COTTON DIVISION

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

November 4 - 8, 2002

The terminal market in New York started the week off very strongly, moving to a 17-month-high, with gains well over 250 points for the spot-trading month of December. Speculative buying pushing prices through previous key resistance level of 47.06 cents sparked market participants to seek higher territory. Their motivation coupled with weather factors gave further support to the market as rain had been forecasted for parts of the cotton-belt this week. According to the Global Weather Services report, showers and thunderstorms were expected to continue to rumble across areas from eastern and southern Texas into Georgia and the Carolinas with rainfall amounts of 1.00 to at least 3.00 inches possible in some locations, increasing flooding potential. While clearer weather last week had allowed harvesting to accelerate, the weekly crop progress report revealed that still only 53 percent of US cotton had been picked up only 5 percent from last week versus 70 percent a year ago and the five-year average of 69 percent. This week’s weather pattern will once again delay the process. Not only is the delay of unexpected detriment to the users, equally important is the deterioration in grade from white to gray. Nonetheless, it was a classic battle between the speculators and the trade, with the specs ultimately throwing in the towel on Tuesday, when the market, after failing to stay above the critical mark of 50 cents, tumbled caused by uninterrupted trade selling and profit-taking by various funds. Even the weekly spec/hedge report, which had been released earlier Tuesday morning was unable to help prices, although speculators had increased their net long position from 17.9 percent the previous week to 24.5 percent as of Friday, November 1. Thursday's weekly 

sales and export data from the U.S. Department of Agriculture were viewed as bearish, but with the market still trading on technicals, the figures again were seemingly overlooked. Net upland sales of 111,200 running bales were 4 percent below the previous week but 15 percent above the four-week average. Actual exports of 124,300 running bales were 2 percent above the previous week and 38 percent over the four-week average. The market continues to be range-bound between 45 to 50 cents and again, further news will have to emerge to push prices higher.

Meanwhile, in US Pima news, export sales are thriving as another 16,300 bales were added to the commitments this week, pushing the cumulative total to 232, 200 bales, almost the same as last year at this time when a total of 243,000 bales had been sold into overseas markets. Ironically, one cannot argue that the USDA step 2 payment subsidy program does not work for US Pima, as that is the obvious incentive behind the recent increase in export sales. Whether, however, it makes sense to pay the growers an artificially high Loan price only to then offer the exporters and mill customers a subsidy payment to ship and consume the cotton, remains highly debatable. This distortion may well continue until the earlier part of next year, when the USDA is expected to auction off its current stockpile of last year's inventory. It has been confirmed, that sale prices of these auctions will be recorded for the spot quotations, which undoubtedly will drive US Pima prices for spot cotton lower, thereby reducing the available step 2 payment. Coincidentally, this will increase the price for current crop Pima, providing an incentive for buyers, who have to insist on 02/03 crop Pima to purchase their requirements at this stage rather than in months to come.

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