COTTON DIVISION

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

December 1 - 5, 2003

This week would have worked well for all of those who “sold the rumour and bought the fact.” Anticipation of exceedingly strong export sales helped move the market considerably higher at the beginning of this week and while many trade participants stayed on the sidelines, permitting prices to trade in lackluster conditions for the remainder of the week, the release of this week’s export report took the wind out of some traders’ sails. While fresh sales for the week ending November 27 turned out to be a mediocre 286,600 bales or 18 percent less than the previous week and 28 percent below the 4-week average, some analysts were quick to note that some of the rumoured sales may well show up on future reports. Meanwhile, speculators have reduced their net long position from 43.9 percent to 36.3 percent as of this past Friday. The fact that the open interest during the same time period decreased 7,090 lots to 48,233 while gross shorts increased only 1,688 lots to 19,093 contracts highlights the fact that long liquidation had been the driving factor behind the recent price decrease. Even the monthly ICAC Supply/Demand report, which provided decent ammunition to the bulls and was released on Monday of this week, was unable to lift the spirits for time being. While world production was forecast to rise to 20.3 million tons in 2003/2004, up 1 million tons, or 5 percent, from last season, world consumption was calculated to fall for the first time in five seasons to 20.7 million tons, which would be down 300,000 tons. Nevertheless, world-ending stocks were projected to shrink by 400,000 tons to 8.1 million tons this season or the lowest level since 1994/1995. Because of higher prices, world consumption of cotton outside China is expected to stumble to 14.2 million tons in 2003/2004 from 14.6

million tons last season, according to the ICAC. The gap between production and consumption in countries outside China is decreasing by an estimated 800,000 tons compared to last season. As a result, the potential for exports outside China is shrinking significantly in 2003/2004. China's imports were projected to reach a record of 1.2 million tons this season, including about 60 percent of U.S. cotton or the same proportion as
last season. U.S. exports are projected to remain at 2.6 million tons in 2003/2004, 39 percent of world exports according to the ICAC. Average cotton prices in 2003/2004 will be once again close to the long-term average of 70 cents per pound for the first time in six seasons per ICAC estimates, which will boost production and put a lid on cotton mill use in 2004/2005. As a result, cotton production is seen by ICAC as climbing to a record of 21.8 million tons next season, up 1.5 million tons from the previous year, outpacing stagnating consumption by an estimated 1.1 million tons.

While prices seem caught in a range between 70 and 75 cents for the trading month of March 2004, most analysts seem to predict a breakout to the upside as more likely since demand for physical cotton is expected to remain strong and the speculative long position has been gradually reduced. Focus will now shift towards next week’s USDA Supply/Demand and Production Report, due to be released on Thursday, December 11.

The harvest of Pima cotton in California has virtually been completed with some minor exceptions of areas still being second-picked. Fields in the Pima growing regions in Texas, Arizona and New Mexico were just about 2/3 harvested by the end of last week. Stalk shredding and discing activity continued rapidly in the San Joaquin Valley in compliance with pink bollworm plow-down requirements and in anticipation of favourable growing conditions come next year’s springtime, farmers are preparing themselves for early seeding.

Many local observers are already contemplating the potential seize of next year’s Pima acreage in California in particular and the US in general. Given current prices and yield experience, it is widely anticipated that next year’s crop may well touch or exceed the acreage seen in 2001/2002, when the US harvested about 270,000 acres of ELS cotton in total with 240,000 acres in California alone. Whether the potential production from such acreage would be sufficient to drastically reduce ELS prices in the US or even on a global scale remains to be seen when considering that beginning stocks worldwide may well reach historically low levels. The current pace of export sales is aiding this calculation as for the week ending November 27 another 31,400 bales of US Pima were committed to overseas customers. This brings seasonal sales to almost 340,000 bales compared with about 330,000 bales at the same

time last year. What is obviously interesting is that to-date twice as many bales have already been shipped for the current crop year versus just half during the same reporting period of the previous year. As widely anticipated, what may well change the entire dynamics of the ELS trade is the strong likelihood of US subsidies seizing to exist within the coming weeks, which in our opinion would bring the sale of US Pima cotton at least to a sudden and sharp standstill, unless the bales have already been shipped outside the US. Until then, offering prices ought to remain “discounted” by virtue of applying the respective US payment rate during which the cargo is physically exported. So far, this strategy seems to have worked very well.

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