COTTON DIVISION

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

November 10 - 14, 2003

Once again a mixed week has passed with a little bit for everybody, both bulls and bears. Primary focus had been given to both the switch activity with traders liquidating or rolling forward their December position while at the same time eying the latest USDA Production and Supply / Demand Report, which were both released this past Tuesday. General expectations had been for a modest increase in production in the US and higher consumption in China and while the USDA in principal agreed it decided nonetheless to make more significant changes to its latest estimate. All US cotton production was forecast at 18.2 million 480-pound bales, up 4 percent from October and up 6 percent from last year's production. Yields in the US are anticipated to average out at a record high of 722 pounds per harvested acre, up 26 pounds from last month. If realized, this would be 14 pounds above the previous record high yield established in 1994. Record high yields are particularly expected in Arkansas, Louisiana, Mississippi, and Tennessee. Harvested area, of 12.1 million acres, was virtually unchanged from October 1 but 3 percent below the 2002/2003 season. Aside from higher production, this month's 2003/2004 U.S. projections also included sharply higher exports and lower domestic mill use beyond most private estimates. Exports were raised 10 percent to 13.2 million bales, exceeding last season’s record due mainly to lower production and higher import demand from China. In contrast, domestic mill use was decreased by 200,000 bales to 6.2 million, reflecting recent activity rates. Accordingly, ending stocks are reduced nearly 8 percent to 4.25 million bales or 200,000 b/c below the average private estimates that had been circulating before the release of the official USDA report. The world

projections for 2003/2004 also included a number of significant changes this month. Beginning stocks were reduced 1.5 percent, mainly reflecting increases in China's consumption for 2001/2002 and 2002/03, which were based on evidence of a higher cotton fiber share than was estimated previously. World production for 2003/2004 was reduced 2.5 percent, including a 3.5-million-bale reduction in China's crop resulting from heavy rain on the North China Plain during the late summer and fall. Other production changes included reductions for Pakistan and Australia, and increases for Brazil, the African Franc Zone, and Central Asia as had been widely anticipated. World consumption for 2003/2004 came in lower, nearly 1 percent from last month’s estimate as decreases in several countries reflected the effects of increasingly tight world supplies and rising prices; these decreases were partially offset by a sharp increase for Bangladesh, where new sources of information indicated that recent consumption growth has been stronger than previously estimated. With lower production in the major cotton-consuming countries of China and Pakistan, world trade was raised about 6.5 percent from last month. World stocks were reduced to 31.7 million bales, the lowest level since 1994/1995. Meanwhile, the US cotton harvest is progressing well with 64 percent taken off the fields versus 56 percent a year ago and the five-year average of 72 percent. In other news, Wednesday morning's speculative/hedge report showed that speculators had increased their long positions, leaving room to add more, as most market participants are expecting. As of the previous Friday, November 7, speculators were 44.5 percent net long versus 38.4 percent the week before. Their net long position had increased 3,022 contracts to 46,975, up from last week's 43,953 contracts while open interest fell to 105,557 compared to 114,453 the week before. As for the weekly export sales, the USDA reported net upland sales of 448,800 bales for the week ending November 6, which were up 63 percent from the previous week but down 33 percent from the prior 4-week average. Exports likewise came in somewhat

higher as 185,900 bales had been shipped overseas, an increase of 43 percent compared to the prior week and 79 percent more than the 4-week average.

There remains a lot of uncertainty in the market whether some of the present targets set by the USDA are truly achievable and as such any price advance in New York is facing equal interest by a strong group of sellers, which has kept the market in a noticeable trading range these past few weeks largely between 75 and 80 cents for March 2004. Short of any major development, it seems prices will be stuck here, though it seems possible to once again dare trading the market (very carefully) from the short side.

The USDA made only a minimal adjustment to last month’s US Pima production estimate by raising the yields in New Mexico for this season from 960 to 1,040 pounds per harvested acre. This change raised total US Pima production marginally to 442,000 bales from last month’s 441,000 bales. Surprisingly and in stark contrast to most private estimates, neither the yields nor the acreage for California was adjusted. General expectations for this state’s production still call for an overall reduced harvest. Meanwhile, prices of American ELS cotton continue to rise in rapid pace while demand remains strong. Weekly USDA export sales reflect fresh commitments of another 12,100 bales, bringing the seasonal cumulative figure to

264,800 bales compared with 246,700 b/c a year ago. At the same time, USDA quotes for US Pima have been raised by more than 10 cents this week alone as prices in the interior have skyrocketed to 130 cents for mixed, uncompressed lots, and the general perception is for further increases as buyers scramble for cover. Thanks to the existing subsidy, export sales have remained strong as indicated above, yet the further fate of US Pima will be better defined once the threshold has been reached, at which time all availability of further government payment rates seize to exist. Unfortunately for most trade participants, nobody knows when this may happen. So far about 75 percent of the California crop has been harvested and, which had been slowed down due to scattered rainfall across the state these past few days. Harvesting progress is somewhat behind this level in Arizona, New Mexico and Texas yet USDA quality results continue to impress. With 13,524 b/c graded so far in Phoenix 99 percent are of Grade 2 or better with an average micronaire of 4.5, average uniformity of 85.2 and average strength of 39.9. In comparison, out of the 100,732 b/c of California Pima already classed in the USDA office in Visalia, 98 percent are Grade 2 or better with an average micronaire of 4.1, average uniformity of 85.1 and average strength of 41 grams/tex.

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