Monthly Economic Letter U.S. and Global Market Fundamentals

Monthly Economic Letter U.S. and Global Market Fundamentals August 2012 www.cottoninc.com After trading within relatively narrow bands throughout July, New York futures moved higher in early August, with the December contract breaking from a range between 69 and 74 cents/lb to levels above 76 cents/lb. Movement in the A Index was more muted, with values remaining within a range between 82 and 86 cents/lb. The shift higher in New York futures may have been influenced by outside markets, such as those for other agricultural commodities like corn and soybeans, both of which set new record highs last month. concerns related to dry conditions in both India and the U.S. have also been cited as potential reason cotton prices may have moved higher in recent weeks. In the latest report, the USDA lowered their Indian production estimate by 500,000 bales, but increased the U.S. production figure by 651,000 bales. The increase in the U.S. figure was a result of an increase in expected acres harvested; the forecast U.S. yield declined slightly. Other upward revisions to production estimates were made for China (+500,000), Burkina Faso (+100,000), and Mali (+100,000). Although the recent surge in corn and soybean prices occurred after northern hemisphere growers had already planted for the 2012/13 crop year, southern hemisphere producers were able to observe these changes prior to sowing. Correspondingly, growers in these countries are expected to divert acreage from cotton when they begin planting in October and November. Due to lower acreage expectations, forecasts for both the 2012/13 Brazilian (-250,000 bales) and Argentinian (-150,000) harvests decreased. The current figures suggest the 2012/13 harvest for Brazil will be 22% lower than in 2011/12 (8.7 million bales in 2011/12 to 6.8 million in 2012/13). In Argentina, a 20% decrease is expected (1.0 million bales in 2011/12 to 800,000 in 2012/13). If maintained through the spring of 2013, the separation between cotton and corn/soybean prices could be expected to also lead to significant shifts away from cotton in the northern hemisphere for the 2013/14 harvest. While it remains to be seen how tight supply conditions -may become for corn and soybeans, record ending stocks and a record stocks-to-use ratio are forecast for cotton in the 2012/13 crop year. This month s revisions to production estimates resulted in a slight increase in the global figure, lifting it 296,000 bales (from 113.8 million bales to 114.1 million). Meanwhile, the world mill use estimate declined, falling 820,000 bales (from 109.0 million bales to 108.2 million). Virtually all of the reduction in the global demand figure was a result of lower 2012/13 consumption expectations for China (-500,000 bales) and Pakistan (-250,000). The estimate for Chinese mill-use in 2011/12 was lowered 1.0 million bales. Given the increase in production expectations and the decreases in consumption figures for both 2011/12 and 2012/13, the forecast for 2012/13 world ending stocks increased 2.3 million bales and rose to 74.7 million bales. The stocks-to-use ratio increased from 66.4% to 69.0%. This record abundance of supply could be expected to keep downward pressure on cotton prices throughout the fall, and to keep cotton prices in an uncompetitive position relative to those for corn/soybeans. Correspondingly, it could be anticipated that world cotton acreage will decline in 2013/14. However, for cotton prices to increase, supplies will have to be drawn down from their current record levels. Apart from acreage, another important factor that will determine whether prices begin to eventually increase is demand. Since prices peaked in 2010/11, demand has been persistently weak. The current consumption forecast for 2012/13 is 108.2 million bales. Although 2.6% higher than in 2011/12 (105.4 million bales), expected mill-use in 2012/13 is also 1.8% lower than it was in 2008/09 (110.2 million), the crop year most associated with the global recession. Relative to the record in 2006/07 (123.9 million bales), 2012/13 consumption is forecast to be 12.7% lower (-15.8 million bales). Recent weakness in mill demand poses questions regarding future consumption growth. Eventual global economic expansion, along with world cotton prices that are competitive relative to those for man-made fibers, suggest global demand for cotton fiber will increase. Nonetheless, a challenge to demand growth may come from government intervention. At present, one of the most notable governmental interventions is the set of Chinese policies that maintain domestic Chinese cotton prices at a record premium relative to the A Index. With the quota system limiting the ability of Chinese spinning mills to secure fiber imports, Chinese fabric mills have already begun importing yarn made in other countries with cheaper cotton. Another potential consequence of high domestic Chinese cotton prices could be prolonged fiber substitution since domestic Chinese cotton prices remain elevated relative those for artificial fibers. Data Tables and Price Charts Balance Sheets Exports Consumption Imports Prices U.S. (bales) China (bales) World (bales) Bales Bales Bales Bales Last 3 Years U.S. (tons) China (tons) World (tons) Tons Tons Tons Tons Last 3 Months

