The Rupp Report: The Volatile Cotton Markets

According to recent market information from Germany-based Bremen Cotton Exchange and the
Washington-based International Cotton Advisory Committee (ICAC), global cotton production is
projected to total 22.2 million metric tons in 2009-10. This is a 5-percent decrease from 2008-09
production resulting from reduced yields. It also represents the third consecutive season of
decline in global cotton output for reasons including decreased price competitiveness of cotton
compared with competing crops and a weakening in cotton yields in the last two seasons. Globally,
average cotton yield increased from 566 kilograms per hectare (kg/ha) in 1998-99 to a record 792
kg/ha in 2007-08.

Decreased Yield

The increase between 1998-99 and 2007-08 was driven by several factors, for example, the
introduction of new technologies, an expanded use of existing techniques, and shifts in areas used
for cotton production. However, since 2007-08, cotton yield has declined. In 2009-10, global cotton
yield is projected to total 726 kg/ha — the lowest in six seasons. ICAC’s look in the crystal ball
indicates world cotton yield might have entered a period of slow growth that could last for several

Mill Use

Global cotton mill use is projected to rise by 2 percent to 23.8 million tons in 2009-10.
This increase is said to be driven by the global economic recovery. Of the seven largest cotton
consumers, only China, India, Pakistan and Bangladesh are expected to see increases in cotton mill
use during this period, with a projected 70-percent combined share of world cotton mill use. Also,
prices are showing a slight improvement: The Cotlook A Index continued to increase during November.
It reached 74.05 cents per pound on November 30 — 10 cents higher than the price at the beginning
of this season.

Last week, according to information from England-based Plexus Cotton Ltd., New York futures
traded lower, as March futures closed  at 74.24 cents — a loss of 98 points. With some fears
regarding a potential debt crisis in Dubai receding, the cotton market had a rather uneventful
week. Even though prices moved lower for a few days, there was hardly any downside momentum behind
it, Plexus reported.

The Plexus report, dated December 3, continues: “We currently seem to have a standoff between
mills and merchants, with both sides unwilling or perhaps unable to make price concessions. Mills
are still not ready to accept the big jump in prices that has occurred over the last two months,
during which the nearby futures contract has risen from 61 cents in early October to over 74 cents.
… [S]ince merchants operate primarily from basis-long positions, they are forced to follow the
lead of the futures market and are therefore unable to meet the lower price ideas of mills.”

Buyers Should Pay Attention

Markets are quite volatile this season. Plexus reports there is a significant production gap
and warns of impending short supply of high grades. Just to hope for lower prices and to expect
continuing availability of the desired qualities into next spring or summer seems to be the wrong
way. However, some people are buying: Two weeks ago, Plexus reports, “the US sold 250,700 running
bales of Upland cotton to 22 different markets, with China taking the biggest portion at 68,300
running bales. During the same week, unfixed on-call sales increased by 361,200 bales net, with
unfixed sales on the March contract jumping by 541,300 bales. Overall there are once again nearly 5
million bales of unfixed on-call sales open ….”

The report continues: “In a market that is moving higher, this strategy of leaving the price
open is backfiring on buyers. … A 13 cents move over two months on a rolling position of roughly
5 million bales of unfixed on-call sales amounts to around $325 million. By keeping such a large
number of unfixed contracts open, mills are essentially defeating their purpose, because these
unfixed contracts create tremendous support underneath the market and keep potential corrections
well contained.”

Consolidation In The Markets

In conclusion, the report adds: “The market seems to be in the process of consolidating the
price jump that was brought about by the Dec/March spread. … Outside markets continue to act in
support of commodities, with the dollar showing further weakness and stock markets holding steady
at the moment. Barring any unforeseen events in the world’s financial markets, we expect current
crop futures to climb above 80 cents in the months ahead.”

December 8, 2009