COTTON DIVISION

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

October 20 - 24, 2003

There is little else to write about but Chinese demand these days. The market has been firmly entrenched by the seemingly incurable Chinese appetite for (US-) cotton as well as many other commodities. With soybeans, bean-oil, wheat, corn and copper, just to name a few, racing to new highs every day, cotton has not been lagging behind. New 5-year high was established this past Thursday as the New York cotton market was once again off to the races with a limit-up close in the first four of the quoted trading months. Record-breaking export figures and heavy activity in the option pit were just as responsible for the move as well as news out of Pakistan, the world’s fourth largest cotton producer, of a smaller crop that may well drop to 8.0 million bales from the currently estimated 10.55 mio. bales. In the U.S. Department of Agriculture's weekly sales and export report, released Thursday morning, upland sales of 634,900 running bales for the week ending October 16 were the highest since its records began in January 1990. Sales to China of 488,300 running bales alone were the highest since the week ending November 9, 1995, when China purchased 557,741 running bales. Of course, chartists immediately drew the conclusion to the sharp rise in prices in 1995, when cotton traded over $1.00 per pound, but by November 1995 prices had slipped back to trade between 82.51 and 88.64 cents based on a monthly continuation chart. The strong weekly sales are also an indication to some traders that the market has not yet reached a price where cotton is starting to be rationed, at least not

in China, where internal prices have already reached a level 93 – 95 cents. Private estimates continue to downgrade Chinese production this season with most analysts looking for 21 million bales at this time, which is well below the USDA estimate of October this year of 25.5 bales and the China National Statistical Bureau's projection of 22.5 million bales. Meanwhile, the speculative net long position as of Friday, October 17 had come down to 45.7 percent from the previous week’s 50.3 percent, yet it seems safe to assume that this figure is well above 50 percent again by now. The RSI values are equally overbought, however, none of the traditional warning signs of an excessive position are currently coming into play as there is only one-directional trading occurring. US crop figures remain encouraging for this year’s production as 89 percent of cotton bolls are reported open versus 96 percent last year and the five-year average of 96 percent. Crop conditions remain virtually unchanged (last week’s data) with 21 (20 percent rated as “very poor to poor”, 29 (31) percent as “fair” and 50 (49) percent as “good to excellent.” There are mumblings in the market that U.S. cotton production could now exceed the U.S. Department of Agriculture's current estimate of 17.6 million bales.

As long as China continues its buying spree, little else will affect New York cotton prices and with expectations of a potential shortfall in the Chinese supply/demand balance sheet of up to 7 or 8 million bales, their continuous inquiries may just keep coming. As always, the best cure for high prices will ultimately be high prices and so one needs to expect both an interim as well as more substantial corrective move in time to come, however, at this stage it appears that this is nothing but a distant thought.

The US Pima crop is currently enjoying simply ideal-harvesting conditions, permitting growers from EL Paso, Texas to Bakersfield, California to rapidly increase the picking of their fields. Some of the larger farming operations in California report that if weather conditions prevail, the harvesting of their fields first pick will be complete within 2 weeks time. This highlights the generally anticipated low yields this season, not inline with current USDA estimates, which may well decimate the official production figures as they stand today. In contrast, the quality of the crop remains on the top end of the scale with official USDA classing results showing overwhelming percentages for Grade 2 and better with otherwise near perfect fibre characteristics. The rising certainty of a smaller crop in the US coupled with the decision taken by Egyptian officials, opting for private negotiations between buyers and sellers

rather than the familiar official offering prices are cause for further price increases for ELS cotton worldwide. The sharply rising terminal price for Upland cotton is now also beginning to build a case for yarn prices both in coarser and finer grades to become more inline with fibre values. Despite or possibly now as a result of higher prices, export sales continue at a strong pace with another 10,600 b/c having sold during the week that ended October 16. Total commitments now stand at 171,400 bales of which 53,000 b/c have already been exported. Despite many buyers’ initial resistance to cover at sharply rising prices, at this stage it appears inevitable for ELS offers to show further increases even in the near-term with no help insight short of the US ELS subsidy.

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