World Cotton Balance Sheet Consumption 62.0 62.5 47.8 49.5 66.7 67.8 107.3 102.2 116.4 122.7 113.8 114.1 169.3 164.7 164.2 172.2 180.5 181.9 110.2 118.6 114.7 105.4 109.0 108.2 62.5 47.8 49.5 67.8 72.4 74.7 56.7% 40.3% 43.2% 64.3% 66.4% 69.0% China Cotton Balance Sheet Imports China Mill Use Exports Demand 20.5 22.4 15.2 11.6 27.3 29.3 36.7 32.0 30.5 33.5 30.5 31.0 7.0 10.9 12.0 24.3 13.5 13.0 64.2 65.3 57.7 69.4 71.3 73.3 44.0 50.0 46.0 40.0 39.5 39.0 0.1 0.0 0.1 0.1 0.0 0.1 44.1 50.0 46.1 40.1 39.5 39.1 22.4 15.2 11.6 29.3 31.8 34.2 51.0% 30.0% 25.0% 73.0% 80.0% 87.0% U.S. Cotton Balance Sheet Imports U.S. Mill Use Exports Demand 10.1 6.3 2.9 2.6 3.3 3.3 12.8 12.2 18.1 15.6 17.0 17.7 0.0 0.0 0.0 0.0 0.0 0.0 22.9 18.5 21.1 18.2 20.3 21.0 3.5 3.6 3.9 3.3 3.4 3.4 13.3 12.0 14.4 11.7 12.1 12.1 16.8 15.6 18.3 15.0 15.5 15.5 6.3 2.9 2.6 3.3 4.8 5.5 38.0% 19.0% 14.0% 22.0% 31.0% 35.0%

World Cotton China 36.7 32.0 30.5 33.5 30.5 31.0 India 22.6 23.8 26.4 26.5 24.0 23.5 United States 12.8 12.2 18.1 15.6 17.0 17.7 Pakistan 8.5 9.2 8.6 10.6 9.7 9.7 Brazil 5.5 5.5 9.0 8.7 7.0 6.8 Australia 1.5 1.8 4.2 4.9 4.3 4.3 Uzbekistan 4.6 3.9 4.1 4.2 4.1 4.1 Turkey 1.9 1.8 2.1 3.3 2.8 2.8 African Franc Zone 2.2 2.1 2.1 2.8 1.6 1.7 Turkmenistan 1.6 1.5 1.8 1.4 1.5 1.5 EU 27 1.2 1.1 1.2 1.6 1.5 1.5 Greece 1.2 0.9 0.9 1.3 1.2 1.2 Mexico 0.6 0.5 0.7 1.2 1.0 1.0 Mali 0.4 0.4 0.5 0.9 0.8 0.9 Burkina 0.9 0.7 0.7 0.7 0.8 0.9 Rest of World 7.6 7.0 7.6 8.3 8.9 7.9 World Total 107.3 102.2 116.4 122.7 113.8 114.1 World Cotton Exports United States 13.3 12.0 14.4 11.7 12.1 12.1 Australia 1.2 2.1 2.5 4.6 4.5 4.4 Brazil 2.7 2.0 2.0 4.8 4.0 3.9 India 2.4 6.6 6.0 10.0 3.7 3.7 Uzbekistan 3.0 3.8 2.7 2.5 2.8 2.7 African Franc Zone 1.5 1.4 1.3 1.2 1.5 1.5 EU 27 1.0 1.1 1.1 1.4 1.4 1.4 Greece 0.8 0.9 0.8 1.0 1.1 1.1 Turkmenistan 0.8 1.2 1.1 0.8 0.8 0.8 Burkina 0.8 0.8 0.7 0.6 0.8 0.8 Mali 0.3 0.4 0.5 0.6 0.8 0.8 Pakistan 0.4 0.7 0.6 1.2 0.5 0.5 Tajikistan 0.4 0.5 0.4 0.5 0.5 0.5 Mexico 0.2 0.1 0.4 0.4 0.4 0.4 Zimbabwe 0.3 0.4 0.4 0.4 0.4 0.4 Rest of World 3.3 3.7 3.9 5.4 4.8 5.0 World Total 30.4 35.6 36.7 44.3 37.4 37.2 Note: African Franc Zone includes Benin, Burkina Faso, Cameroon, Chad, Cote d'ivoire, and Mali.

