COTTON DIVISION

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

October 13 - 17, 2003

The Chinese syndrome has taken complete hold of the cotton market by now. Not a day passes when somebody, somewhere is holding either a bullish speech or is executing a bullish-perceived trading strategy in this world. By now, it’s rather old news as demand by China has been primarily driving the recent rise in prices up to a fresh five-year high as of this Friday. Despite some warning words from Don Conlin of the NYCE, participants are seemingly undeterred to lift prices higher and higher, ignoring some of the traditional, technical and rational warning signs. The oftentimes heavy and hectic activity in the options-pit has been further aiding this frenzy as especially some of the larger merchants have been in the market buying both in-the-money calls and selling out-of-the money puts. Meanwhile, China's National Bureau of Statistics forecast cotton production as of this Friday at 4.92 million bales, which converted into bales equates to 22.5 million bales or 3 million less than the USDA projected in its October supply and demand report. Many market participants are convinced that continued wet weather in key cotton growing regions in China will ultimately lead to a further production cut. Simultaneously, U.S. export sales into China remain at brisk pace, despite the recent price increase. For the week ending October 9, 227,100 running bales of U.S. cotton were sold to China - far surpassing market expectations. This brings its total commitments for the current marketing year to 447,800 running bales. Overall net upland sales were 319,000 running bales and exports 96,300 running bales, both figures well supporting current market sentiment. There seems to be no end in

sight of additional, significant sales into China as the China Textile Industry Association is reported as having sent a request to the government, asking for more tariff rate quotas for cotton in 2004 and earlier allocation of such quotas to end-users to alleviate the acute shortage of cotton in China itself. The Chinese government is being petitioned to allocate the TRQ of cotton to end-users in advance to ensure the supply of raw materials for exporters of cotton products, according to a report, released October 10. The association also advised the government to increase the TRQ for cotton in calendar year 2004 to 2.00 million metric tons from the current 894,000 tons to solve the supply woes for end-users and replenish the industry stock. Estimating this in bales, analysts said this would mean an increase from 3.9 million to 9.2 million bales. All of these bullish news have given the speculative camp further ammunition to increase their heavy net long position, which as of Friday, October 10 has swollen to 50.3 percent of the open interest. More importantly the speculative gross long position increased by 9,564 contracts to 77,467 - which observers noted represented a new record. Open interest also posted a new record at 108,657 contracts versus 99,134 the week before. These figure highlight how overbought the market has become, indicating likewise its vulnerability at least to the tune of a 5-7 cents correction.

While there are other developments out in the cotton consuming and producing world that are far less bullish than the market currently makes us believe, among others the increase in certificated stocks, everything pales in comparison to the gold-rush-like behaviour occurring every time the word “China” is being uttered. Until a cooling of the present insatiable appetite by the Chinese can be reported, this market’s trading activity seems to be one-directional.

Harvest activities are gradually gaining momentum both in Arizona, Texas and New Mexico but also in California. Though official classing results from the USDA offices in Phoenix and Visalia can still not provide a representative picture, the crop can certainly be considered off to a very good start. As of October 16, approximately 5,000 bales of SJV Pima have been classed in the Visalia offices and more than 97 percent have been given Grade 2 or Grade 1 designation with an impressive average staple length of 47 or almost 1.1/2”, micronaire reading of 4.1, strength of 41.5 grams per tex and uniformity at 85.4. Meanwhile, samples classed in the Phoenix office showed on average of 99 percent Grade 2 or better, average staple length of 45 or close to 1.7/16”, micronaire at an average of 4.0, strength of 40 grams per tex and uniformity at 84.1. Growers remain optimistic that these current averages will most likely be well maintained as the harvest is rapidly accelerating. Despite the reported white-fly infestation in certain areas of California, independent tests have proven so far that the fibre was not affected by these pests. The only concern remains with the yield factor as the latest government estimates are certainly not being share by those, who actually drive the pickers across their

 fields. Though the final figures for Arizona, New Mexico and Texas may turn out to be nearly correct, the official estimate of 1,312 lbs per harvested acre for California appears at least 200 pounds above private estimates representing a potential loss of 50,000 to 60,000 bales for this state, which would reduce total US output this season to about 380,000-390,000 bales. Meanwhile, US exports continue at stable pace with yet another 4,200 bales sold, lifting cumulative sales to 160,800 bales for the season versus 200,000 b/c at the same time last year. Prices in the interior are beginning to rise as the limited availability of physical bales comes to the marketplace. Grade 2, 1.7/16, G.5 new crop production has been trading at ard. 120.00 cents per pound, FOB interior warehouse, and further price increases are expected. Despite the increasing anticipation felt for the official opening of the season in Egypt, buyers’ focus likewise remains on the potential of US subsidy payments for true new crop Pima exports in order to provide mills with a more feasible price range for the raw fibre.

• Previous Report