Mills Busy, Long-Term Outlook Hazy

emand continues to be strong for ring-spun (RS) and open-end (OE) yarns. For RS, combed
cotton and fine counts particularly are running strong, with combed looking good four or five weeks
out. Fine-count yarns (Ne 30 and finer) are especially tight. An OE spinner described his business
as “ real good,” but declined to speak about prices or margins. The market for air-jet yarns
appears to be cooling off. At least one industry observer said that the air-jet market is currently
running cold.

A ring spinner reported operating through the traditional 4th of July holiday week and seeing
a pickup in business in the last few weeks. Another mill manager characterized his business as
good, but said, “We really cannot see that far beyond October.”

On the other hand, a specialty ring spinner reported a slowdown in the last couple of weeks,
following a very good May and a slow June. “I don’t know what retail is doing,” he said. “Retail
seems to have slowed down. I’m wondering what September is going to be like.”

Two of the spinners interviewed reported strong export business. One ships yarn to Israel and
Mexico, and sometimes to Portugal and Hong Kong. He said business with Mexico has slowed down
recently, after setting a brisk pace for four or five months. Another spinner mentioned pretty good
program business with South America. Both expressed hopes for a Central American Free Trade
Agreement friendly to the US industry.

Spinners once again described the cotton market as volatile and are hoping prices will
stabilize. At the time of this writing, the cotton market has just had an upward bounce, which may
or may not signal a trend.

On the man-made side, spinners have seen three polyester price hikes this year. They
sympathize with fiber producers’ need to improve profitability and acknowledge rising oil prices,
but, as one asked: “How in the world are we supposed to handle that? Go to Wal-Mart with an

One spinner said the change in cotton consumption at US mills in recent years is, in his
opinion, the most telling indicator of how the textile industry has changed. Cotton consumption by
US textile mills has fallen by nearly half, from 11.4 million bales in 1997-98 to roughly 6.3
million bales during the just-completed 2003-04 marketing year. The forecast for 2004-05 is 5.9
million bales. As another spinner put it: “I continue to lose customers. I continue to find new
customers, but nobody orders in the volume that they used to. That concerns me more than anything.”

One spinner was more upbeat about the post-2005 business environment. “We are convinced that
there will be a certain amount of US business available,” he said. “We do a fair amount of
Caribbean Basin Initiative business, and there is going to be a certain amount of replenishment
business. Retailers don’t want to put all their eggs in one basket. They are one dock strike away
from empty retail shelves.”

Near-Record Cotton Crop Predicted

In its August crop report, the US Department of Agriculture (USDA) forecast the 2004-05 US crop
at 20.2 million bales, up 11 percent from last year’s 18.3 million bales. The yield is expected to
average 727 pounds per harvested acre, down 3 pounds from 2003 and 60 pounds above the five-year
average. Upland cotton production is forecast at 19.5 million bales — 9 percent above 2003.
Producers expect to harvest 13.3 million acres total — 11 percent above last year. Upland cotton
harvested area, at 13.1 million acres, is 1.24 million acres more than a year ago.

In its final report for the 2003-04 marketing year, the USDA reported exports of 13.8 million
bales of cotton, up 1.9 million bales, or 17 percent, from the 2002-03 total.

A dramatic increase in exports to China — up 3 million bales to almost 4.9 million bales —
more than offset declines in other markets. These exports accounted for more than one-third of
total reported exports. Exports to Mexico, traditionally the largest US market, declined 17.5
percent, as China replaced Mexico as the top US market. Exports to Mexico in 2003-04 — more than
1.8 million bales — suffered due to a continued decline in Mexican mill use, higher domestic
production and large carry-in stocks.

September 2004