World Cotton Consumption China 44.0 50.0 46.0 40.0 39.5 39.0 India 17.8 19.8 21.1 20.5 21.5 21.5 Pakistan 11.1 10.4 10.0 10.1 11.3 11.0 Turkey 5.1 5.8 5.6 5.3 5.6 5.6 Brazil 4.2 4.4 4.3 4.0 4.3 4.3 Bangladesh 3.8 3.9 3.7 3.2 3.6 3.6 United States 3.5 3.6 3.9 3.3 3.4 3.4 Indonesia 2.3 2.2 2.1 1.9 2.1 2.1 Mexico 1.9 1.9 1.7 1.7 1.8 1.8 Vietnam 1.3 1.6 1.7 1.6 1.8 1.8 Thailand 1.6 1.8 1.7 1.3 1.6 1.6 Uzbekistan 1.0 1.1 1.3 1.4 1.5 1.5 South Korea 1.0 1.0 1.0 1.1 1.2 1.2 Taiwan 0.8 1.0 0.9 0.8 0.8 0.9 Argentina 0.8 0.8 0.8 0.8 0.8 0.8 Rest of World 10.1 9.4 9.1 8.4 8.5 8.4 World Total 110.2 118.6 114.7 105.4 109.0 108.2 World Cotton Imports China 7.0 10.9 12.0 24.3 13.5 13.0 Bangladesh 3.8 3.9 3.7 3.2 3.6 3.6 Turkey 2.9 4.4 3.4 2.3 3.0 3.0 Pakistan 1.9 1.6 1.7 1.0 2.2 2.2 Indonesia 2.3 2.2 2.1 2.0 2.1 2.1 Vietnam 1.3 1.7 1.6 1.6 1.7 1.8 Thailand 1.6 1.8 1.8 1.3 1.7 1.7 Mexico 1.3 1.4 1.2 1.0 1.2 1.2 South Korea 1.0 1.0 1.0 1.2 1.2 1.2 India 0.8 0.5 0.5 0.6 1.0 1.0 Taiwan 0.8 1.0 0.8 0.8 0.8 0.9 Malaysia 0.2 0.3 0.3 1.0 0.8 1.0 Egypt 0.4 0.6 0.6 0.3 0.5 0.5 Russia 0.9 0.8 0.5 0.5 0.5 0.5 Japan 0.4 0.3 0.4 0.3 0.3 0.3 Rest of World 3.8 4.0 4.5 3.1 3.3 3.3 World Total 30.5 36.3 35.9 44.3 37.4 37.2

World Cotton Balance Sheet Consumption 13.5 13.6 10.4 10.8 14.5 14.8 23.4 22.3 25.3 26.7 24.8 24.8 36.9 35.9 35.8 37.5 39.3 39.6 24.0 25.8 25.0 22.9 23.7 23.5 13.6 10.4 10.8 14.8 15.8 16.3 56.7% 40.3% 43.2% 64.3% 66.4% 69.0% China Cotton Balance Sheet Imports China Mill Use Exports Demand 4.5 4.9 3.3 2.5 5.9 6.4 8.0 7.0 6.6 7.3 6.6 6.7 1.5 2.4 2.6 5.3 2.9 2.8 14.0 14.2 12.6 15.1 15.5 16.0 9.6 10.9 10.0 8.7 8.6 8.5 0.0 0.0 0.0 0.0 0.0 0.0 9.6 10.9 10.0 8.7 8.6 8.5 4.9 3.3 2.5 6.4 6.9 7.4 51.0% 30.0% 25.0% 73.0% 80.0% 87.0% U.S. Cotton Balance Sheet Imports U.S. Mill Use Exports Demand 2.2 1.4 0.6 0.6 0.7 0.7 2.8 2.7 3.9 3.4 3.7 3.8 0.0 0.0 0.0 0.0 0.0 0.0 5.0 4.0 4.6 4.0 4.4 4.6 0.8 0.8 0.8 0.7 0.7 0.7 2.9 2.6 3.1 2.6 2.6 2.6 3.7 3.4 4.0 3.3 3.4 3.4 1.4 0.6 0.6 0.7 1.0 1.2 38.0% 19.0% 14.0% 22.0% 31.0% 35.0%

