COTTON DIVISION

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

November 17 - 21, 2003

Cotton futures moved lower this past week amidst primarily bearish news and technical considerations. The volume overall remained lighter than participants had observed in past trading sessions and general focus remained on First Notice Day and the respective rolling or liquidation of positions in advance of this week’s Thursday deadline. News that 23,406 bales of cotton had been decertified early on sparked talk among some analysts that a physical sale of these bales was behind the move and that in return caused the usual expectation for continued strong export sales. While this general consideration turned out to be correct later on during the week, it was the announcement on Tuesday by the US government to implement certain import quotas on Chinese textile imports into the US that took the air out of the market. The immediate reaction was for prices to drop their daily permitted limit of 300 points before some mild buying was witnessed again. China effectively canceled its second buying trip to the U.S. after the Bush administration had imposed trade sanctions on imports of some Chinese textiles. The proposed delegation's "Made in America" shopping list had included agricultural goods, such as soybeans and cotton, as well as chemical fertilizer, alumina, and some telecommunications products. The group had planned to leave Wednesday for the 10-day buying trip to the U.S. The U.S. Committee for the Implementation of Textile Agreements voted late Monday to invoke safeguard relief on certain clothing items as permitted under WTO rules, which was greeted with satisfaction by the domestic textile industry, though this move is generally expected to be short-term in nature. Meanwhile, 71 percent of the US cotton crop has been harvested

versus 64 percent a year ago and the five-year average of 78 percent. There have been only limited reports of harvesting difficulties due to detrimental weather conditions, yet overall expectations remain high for both a high yielding, top-quality crop. Upland sales as had been anticipated came in strong with net Upland sales of 527,000 bales for the week ending November 13, which was 17 percent above the prior week, but 24 percent below the prior 4-week average. China was once again the major buyer with 196,500 bales with smaller quantities registered to Mexico (132,000 b/c), Turkey (104,200 b/c), and Brazil (22,100 b/c). The market showed little interest for these figures, though, as they had been widely expected yet rather focused on demand from overseas’ customers going forward, primarily China, which forced prices once again to move lower on Thursday. Further consideration was given to the technical factors, which have been highlighting the seemingly mesmerizing effect of the underlying gap between 74.05 and 75.80 cents per pound, which had been established on October 14-15 of this year and was finally filled on Friday of this week.

Though prices clearly find themselves in a downdraft these past few days and can be expected to still drop further towards 72.00-70.00 cents, it seems premature to write off the possibility of a return to the 75 to 80 cent-range for the spot month once the speculators have reduced their current net long position while physical demand continues strong.

According to the California Crop-Weather report, the SJV Pima harvest has been slowed due to scattered rainfall across the state these past few weeks yet it is too early to tell whether the quality of this year’s crop will be impacted as well. Those growers, who had commenced their picking earlier in October this year are feeling relief now, although their yields clearly were negatively affected by their decision to enter their fields relatively early.

In some areas, ground preparation for next year’s crop has already begun as the majority of the California Pima crop has now been picked. Harvesting has likewise expanded quickly during the past 2 weeks in the central portion of Arizona as well as New Mexico and Western Texas though picking had been briefly interrupted this past week due to inclement weather. Although the USDA is still forecasting American Pima production to arrive at 442,000 bales, which one has to remember is down 35 percent from last year, there remains widespread disbelief among the farming community especially in California that this figure can be achieved. Though there appears to be less disagreement now about the total ELS acreage itself, the USDA estimate of an average 1,260 pounds of yield per harvested acre, and specifically the California figure of 1,312 pounds remain largely in question. Though a good number of large growers waited as long as possible to send their pickers into

the fields, the spottiness of planted rows caused by the early rains in the springtime this year, certainly was not compensated in full and as such should cause yields to drop significantly in some areas of the San Joaquin Valley. Most private analysts are still estimating the California crop not to exceed 320,000 bales and the US therefore to come in at max. 400,000 bales in total. The limited supply is of even greater concern when considering the recent surge in export sales, which once again for the week ending November 13 added another 11,700 bales to the registrations therefore bringing total commitments for this season to 276,600 bales versus 262,600 bales at the same time last year. Next year’s commitment remains at a minimal 1,900 b/c so far compared with 500 b/c sold during the comparable timeframe last year.

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