COTTON DIVISION

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

September 27 - October 1, 2004

Although there has been some encouraging news for the cotton market this week, prices were unable to gain any ground over the past 5 trading sessions. Cotton futures initially rallied to a 1-1/2-week high earlier this week, primarily on weather related nervousness as unexpected rainfall fell in West Texas and remnants of Hurricane “Jeanne” passed through Georgia, causing more damage to the already stressed cotton fields in this State. After battling three successive hurricanes (“Frances”, “Ivan” and “Jeanne”), estimates of crop losses for the entire Southeastern region of the US are currently placed anywhere from 400,000 to 600,000 bales. Ironically, the USDA crop progress report as of September 26 showed US cotton conditions had actually improved as 8 (11) percent were reported as “poor to very poor”, 21 (23) percent as “fair” and 71 (66) percent as “good to excellent” (previous week’s figure). Meanwhile, 72 percent of cotton bolls are now open versus 67 percent last year and 79 percent representing the five-year average while 12 percent have been harvested thus far versus 13 percent the previous year and the five-year average of 18 percent. The crop condition report reminded many traders that the US is still facing a sizeable crop possibly in excess of 20 million bales and cotton futures began their gradual descend at the New York Board of Trade. The present sentiment of lower prices is being aided by the development of cotton crops worldwide, which appear to be gaining in momentum and seize (e.g. India) while worries about China’s ultimate cotton output have subsided as well. The increase of the speculative net short position from 26.4 percent to 31.3 percent as of September 28 was not stirring up any emotions either as this level still holds only limited risk of a potential short-covering rally. The other two key reports released this week in form of the USDA export report and the monthly mill use figure from the US Census Bureau, though supportive of prices, were also unable to push prices back up significantly. First, the National Cotton Council announced its seasonally adjusted domestic

consumption figure for the month of August 2004, which arrived at 6.51 million 480-pound bales compared with 6.42 million bales the previous month, 6.40 million bales at the same time last year and private estimates of 6.1 to 6.2 million bales, then the USDA published its weekly export report. The latter revealed net Upland sales of 219,500 bales or 57 percent more than during the previous week and 85 percent over the prior 4-week average while exports amounted to 61,300 b/c, which represented 8 percent less than the previous week and were 35 percent below the prior 4-week average.

Despite a gradually improving fundamental outlook, time being, technicals continue to dominate the market’s movement, pulling it lower until more significant demand resurfaces.

The weekly USDA Pima export report as of September 23 showed sales of another hefty 18,900 bales, pushing cumulative commitments to 148,600 b/c of which 27,000 b/c (of last year’s crop) have already been exported. The quantity of these fresh sales, which are expected to be shipped in the very near future, were largely made possible as a result of the final calculation of the first step-2 subsidy payment from the USDA, which is valid for shipments from October 1 through 7. Considering the 28+ cent perk from the government, both farmers as well as exporters are duly7 motivated to move the young harvest as quickly as possible. As ideal conditions have permitted early harvesting this year, which commenced in the San Joaquin Valley in volume earlier this week, gins will start their operation simultaneously, delivering first bales to the gin-yards and loading docks in the next couple of days. Although the port congestion in Los Angeles continues, the USDA office in Visalia has successfully reinstalled its HVI equipment and first analysis is showing nothing out of the ordinary so far. Quite contrary, top grades combined with long and strong fiber characteristics are dominating so far, just as buyers of California Pima have become used to. The Pima crop in New Mexico, and Texas has remained on the plant as temperatures in the past 3-4 weeks have been less conducive to an early harvest and growers are trying to maximize yields and quality by leaving their production in the fields for yet another couple of weeks before harvesting will begin in earnest.

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