The Rupp Report: Cotton Under Pressure

According to recent reports from the Bremen Cotton Exchange and Plexus Cotton Ltd., the production
of extra-fine cotton was price-responsive in most recent years. In reaction to the sharp decline in
extra fine cotton prices in 2004-05, world extra-fine cotton production fell by 22 percent to
570,000 metric tons in 2005-06. After extra-fine cotton prices and premiums increased significantly
in 2005-06, production jumped by 31 percent to an estimated 749,000 metric tons in 2006-07. The
increase in supply of extra-fine cotton pressured prices down in 2006-07, and area declined in
2007-08. However, the average yield increased significantly, and as a result, production remained
stable in 2007-08.

Price Decline

Prices declined further in 2007-08: the season average Cotlook quote for American Pima (FE)
was $1.15 per pound, 2 cents lower than in 2006-07. Given the decline in extra-fine cotton prices
and premiums in 2007-08, as well as strong competition with grains and higher prices for irrigation
water in the United States, world production of extra-fine cotton is expected to drop by 38 percent
to 464,000 metric tons in 2008-09. Upland cotton production is forecast down by 6 percent, and
therefore the share of extra-fine cotton in world production should decrease from 3 percent to 2

Cotton quotations in New York had further moved downwards and dipped below the 40-cent mark.
However, therewith the quotations had moved far away from the prices for physical cottons.
According to merchants´ reports, the demand from the spinning mills was still reserved and limited.
The most asked Central Asian cottons moved quite high price-wise.

Lower Production Of Extra-Fine Types

Production is expected to decline in 2008-09 in every extra-fine producing country except
India. In Egypt, production is forecast down 43 percent to 126,000 metric tons, the lowest since at
least 1900-01, due to lower prices received in 2007-08 and competition from food crops. Egyptian
extra-long staple production is expected to decline by 42 percent to 24,000 metric tons, while
long-staple production is expected to decline by 44 percent to 102,000 metric tons. US Pima
production is also expected to decrease by 47 percent to 98,000 metric tons, due to limited
irrigation water and competition from alternative crops. Production in Xinjiang, China, is expected
to decline by 41 percent to 90,000 metric tons, due to lower extra-fine cotton prices received in
2007-08. Production declines are also expected in Sudan, Israel, Peru and Central Asia.

Ending stocks in producing countries are projected to fall by 43 percent to 172,000 metric
tons in 2008-09. The extra-fine cotton stocks-to-use ratio in producing countries is expected to
decline from 37 percent in 2007-08 to 26 percent in 2008-09. The expected drop in extra-fine cotton
supplies is driving prices up. The Cotlook quote for American Pima averaged $1.47 per pound during
the first three months of 2008-09 — the highest since 1995-96, when the Cotlook quote for American
Pima averaged $1.57 per pound during the first three months and $1.70 per pound during the season.
Between August and October 2008, the Cotlook quote for American Pima was on average more than
double the Cotlook A Index.


Similar to what happened in 2005-06, exports and mill use of extra-fine cotton in producing
countries are expected to decline in 2008-09 in response to the drop in supplies. Export shipments
of extra-fine cotton are forecast at 286,000 metric tons, down by more than 100,000 metric tons
from 2007-08 and close to the shipment levels achieved in 2005-06 and 2006-07.

The fall in exports will be driven by a drop in US exports, from 181,000 metric tons to
109,000 metric tons. Mill use of extra-fine cotton in producing countries is forecast at 425,000
metric tons, down by 12 percent from last season and close to the 2005-06 consumption level of
422,000 metric tons. In particular, consumption in Egypt is expected to fall by 37 percent to
68,000 metric tons. Total mill use in Egypt, including upland and extra-fine cotton, is projected
down by 15,000 metric tons to 190,000 metric tons in 2008-09; therefore, Egyptian imports of upland
cotton will need to increase.

The latest US export sales report showed a relatively strong 203,100 running bales of net new
sales, with shipments at 240,900 running bales. For the season, total commitments of 7.3 million
statistical bales are actually 400,000 bales ahead of last year, although if one looks at the
amount of cotton shipped so far, things don’t look quite as good. Until last week, just 3.7 million
bales had been exported, some 300,000 bales less than a year ago. And in order to reach the current
USDA projection of 13 million statistical bales, one should have to export another 9.3 million
bales between now and the end of July, which seems to be a monumental task in the current


The cotton market is suffering through its steepest decline in history, having lost around 65
percent of its value since making a synthetic high of around $1.09 in early March. Cotton has
prominent company, though, as pretty much everything except the government bond market continues to
collapse. The stock market, as measured by the S&P 500 index, is down 53 percent from its high
in October 2007, and the CRB index has lost 51 percent since early July this year.

The problem is global, as nearly US$30 trillion of paper wealth have been destroyed in stock
markets worldwide since May 2008, when global market capitalization measured US$57.5 trillion. On
top of that, investors and homeowners have suffered additional wealth destruction from collapsing
real-estate markets.

November 25, 2008