COTTON DIVISION

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

September 29 - October 3, 2003

While rising cotton prices dominated this past trading week for the most part, values came under pressure on Friday as profit-taking began to set in, attempting to correct the heavily long spec position. Briefly after prices shot to their highest level since 1998, based on a continuation chart, speculators decided to unwind a portion of their rather substantial net long position, alleviating the market from its burdensome overbought condition. All week long, market participants had been pushing prices higher as they felt supported by both very strong technical considerations as well as fundamentals, pointing towards yet another attempt to reach and surpass the 70-cent mark for the spot-trading month. Although the announcement by Levi Strauss & Co. that it would close its two remaining U.S. plants as well as three plants in Canada was considered to be another huge setback for the domestic textile industry the surprisingly better than expected weekly export figures lifted market participants’ spirit once again. The U.S. Department of Agriculture's export sales report issued on Thursday was well received as net upland sales of 92,900 running bales were more than double the previous week and 38 percent above the prior four-week average. Exports of 95,300 b/c were 29 percent above the week earlier, but 19 percent under the prior four-week average. The fact that sales came in stronger than anticipated despite the rising US Dollar and that China took 27,100 bales for the current crop year was viewed as particularly bullish for the market. Adding further fuel to the fire, the International Cotton Advisory Committee released its latest supply / demand outlook for 2003/2004, which placed world cotton usage at 97.4 million bales and output at 92.8 million bales. The

ICAC's prediction of China's (Mainland) cotton production for 2003/2004 was reduced by over 300,000 tons to 5.4 million tons due to poor weather, which is expected to increase imports by China to a record 900,000 tons this season or up 200,000 tons from last year. Despite the anticipated increase in US production due to the presently ideal harvesting conditions, the general consensus remains that global consumption is about to well outpace global production. Sparks Commodities, publishing its monthly production estimate earlier this week, announced that their yield survey is calling for US production this season to grow to 17.084 million bales, which is only somewhat higher than the current USDA figure of 16.939 million bales due for revision in their upcoming estimate, expected to be released on Friday, October 10. The improving weather conditions in the US were also reflected in this week’s USDA crop condition report, which showed that the cotton crop was 49 percent in “good to excellent” condition with 70 percent of all cotton bolls open and 15 percent of the entire crop already harvested.

There seems less and less resistance for cotton prices to move higher. While these higher prices as always bear the risk of lost sales overseas, the gradual increase of foreign growths may well quench this concern. Meanwhile, demand from China appears to be insatiable especially in light of this country’s own production loss this season, which is coupled with the already growing imbalance between world production and consumption. Though focus next week will shift once again towards the monthly USDA supply/demand report it remains doubtful that short of significant improvements elsewhere in the world, any increase in US production will offset the respective shortfall in other cotton producing countries. Unless speculators are planning to exit their current position more massively, which after today’s correction has become somewhat unlikely, one has to expect cotton prices to rise further.

Producers expected limited harvesting to begin around early October yet samples are already beginning to arrive at the USDA classing office in Phoenix, primarily from Yuma County. Though one cannot at all consider the results of these few ginnings an indication of any kind, it is interesting to note that once again high grades, strong and long fibre dominate. As we are entering the harvesting phase of the current season, one can only hope for results similar to last year’s when color grades 1 and 2 made up 93 percent of classings from the 2002/2003 crop, the same as the previous year. Leaf grades 1 and 2 accounted respectively for 74 percent and 20 percent of the 2002/2003 classings. The average staple length was 46.5 thirty-seconds inches as compared to 46.0 the prior year. The average micronaire was 4.1 and the average fibre strength was 40.6 grams per tex, which was up from the previous season’s 40.1 g/tex. For time being, the crop is still enjoying picture perfect conditions and some observers are already arguing that the benefits of the current weather pattern will result in higher yields and production. It will be

difficult to gauge this development until more widespread harvesting activities begin, which is expected for the coming 2 weeks, especially in California. Meanwhile, exports picked up considerable volume for the week ending September 25 as new sales arrived at 28,700 bales, pushing cumulative sales for the season to 154,300 b/c compared with 187,600 b/c at the same time last year. These strong sales cannot be considered a huge surprise as the USDA just announced a 4.95 cents/lb export subsidy for the coming week, which may have well sparked the larger than usual sale to Indonesia. It is noteworthy that CCC-stocks as of September 30 were also reduced by 20,500 bales representing about 70 percent of this past week’s increase in export commitments, which once again proves that current export sales are being fulfilled with last year’s production.

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