World Cotton China 8.0 7.0 6.6 7.3 6.6 6.7 India 4.9 5.2 5.7 5.8 5.2 5.1 United States 2.8 2.7 3.9 3.4 3.7 3.8 Pakistan 1.9 2.0 1.9 2.3 2.1 2.1 Brazil 1.2 1.2 2.0 1.9 1.5 1.5 Australia 0.3 0.4 0.9 1.1 0.9 0.9 Uzbekistan 1.0 0.8 0.9 0.9 0.9 0.9 Turkey 0.4 0.4 0.5 0.7 0.6 0.6 African Franc Zone 0.5 0.5 0.5 0.6 0.4 0.4 Turkmenistan 0.3 0.3 0.4 0.3 0.3 0.3 EU 27 0.3 0.2 0.3 0.4 0.3 0.3 Greece 0.3 0.2 0.2 0.3 0.3 0.3 Mexico 0.1 0.1 0.2 0.3 0.2 0.2 Mali 0.1 0.1 0.1 0.2 0.2 0.2 Burkina 0.2 0.2 0.1 0.2 0.2 0.2 Rest of World 1.6 1.5 1.6 1.8 1.9 1.7 World Total 23.4 22.3 25.3 26.7 24.8 24.8 World Cotton Exports United States 2.9 2.6 3.1 2.6 2.6 2.6 Australia 0.3 0.5 0.5 1.0 1.0 1.0 Brazil 0.6 0.4 0.4 1.0 0.9 0.8 India 0.5 1.4 1.3 2.2 0.8 0.8 Uzbekistan 0.7 0.8 0.6 0.5 0.6 0.6 African Franc Zone 0.3 0.3 0.3 0.3 0.3 0.3 EU 27 0.2 0.2 0.2 0.3 0.3 0.3 Greece 0.2 0.2 0.2 0.2 0.2 0.2 Turkmenistan 0.2 0.3 0.2 0.2 0.2 0.2 Burkina 0.2 0.2 0.1 0.1 0.2 0.2 Mali 0.1 0.1 0.1 0.1 0.2 0.2 Pakistan 0.1 0.2 0.1 0.3 0.1 0.1 Tajikistan 0.1 0.1 0.1 0.1 0.1 0.1 Mexico 0.0 0.0 0.1 0.1 0.1 0.1 Zimbabwe 0.1 0.1 0.1 0.1 0.1 0.1 Rest of World 0.7 0.8 0.8 1.2 1.0 1.1 World Total 6.6 7.7 8.0 9.7 8.1 8.1

World Cotton Consumption China 9.6 10.9 10.0 8.7 8.6 8.5 India 3.9 4.3 4.6 4.5 4.7 4.7 Pakistan 2.4 2.3 2.2 2.2 2.4 2.4 Turkey 1.1 1.3 1.2 1.2 1.2 1.2 Brazil 0.9 1.0 0.9 0.9 0.9 0.9 Bangladesh 0.8 0.8 0.8 0.7 0.8 0.8 United States 0.8 0.8 0.8 0.7 0.7 0.7 Indonesia 0.5 0.5 0.4 0.4 0.4 0.4 Mexico 0.4 0.4 0.4 0.4 0.4 0.4 Vietnam 0.3 0.3 0.4 0.3 0.4 0.4 Thailand 0.3 0.4 0.4 0.3 0.3 0.3 Uzbekistan 0.2 0.2 0.3 0.3 0.3 0.3 South Korea 0.2 0.2 0.2 0.2 0.3 0.3 Taiwan 0.2 0.2 0.2 0.2 0.2 0.2 Argentina 0.2 0.2 0.2 0.2 0.2 0.2 Rest of World 2.2 2.1 2.0 1.8 1.9 1.8 World Total 24.0 25.8 25.0 22.9 23.7 23.5 World Cotton Imports China 1.5 2.4 2.6 5.3 2.9 2.8 Bangladesh 0.8 0.8 0.8 0.7 0.8 0.8 Turkey 0.6 1.0 0.7 0.5 0.7 0.7 Pakistan 0.4 0.3 0.4 0.2 0.5 0.5 Indonesia 0.5 0.5 0.5 0.4 0.5 0.5 Vietnam 0.3 0.4 0.4 0.4 0.4 0.4 Thailand 0.3 0.4 0.4 0.3 0.4 0.4 Mexico 0.3 0.3 0.3 0.2 0.3 0.3 South Korea 0.2 0.2 0.2 0.3 0.3 0.3 India 0.2 0.1 0.1 0.1 0.2 0.2 Taiwan 0.2 0.2 0.2 0.2 0.2 0.2 Malaysia 0.0 0.1 0.1 0.2 0.2 0.2 Egypt 0.1 0.1 0.1 0.1 0.1 0.1 Russia 0.2 0.2 0.1 0.1 0.1 0.1 Japan 0.1 0.1 0.1 0.1 0.1 0.1 Rest of World 0.8 0.9 1.0 0.7 0.7 0.7 World Total 6.6 7.9 7.8 9.7 8.1 8.1

100 cents/lb. NY Nearby Daily NY Nearby and A Index Prices: Last Three Months A Index 90 80 70 60 280 230 cents/lb. NY Nearby Monthly NY Nearby and A Index Prices: Last Three Years A Index 180 130 80 30 Note: Values for the A Index were unavailable from June 23, 2010 to August 1, 2010 and again from June 10, 2011 to August 1, 2011.