COTTON DIVISION

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

December 2 - 6, 2002

The market in New York continues in its long-term trading range, seemingly unable to break out to either side. While heavy speculative selling on Tuesday of this week combined with negative news among others via the release of the monthly ICAC Supply and Demand Report generated significant sell orders, the market gained support from various overseas crop reports as well as a solid weekly USDA export report. The International Cotton Advisory Committee on Monday estimated worldwide 2002/2003 cotton consumption at 94.3 million 480-pound bales, or 20.53 million metric tons, lower than the previous estimate. It pegged world cotton production at 88.5 million bales, or 19.28 million tons, unchanged from the previous month. According to the report, U.S. domestic mill consumption resumed its decline in August 2002, while the textile industry in China is growing rapidly. Meanwhile, the New York Cotton Exchange plunged Tuesday as funds and speculators bailed out of the market due to a weaker technical picture, local observers said. Fund and speculative sell stops were triggered at 49.70, 48.80 and 48.10, and within 20 minutes, prices crashed to 48.00 cents - the market's low of October 31. Speculators were still holding a 38.9 percent net long position of the open interest versus 39.1 percent the week before. Translated into lots, it showed speculators were around 30,000 futures long. In other news, there remains a lot of debate in the market over the cut in the production forecast for the Australian crop. Cotton production in Australia will fall to 238,000 metric tons this fiscal year ending June 30, 2003, and if achieved, will represent only about one-third of actual output of 705,000 tons harvested during the last fiscal year, according

to an official forecast. The forecast was contained in a crop report issued Monday by the Australian Bureau of Agricultural and Resource Economics, a government forecasting and analytical agency. The forecast was well below recent industry projections and equates to roughly 1.09 million bales and that with Australia "presumed" to have sold a million bales for next year, it would not allow room for poor-quality cotton that could emerge. Simultaneously, India's cotton output is forecast to fall nearly 4 percent in the current crop year ending September 30, 2003, to 15.2 million bales, as announced b the country’s Cotton Advisory Board on Tuesday. India weighs its bales at 375 pounds, and equated to the 480-pound bales that the U.S. Department of Agriculture works on, its output is forecast at 11.9 million bales. The importance of this figure is that it is higher than the 10.9 million the USDA is carrying. It will remain to be seen whether the USDA will amend this figure in its next monthly supply and demand report, which is due next week on December 10. Weekly exports turned out to be more impressive than expected as the shortened workweek due to the Thanksgiving Holiday had been assumed to cut business, however, new sales for the week ending November 28 amounted to 249,800 or 43 percent more than during the prior week and 67 percent above the 4-week average. Actual exports of 115,700 bales were off 20 percent from the previous week and 22 percent below the 4-week average, which was of little consequence due to above mentioned shortened workweek. With prices again failing to test Tuesday's low of 48.00 cents, it seems that the market has reached its bottom, establishing a trading range of 48.00 to 52.00 cents. The funds are heavily long and the question remains whether they will want to push prices higher or abandon their position. Meanwhile grower-selling interest above the market ought to keep a lid on any major advances. So it should be more of the same.

American Pima buyers worldwide, as widely expected, are taking advantage of the current step 2 payment rate offered by the US

government, which has permitted US ELS sales to continue at a brisk pace. Last week, the USDA announced that sales for the week ending November 21 had increased by 39,800 bales to 302,400 bales, which compares to 262,000 bales at the same time last year. This week, the USDA recorded further sales for the week ending November 28 of 26,200 bales, bringing the annual cumulative total to 328,400 bales. Interestingly, it is once again the “non-traditional” customer, especially in China, Pakistan, India and Bangladesh that is taking advantage of the recent price decrease here in the US, while some of the traditional customers, among others in Europe, have not

 yet stepped up to the plate in their usual fashion. Anticipation remains high that current step 2 values may well grow another 100-200 points before the year is over, then, however, auction sales initiated by the US government of their 2001/2002 crop inventory appear to be imminent, which will provide yet another buying opportunity for those buyers, who are not as critical of crop year specific quality criteria. It is generally anticipated that commitments of US Pima will continue to flourish well into the coming year, if not of current crop sales due to a shrinking subsidy payment, then of last season’s production. As such, the currently high inventory figure of American ELS cotton may well shrink to an easily manageable figure by July 31, 2003.

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