COTTON DIVISION

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

October 6 - 10, 2003

While awaiting the latest USDA Production and Supply/Demand Report, this week was all about rising local prices and production losses due to heavy precipitation in Chinese cotton growing regions of Henan and Shandong, which are responsible for about 40 percent of Chinese cotton output. Adding fuel to the fire was speculators’ insatiable appetite for more and more cotton. Trading sideways for a couple of days and thereby alleviating the rather hefty overbought conditions on the RSI chart, permitted the spec camp to add further to their already substantial net long position. In Tuesday morning's speculative hedge report, the speculative position stood at 48.3 percent net long of the open interest, which represented little change from 48.1 percent the week before, however, their gross position swelled from 60,028 to 67,903 while the short position increased by only 1,875 to 20,029 contracts. The rising open interest has obviously skewed the percentage values. Despite the growing optimism that the US cotton crop, specifically in the Southeast, will provide higher yields, resulting in total output rather above than below 17.0 mio bales for the present season, concern over final production in China easily outweighed the bearish sentiment in the US. Crop condition data for this past week confirmed that American cotton production has improved (last week’s figure) as 21 (20) percent were rated as “very poor to poor”, 29 (31) percent as “fair” and 50 (49) percent as “good to excellent”. Meanwhile, 76 percent of all bolls were called “open” versus 89 percent a year ago and the five-year average of 89 percent As of Sunday, October 5, 21 percent of the entire US cotton crop had been

harvested, which compares to 23 percent a year ago and 31 percent, which represents the five-year average. Nonetheless, the market kept reaching higher and higher territory easily surpassing highs last seen more than 5 years ago. Weekly exports came in more or less as expected as sales amounted to 104,800 bales for the week ending October 2, with China buying 36,200 running bales, which once again provided the market with a reconfirmation of its familiar headlines. The issuance of the monthly USDA reports surprisingly did not alter the market’s direction either. Although both the US figures as well as the global estimate were widely regarded as bearish, the bullish character of late was not to be disrupted. For the US, an increase in production from 16.94 mio. bales to 17.56 mio. b/c was due primarily to an improvement in yields from 667 to 696 pounds per harvested acre. Meanwhile, domestic consumption was curtailed yet again to 6.40 mio. bales down from the previous month’s 6.60 mio. b/c. Leaving exports at 12.0 mio b/c ultimately resulted in ending stocks rising to 4.60 mio bales in the US, up 800,000 b/c from the USDA estimate issued in September of this year. The world 2003/2004 projections included higher production and lower consumption, boosting world stocks by 4.7 percent from last month. Production was raised in the United States, India, Brazil, and the African Franc Zone, partially offset by a reduction in Uzbekistan. Consumption was reduced mainly in the United States, Turkey, Venezuela, and Europe, partially offset by an increase for China. Larger supplies and lower consumption resulted in reductions to trade for a number of countries; however, these were largely offset by a significant increase in China's imports, which was based on recent strong demand by Chinese mills. Meanwhile Chinese production was left unchanged at 25.50 mio. bales.

It appears, almost panic-like buying has gotten a hold of the cotton market and although nothing seems to be able to stop this movement, one should expect a more significant setback in the near-term as physical business to destinations other than China ought to be hard to come by.

Harvesting of this year’s Pima crop has begun in California this week. While it will take a while before any representative quality data becomes available, initial reports are pointing towards yet another good quality crop just like in Arizona, New Mexico and Texas, where harvesting conditions up to this point remain ideal. Though inquiries from overseas customers during the past week remained quite active, the ongoing disparity between fibre and high-count-yarn prices kept the conclusion of actual contracts to a minimum. On the other hand, the presently available step-2 subsidy payment of nearly 5 cents, which could still well increase in coming weeks, has kept old crop inventory in steady demand. CCC-stocks are being redeemed on a regular basis and it is expected that this source of raw material will soon be depleted. Most mill buyers still seem to prefer a wait-and-see approach, hoping to catch a break in offering prices once the Egyptian cotton season has been officially declared open or the step-2 subsidy for US Pima will continue for new crop shipments as well. As for the latter, it needs to be taken into consideration

that once the lowest priced foreign quote, as part of the step-2 calculation, exceeds 134 percent of the present loan value for Grade 3/44 or about 99 cents/lb, C&F North Continent, regardless of US Pima prices, there won’t be any further subsidy payments, which could truly render US Pima as very uncompetitive. For time being, though, despite yet another week of 5.85 c/lb in subsidies, exports continue at slow pace, which indicates that most buyers are yet expecting higher payment rates in weeks to come. For the week that ended October 2nd another 2,800 bales were committed to overseas buyers, bringing the cumulative total for the season to 157,100 bales, which compares to 193,200 b/c at the same time last year. The USDA report revealed yet another surprise today as yields for California were raised to 1,312 from 1,278 lbs per acre, New Mexico’s from 880 to 960 pounds and only Arizona’s were lowered to 1,108 from 1,169 pounds. All of these changes led to a production increase to 441,000 bales for the season, which certainly was unexpected by the trade. Despite this questionable increase in production, significant price decreases for new crop Pima are certainly not on the horizon unless subsidies will be carried forward until the fresh harvest becomes available for shipment by November of this year.

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