COTTON DIVISION

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

December 8 - 12, 2003

Though this week’s focus was very much directed towards the release of the monthly USDA Supply and Demand Report, the market did show some interesting “moves” on Monday and Tuesday when it rallied strongly after making fresh lows. Pressured by further find selling, prices had come off sharply throughout the first day and a half of trading this week, yet as soon as the funds had exhausted their sales efforts, prices were capable of rebounding quickly. Most market participants claimed US merchants’ interest in lower prices as another potential force behind the pressure as they are awaiting the visit of yet another Chinese buying delegation on a shopping spree throughout the US. Whether or not the recent increase in margin requirements had an impact on positions remains very much an open debate, though. Tuesday morning's speculative/hedge report showed that as of last Friday, December 5, speculators were 34.6 percent net long versus 36.3 percent the previous week. The gross long position had decreased by 1,728 contracts to 46,505, while gross shorts were unchanged at 19,093 contracts. Open interest likewise fell to 79,188 compared to 80,312 the week before, which points towards pure spec long liquidation. In other news, NYCE certificated cotton stocks reached a four-year low for the week ended December 5, as total stocks stood at 216,687 bales. Meanwhile, market watchers were correct when they expected few changes to Thursday's monthly supply and demand report from the U.S. Department of Agriculture. All cotton production was forecast at 18.2 million 480-pound bales, unchanged from November 1 but up 6 percent from last year's production. Yields were expected to average a

record high 722 pounds per harvested acre, surpassing the previous record of 708 pounds set in 1994. Record high yields are currently expected in Arkansas, Louisiana, Mississippi, and Tennessee. Harvested area, at 12.1 million acres, also remained unchanged from November 1 but 3 percent below 2002. The world projections for 2003/2004 included marginally higher beginning stocks and production and lower consumption, resulting in slightly larger ending stocks. Production was raised in India and Turkmenistan, partially offset by reductions in Turkey. Consumption was reduced mainly in India and Turkey, with smaller reductions in a number of countries. Projected ending stocks were raised nearly 2 percent to 32.2 million bales, which would be the smallest world stocks since 1994/1995. Released simultaneously, net upland sales of 150,900 running bales were 47 percent below the previous week and 63 percent under the prior four-week average. Shipment of 247,500 running bales were 78 percent over the week earlier and 54 percent above the prior four-week average. While fresh sales were viewed as disappointing, shipments were considered positive.

One has to expect the market to come off further as technical indicators are certainly in a bearish mode and the fundamental picture does not appear too rosy either until renewed buying from the Chinese market can be reported again. Moreover, the speculators are still left with some room in their net long position for further liquidation, which may come in form of book squaring before the end of the year.

US Pima figures remained largely unaltered this month, although the USDA finally cut the yield in California from 1,312 to 1,278 pounds per harvested acre. This reduces the production to 370,000 bales from last month’s 380,000 in California, decreasing total US production from 442,000 bales to 432,000 bales for the 2003/2004 season.

Meanwhile, weekly export sales came in strong once again as it reflects sales during the next to last week for which US Pima subsidies have been available. New sales arrived at 10,800 bales, bringing cumulative commitments to 350,800 bales for the 2003/2004 season. It will be interesting to watch the development of fresh sales from hereon forward, now that the sometimes hefty government subsidies are no longer available. Though there is a very slim chance that a payment rate could return at some point in time, the probability is limited and US Pima sales will have to compete on their own

merits. Although the availability of unsold stock appears somewhat scarce, current prices still ought to entice the sellers to move inventory and the general perception is that prices after an initial phase of reaching such levels as 140.00 c/lb C&F NC will gradually decrease towards 125.00 c/lb C&F NC, or the very same level that was available while US subsidies were still applicable.

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