The Rupp Report: Lower Cotton Production And Higher Chinese Investments

According to the latest report from the Germany-based Bremen Cotton Exchange, the January US cotton
2008-09 supply and demand estimates include reduced production, domestic mill use and exports,
resulting in ending stocks of 6.9 million bales – slightly below the previous month’s estimate.

Lower Production

Production was lowered by 577,000 bales, mainly because of a reduction in Texas. Domestic
mill use was reduced by 100,000 bales to 4.2 million, reflecting lower activity in November. The
export forecast also was reduced by 250,000 bales to 12 million as a result of lower world import
demand. The forecast marketing year average price received by producers – 44 to 52 cents per pound
– was raised by 1 cent on the upper end and by 3 cents on the lower end of the range, as market
prices have improved during the past month.

The world cotton estimates for 2008-09 show lower production, consumption and trade compared
with the previous month. Beginning stocks were nearly 1 million bales higher as a result ot to
prior-year adjustments in China, India and Turkey. Production was reduced by 1.7 million bales,
mainly in India, the United States and Argentina. Consumption was lower in China, India, Pakistan
and the United States, reflecting a continued slowdown in global textile demand; but was higher in

Reduced Imports

World imports were sharply lower, according to the US Department of Agriculture, mainly
because of lower consumption and imports by China. Exports were reduced in several countries,
notably India, which accounts for more than half of the reduction in world exports. India’s
adoption of a minimum support price has resulted in sharply lower export commitments compared with
last season. World ending stocks were 1-percent higher than last month’s level.

In order to protect their farmers’ income, China and India have dramatically increased
government purchases to drive up domestic farm prices. These recent aggressive government purchases
add a new element of uncertainty and potential price volatility to global cotton markets. Although
there have been no official statements from either government regarding how these stocks will be
managed, their disposition will certainly affect US exports and prices. If significant portions of
stocks are held off the market, demand could shift to other suppliers, including the United States.
However, release of these stocks could further dampen demand, particularly for US cotton.

Heavy Investments In China

China and India are on track to acquire nearly 25 million bales of government-controlled
stocks in the next couple of months. Industry sources indicate that the Cotton Corp. of India (CCI)
has authorization to purchase up to 11.7 million bales – half the 2008 crop. CCI has bought about
3.6 million bales – 40 percent of the cotton sold by farmers to date. China already has purchased
more than 7.3 million bales of the 12.5 million it intends to buy. Continued weakening domestic
demand has offset some of the effect of the purchase,s and farm prices have responded only
moderately. According to industry sources, China already holds 4 million to 6 million bales of
state reserves carried over from the previous season. These policies raise the question of how many
government-stocks will be carried over into the next marketing year, and what impact the policies
will have on production in these countries in 2009.

… For Petrochemical And Textile Sectors

In general, China is planning multi-billion-dollar aid packages for its petrochemical and
textile sectors, as part of efforts to help key sectors through the global economic crisis. There
is a plan on the way that China will spend 100 billion renmimbi ($14.6 billion) by the end of 2010
to upgrade refineries to ma produce cleaner fuels, the China Business News reported, citing unnamed
sources. China will invest a further 400 billion renmimbi ($58.4 billion) on 20 new projects
related to the fuel-upgrading initiative, as well as on the overseas acquisition of oil and some
fertilizer assets.

The Chinese government also is drafting a stimulus package for the textile industry,
including preferential loans, to boost sales and create jobs, according to another source. The plan
has been submitted to the State Council and is expected to be issued soon, the source added without
giving further details. China’s textile industry had a hard year in 2008, with profits in the first
11 months falling by 1.8 percent – the first decline in a decade.

January 27, 2009