COTTON DIVISION

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

December 9 - 13, 2002

The market showed a little bit of both, positive and negative this week, revealing its still fragile and sensitive stage. In anticipation of this week’s USDA Supply and Demand Estimate, released on Tuesday, the market showed little conviction. Prices ended lower on Monday amid trade scale-up selling and a lack of general support, as participants were eyeing a fundamentally, technically and sentimentally bearish USDA report. The average U.S. cotton output had been pegged by private analysts at 17.67 million 480-pound bales, compared with the previous estimate of 17.82 million. Exports were forecast at 10.26 million bales, which would have been down from the 10.8 million estimated in November of this year while domestic consumption had been seen lower, estimated at 7.6 million bales, from 7.7 million the previous report. Ending stocks would have increased as a result from November's 6.8 million bales to an estimated 6.95 million b/c. Fortunately for all bulls, the USDA had different ideas and reported all U.S. cotton production at 17.40 million 480-pound bales, down 2 percent from November and 14 percent less than last year's record high production. The primary reason behind the decrease was a yield reduction of 17 pounds from last month and 57 pounds from last year.  The harvested area, at 12.9 million acres, was unchanged from November but still 7 percent below 2001 as Southeastern growers were continuing to see the results of adverse weather, which has affected them throughout the entire season. As for the supply and demand picture, this month's 2002/2003 U.S. cotton forecast included lower production as cited above and lower domestic mill use, causing ending stocks to be revised downward as well.

Domestic mill use was projected at 7.50 million bales or 200,000 bales less than last month based on increased competition from textile imports. Exports, surprisingly, were left unchanged from the November estimate of 10.80 million bales, potentially leaving room for downward revisions in time to come as the current pace of sales is lagging behind general expectations. As a result, cotton-ending stocks for the US as of July 31, 2003 were reduced to 6.50 million bales from 6.80 million b/c in November of this year. The 2002/2003 world cotton projections similarly reflected slightly lower production and marginally higher use, reducing ending stocks by 3 percent from last month’s 40 million 480-pound bales to 38.84 million bales. Decreases in production for Australia (now 1.50 mio. b/c from 2.0 mio. b/c last month), Argentina, Egypt, and the United States were partially offset by an increase for India from 10.90 million bales to 11.20 million b/c. Projected consumption included increases for China, Argentina, and Indonesia which were nearly offset by the decrease for the United States.  World stocks were reduced to 38.8 million bales, the lowest level since the 1995/96 season. With these figures in mind the market was able to capture the magic 50 cents level again for the trading month of March 2003 and expectations were for a continuation of this trend. This held especially true in light of the speculators’ camp, which had reduced its net long position as of Friday, December 6, to 34 percent of the open interest, down from the previous week’s 38.9 percent, making some room to get back into the buying fray. Moreover, the weekly export report provided additional support with another wave of strong sales totaling 359,400 running bales or 31 percent above the previous week and 78 percent above the 4-week average. Actual exports of 223,400 running bales were also reported, marking a high for this marketing year, 82 percent greater than the previous week and 45 percent above the 4-week average.

Although the market fell below 50 cents again by the week’s end, highlighting the fight between speculators with a significant net long and the trade selling on the highs, it sure seems as though the market continuous to look for opportunities to extend its trading range to the upside. 

American-Pima production was forecast in this week’s USDA supply estimate at 645,000 bales for the 2002/2003 season, up almost 2 percent or 10,000 bales from the November forecast but still 8 percent lower than last year. The increase in production came exclusively via an expected increase in yields in California from 1,309 pounds in November to now 1,332 pounds per harvested acre, which would constitute a new record high for that state. Likewise, this will boost the U.S. yield curve to a new record high of 1,283 pounds per harvested acre, which, if realized, would be 29 pounds above the previous record established a year ago and 20 pounds above last month’s

 average. Albeit the significance of the estimated production of 645,000 bales when combined with beginning stocks of 328,000 b/c, the estimated off-take remains equally impressive these days. Exports of 475,000 bales, which may well increase during months to come, and domestic demand of around 115,000 bales, again subject to further improvements, will yield into ending stocks of 383,000 b/c. The export data released for the week ending December 5 once again provided positive feedback concerning US Pima demand as new sales amounted to 32,000 bales, pushing the cumulative total for the current season to 360,100 b/c, surpassing last year’s level by more than 75,000 bales. Therefore and in light of the anticipated USDA auction sales commencing early next year, expectations continue to run high that demand for American Pima will remain significant, as prices are not expected to stray far from their current level.  

• Previous Report