COTTON DIVISION

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

November 3 - 7, 2003

This was once again one of those very mixed weeks in terms of the performance of the New York futures prices. While the market took its cue during the first few days of this past week from the fundamentals, which are still presenting a bullish case, prices came heavily under pressure as we approached Friday’s option expiration day. Record open positions as of Wednesday of over 78,000 calls and over 71,000 puts forced the market to plummet limit-down and although it regained its consciousness the following day, some damage had been done to the charts as well as the confidence of the bulls. Those, who had focused on some of the positive reports that had been issued this week received a rude awakening as prices fell suddenly and sharply this past Thursday. The sharp drop in prices was indeed surprising, given the fact that China had continued to appear as strong buyer of primarily U.S. cotton throughout the past week as expectation of Pakistan’s crop became smaller and smaller. The weekly export sales, though considerably lower than during the previous reporting week, were nonetheless viewed as constructive as net Upland sales reached a respectable 275,800 b/c or 81 percent less than the week earlier and 56 percent under the prior 4-week average, however, not only had general expectation hovered around 10-150,000 bales but China being once again the major buyer with 141,700 bales provided confidence to those, who had been looking for this mega-buyer to keep adding to its purchases regardless of price level. Exports of 130,200 bales were actually up 36 percent from the week earlier and the prior 4-week average. Also, the publication of the latest ICAC statistics, though mixed in its analysis of future global demand given current

prices, was nonetheless generally regarded as positive for the market as it once again highlighted the growing consumption by China and its present production loss (6.5 million tons consumption versus 5.0 million tons expected production this season). Meanwhile, the weekly spec/hedge report was released showing the speculative net long position as of Friday, October 31 had been reduced from 43.5 percent to 38.4 percent permitting speculators to add to their longs, or so most people thought at least. The further reduction of the Australian cotton crop for 2003/2004 to 1.0 million 480-pound bales by the US agricultural attaché was likewise greeted with optimism of rising prices as this estimate now stands 300,000 b/c below the current USDA figure. Meanwhile, private analyst Sparks Cos. was said to have forecast the 2003/2004 U.S. cotton crop at 17.984 million bales. This is up from the U.S. Department of Agriculture's October crop production estimate of 17.6 million and it will be interesting to see what the next round of global USDA estimates will show come November 12.

For time being, there seems to be once again less conviction about the market’s clear direction, yet one has to recall the tremendous rise over the last 4 weeks and surely a correction had to be expected in due course. Despite the hits the bulls have taken over the last couple of weeks, the consensus still appears to call for a further rise in prices, though the limitation thereof going further forward in time are surely well known.

Motivated by an increase in the subsidy payment, many buyers took advantage committing to further US Pima purchases as this week’s USDA export report revealed. American Pima sales of 36,200 bales, mainly for China (11,300 b/c) and Indonesia (6,000 b/c) brought cumulative sales for the current season to 252,800 bales as of the week ending October 30, now surpassing sales at the same time last year by some 20,000 bales.

Actual export shipment, again thanks to the substantial payment rate offered by the US government were strong with 10,200 bales or the present marketing-year high. Meanwhile harvesting and ginning operations are running on high as most gins are now operating 24 hours a day. Growers’ speed in harvesting this year’s crop also accelerated, especially in California, where a sudden change towards much cooler temperatures and the arrival of rain, provided yet another motivation. Given the already dampened expectations for yield this season, the shift in weather will likely take another toll on production yet also on quality. This is especially painful for those farmers, who had decided to leave their crop on the stalk for as long as possible this year to maximize their yields. Though rain had not yet

arrived in Arizona, New Mexico and Texas, temperatures dropped as well and growers were actively picking their crop. CCC-stocks have been virtually depleted at this time with just 1,200 b/c of the 2002/2003 crop remaining in the loan as anticipated. One would expect sales of American Pima to continue strong until the US subsidy runs out as per the latest threshold established by the USDA, yet even thereafter, given global demand versus reduced availability from the world’s top ELS producers, there seems little worry that Pima prices will deteriorate any time soon.

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