue to show very satisfactory data as 66 percent appear to be in “good to excellent” shape versus 68 percent the previous week, 23 percent are in “fair” condition, which is identical with the prior week, and 11 percent are reported as “very poor to poor” compared with 9 percent the previous week all the while 58 percent of the entire US cotton bolls were reported to have opened versus 46 percent the previous week and the five-year average of 69 percent. In total 8 percent of the US cotton crop have been harvested as of the middle of September, which compares with 7 percent as of last week and the five-year average of 13 percent. After the previous week’s export figures had been disappointing with only 37,800 bales sold, which was 58 percent below the week earlier and 77 percent under the prior four-week average, this week’s USDA data was more encouraging as it revealed net Upland sales of 140,000 bales, which was 40,000 b/c above expectations and nearly three

and three quarters times the week earlier and one-quarter above the prior 4-week average. Exports of 66,300 bales were 9 percent over the previous week but still 44 percent under the prior 4-week average. Particularly helpful was the reappearance of buying from China this past week, which highlighted that US cotton prices between 45 and 50 cents are once again appealing for the largest cotton consumer in the world to enter into new purchases. As Chinese central government stocks are still believed to be well below the levels seen in previous years, US exporters remain hopeful that sales to this destination may well increase as long as US prices remain competitive, meaning below 50 cents for time being. The upgrading of tropical storm “Jeanne” to hurricane status by midweek provided the market with further strength, particularly as it was turning its direction and was heading towards the U.S. All of the above apparently did not go unnoticed by the speculative community, which at 22 percent net long, has enough ammunition to add to its present long position, which it apparently did moderately as the week wore on.

Range-bound activity between 45 and 50 cents in December 2004 appears to be the most likely outcome for time being until more decisive information becomes available.

The US Pima harvest is about to commence in California, where pickers are expected to enter into fields by the middle of next week. As the chance for detrimental weather conditions increases with every passing days, many growers do not want to take any chances now that the production cycle is about to come to an end. It is expected that as ginning will commence in earnest by October 1, this year’s crop may be available for shipment by the second half of October, yet there remain potential delays as the port of Los Angeles continues to experience significant congestion and the USDA classing office in Visalia, which had removed about 50 percent of its HVI machines for replacement, never received the new equipment and now is struggling to reinstall the original HVI machines. Meanwhile, sales of new crop Pima continue at pleasant pace with another 9,300 bales registered for sale to overseas customers during the week ending September 16. The seasonal cumulative

total now stands at 129,700 bales of which 26,700 bales (of old crop production) have already been shipped. Somewhat surprising, the USDA for the first time in weeks, lowered its USDA spot quotations by 5 cents this past Tuesday, which if similar decreases were to occur in coming days and weeks can effectively lower the step-2 USDA subsidy quite dramatically. This is, of course, as long as Egypt will not see the need to lower its own

offering prices any further in its effort to compete aggressively in the global ELS market. At this stage one has to still expect a gradual slide in Pima prices, although the decreases ought to become more modest and values may stabilize in the not so distant future.

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