The Rupp Report: Cotton Supply Challenges

For weeks and months, the whole cotton trade has been more or less upside down. Now it seems the
supply of cotton will remain tight until the start of the harvest of the new crop in the Northern
Hemisphere this month.

Cotton Offers Dropped

The latest reports from the Bremen Cotton Exchange and the International Cotton Advisory
Council state that offers for cotton from the 2009-10 crop dropped during June 2010 as a result of
the significant decline in stocks this season. The 2009-10 Cotlook A Index was quoted as “nominal”
between June 9 and June 22, as offers for some growths were in short supply, and it was not
published thereafter because there was a lack of quotations eligible for its calculation.

On the other hand, the 2009-10 Cotlook A Index averaged 78 cents per pound between August 1,
2009, and June 22, 2010. This is 28-percent higher than the 2008-09 season average and the highest
season-average Cotlook A Index since 1996-97.

Rebound In Global Mill Use

The 2010-11 Cotlook A Index (Forward Index) was introduced on May 16, 2010, and now is the
only Index published. The 2010-11 Forward Index increased steadily from 83 cents per pound in
mid-May 2010 to 88 cents per pound in mid-June and remained around that level until the end of
June. As a result of a continued decline in world production and a parallel rebound in global mill
use, 2009-10 global cotton ending stocks are projected at 9.6 million tons, 21-percent lower than
the previous season’s ending stocks, and are considered to be at the lowest level since 2003/04.

First Decline In Global Stocks

The experts say this is the first time global cotton stocks have shown a significant drop
since they jumped by 32 percent in 2004-05. The global stocks-to-use ratio also is dropping, from
52 percent in 2008-09 to 39 percent in 2009-10, down from a five-year average of 49 percent 
from 2004-05 to 2008-09, and the lowest ratio since 1993/94.

Stocks are expected to decline by 14 percent to 3.2 million tons in China — less sharply
than in the rest of the world, where they are expected to drop by 24 percent to 6.4 million tons —
thanks to a large increase in Chinese cotton imports in 2009-10.

Tight Cotton Supply

Cotton supplies will remain tight until the start of the harvest of the new crop in the
Northern Hemisphere this month. However, according to the reports, global 2010-11 cotton production
is expected to rebound by 14 percent to 25 million tons, reportedly the first global output
increase in four years. This rebound is explained mainly by an expansion in cotton plantings as
farmers are reacting to elevated 2009-10 cotton prices and declining grain and oilseed prices.

Increasing Growing Area

The cotton cultivation area has risen in most major producing countries, with more than half
of the projected global increase occurring in the United States and India. Many countries are
increasing their output: In the United States, production is forecast to grow by 44 percent to 3.8
million tons in 2010-11; in  India, by 8 percent to a record 5.5 million tons; and in
Pakistan, also by 8 percent to 2.2 million tons. Production also is expected to increase in Brazil,
Uzbekistan, Turkey, Australia, Greece, and the African Financial Community (CFA) Zone. Chinese
production is expected to increase slightly to 7.1 million tons.

China And India The Big Consumers

It is forecast that 2010-11 global cotton mill use will grow by 2 percent to 24.9 million
tons, pushed by continued global economic growth improvement but limited by high cotton prices and
a slowing kind of restocking effect. China and India are expected to account for 80 percent of that
increase. Their combined share of global cotton mill use will increase by 2 percent to 57 percent.
As global cotton output and mill use are forecast to nearly balance in 2010-11, world ending stocks
are expected to remain essentially unchanged at 9.6 million tons.

Ban On Cotton Exports To Be Lifted

However, one positive message is to be noted: The Cotton Association of India reports the
Commerce Secretary of the Government of India was quoted to have stated that raw cotton exports
will be on Open General License without any restrictions as of October 1. On May 21, the
Directorate General of Foreign Trade (DGFT) had moved cotton exports from “free” to the
“restricted” list and permitted shipments only against license. Even earlier, in July 2008, the
DGFT had required all export contracts to be registered with the Textile commissioner prior to
shipment. On April 19, 2010, the Textile commissioner announced registration of all export
contracts would be suspended “till further orders.”

August 18, 2010