COTTON DIVISION

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

October 21 - 25, 2002

Despite further gradual improvements in prices, this has been overall a rather quiet week for cotton. Few fresh developments were reported, leaving market participants with much of the same talk over the past days. On October 18, last Friday, the December contract hit a 2-week high of 44.45 cents, and although it broke through the 21-day moving average of 43.84 cents it was initially unable to test the 50-day moving average of 44.66 cents. However, having closed near this technical resistance level Friday, speculators together with the trade, though the latter in moderate fashion and for different reasons, began to push values higher. Albeit some thinly traded sessions, speculators increased their net long position from 3.5 percent to 5.8 percent for the week ending October 18 while merchants simultaneously bought the market in an effort to cover white grades considering the impact of rainy conditions both in the Delta and Southeast of the United States onto the cotton crop just being harvested. Yet prices are remaining too low for the farmers to sell and too high to sell on the world market. Uncertainty over when, and not whether, China will start buying U.S. cotton and what type it will buy also remained one of the deterrents for trade buyers though the appearance of a modest step 2 payment increased the likelihood of sales. Many observers meanwhile were keeping an eye on tropical storm ‘Kenna’, which was expected to reach the western coast of Mexico by this weekend, possibly strengthening into hurricane-status at that time. This latest weather front is forecast to bring more rain to the Southern Plains and

Southwest that will further impact the production and harvesting of crops. Market participants also were expecting to see higher weekly export sales for the week ending October 17, yet net upland sales of 108,800 running bales were 13 percent below the previous week and only 5 percent above the four-week average. Exports of 89,600 running bales, however, arrived at 85 percent above the previous week yet 9 percent below the four-week average. Though encouraging, this week's sales in combination with commitments still remain well behind last year's pace and the level needed to meet the current USDA estimate for exports. Despite the supportive technical upturn, serious demand problems are facing the market and sales will have to drastically increase to even meet the USDA's current carry-over figure of 6.8 million bales. Considering that sales were down this much when the futures price had hit 42.60 cents, the current levels of 46.00 to 47.00 cents – even with the Step 2 certification subsidy included (2.95 cents) – then still ought to be too high to entice significant business. Any further advances of futures prices will most likely have to come from the funds, who continue to remain technically driven in their present trading, looking at such indicators as the Dow Jones Index. Although there was little reason for exuberance as the equities continue to struggle, the excessive volatility both there as well as in some of the other soft commodity markets certainly were sufficient to highlight the speculators’ opportunities. In other news, the National Cotton Council released its annualized mill cotton use for the month of September on Friday of this week, showing that U.S. textile mills used cotton on a seasonally adjusted annual rate of 7.46 million 480-pound bales in September. Traders had estimated an improved consumption figure of between 7.6 to 7.8 million bales, although lower than 7.77 million bales the year before.

The general consensus remains that without any strong fundamental news the market could remain stuck within the recent range of 45 to 50 cents for the spot month until harvest pressures subsides. 

US Pima news meanwhile remained subdued. While exports sales for the week ending October 17 added another 6,400 bales to the off-take portion of the balance sheet, the combined figure of roughly 210,000 bales for the season-to-date total is not very exciting and reflects the limited demand currently experienced from the traditional European buyers. The previously described wait-and-see attitude seems to be paying off, though, as some US sellers are beginning to reduce their asking prices in light of noticeable step 2 subsidy payments. This happens despite the ongoing difficulties to export via the US West Coast ports, which, although free from strike-blockades, are now subject to a significant congestion surcharge, effective November 9, of as much as $1,000 per 40ft container. Increasing

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