LONG-TERM OUTLOOK: SUGAR
Prepared by Prudential Securities, Inc.
Overview
(November 10, 2000) Our previous Long-Term Sugar Outlook report was released July 26. Since then, #11 sugar futures have made new highs, extending the long-range price advance that began in April. The market's strength, which peaked on October 16 at 11.40 cents, basis the March contract, pushed futures to the highest price level since early 1998 and reflected the widely-held view that the massive global sugar stocks buildup of the last two seasons would be followed by a supply/use deficit in 2000/01. In late October values began to retreat from their highs, with new statistical information undermining trader confidence in the size of the anticipated new season stocks drawdown.
The market's spread action has tended to mimic the outright price moves. The March contract has generally widened its premium to the back months, with the premium reaching its widest level in mid-October; since then, March futures have lost some ground relative to the back months. The narrowing price structure has been most pronounced in the spot spread, with March losing about half of its premium since mid-October. Other spreads have remained relatively firm: March/October, for instance, was trading recently at a 120-point premium, a loss of only 44 points from the mid-October high.
Trends in the London/New York price differential, basis March futures, are shown in Figure 3. The whites premium, which was trading at around $49-$52 per tonne in June, came under sharp downside pressure in July and, following some sideways action, had eroded to the $21 level by mid-October. Since then, London's premium has recovered to the $35 area. The major reason for the premium's long-range contraction appears to have been the weakness of the Euro, which encouraged a more aggressive sales posture on the part of European producers.
Figure 3
March 2001 London White #5/New York #11 Sugar
dollars per tonne
Source--CQG
We are forecasting world 2000/01 sugar stocks at roughly 32.8 million tonnes, representing a drawdown of about 3 million from the year-ago level. The new forecast compares with a stocks forecast of 29.5 million tonnes shown in our July Long-Term Sugar Outlook report. However, because of revisions affecting the 1999/2000 data, the stocks contraction relative to 1999/2000 is about the same for the two reports.
The world sugar market's long-term bullish price action has been driven primarily by developments on the production side of the supply-use equation. The most bullish development, by far, has occurred in Brazil, where a weather-induced production crash had long been expected. The new production forecast for 2000/01 is 15.4 million tonnes, sharply below the 20.1 million tonnes produced in 1999/2000 but roughly 0.9 million tonnes more than was forecast in the July report. Sugar output in the new season is also expected to fall in several other origins, particularly the European Union, Australia, India and the United States.
Recent price softness reflects a number of factors, including a partial discounting of the bullish fundamentals, profit-taking and the funds' lowered net long exposure. Bullish traders have become more cautious, and the market as a whole appears to be reassessing the major underlying fundamentals. The near- to intermediate-term outlook seems to be for "more of the same." Although we have not written off the possibility of further long-term price appreciation, we believe these gains will be far more labored.
Assuming normal weather conditions, production in several origins, particularly Australia and Brazil, can be expected to recover in 2001/02; if this is borne out, the market will have lost a major source of support. In this context, weather patterns in these countries will be monitored closely by world sugar traders over the next several months. Another, and more immediate, fundamental factor will be Russian import activity following that country's November 27 tariff import quota auction; we view this in potentially price-supportive terms. We also expect China to become a more active importer early next year, which would also be supportive for the world sugar market.
2000/01 Global Supply/Use Update
We are forecasting global 2000/01 sugar production at 123.2 million tonnes, about 9% below the year-ago record level and the lowest world output since 1996/97. The anticipated decline follows six consecutive seasons of production expansion and, if confirmed, would only be the third time in the years 1990-2000 that global production has fallen from the year-earlier level. The forecast is roughly 1 million tonnes less than in our previous Long-Term Sugar Outlook report (released July 26), reflecting more up-to-date information on production cutbacks for the United States, Brazil, Australia and Pakistan. We have also revised global 1999/2000 output, shown as 133.1 million tonnes in the July report, to 135.2 million tonnes. This increase is based on major statistical changes for a small number of origins, especially India and Brazil.
We anticipate that 2000/01 will see a sharp decline in global sugar trade, which we are forecasting at roughly 32.7 million tonnes, down from 38.2 million in 1999/2000 and about 11% below the three-year average. (The U.S. Department of Agriculture, whose historical data series we are using, employs a balancing mechanism based on "unrecorded" trade, enabling it to show world exports and imports as identical numbers.) The steep drop in Brazilian exports goes a long way in explaining the global figure, with sugar shipments from that country expected to be off by roughly 5 million tonnes versus the 1999/2000 level. Exports from Australia and the European Union are also projected to drop significantly.
In terms of their overall statistical impact, the major trade question marks currently relate to China, Pakistan and Russia. China had been expected to import roughly 1.4 million tonnes of sugar in 2000/01 (up from 0.6 million in 1999/2000), but due to various governmental policies, that figure has now been trimmed to about 1.0 million. A production shortfall in Pakistan had led to expectations that imports would expand sharply vis-a-vis 1999/2000, but newly introduced advance payment requirements by the banking sector are being viewed as discouraging by the country's commodity importers. In Russia, according to a recent U.S. agricultural attache report, the imposition of a tariff import quota could have an adverse impact on the 2000/01 import level; some private traders, on the other hand, tend to discount that and believe the country's imports will be little changed relative to the previous season.
We are forecasting global 2000/01 sugar consumption at a record 129.0 million tonnes, 1.4% above the year-ago level and 3.3% above the three-year average. The long-range global consumption trend is far more uniform than its production counterpart, with consumption falling only once (in 1993/94) from the year-earlier level in the years 1990-2000. The forecast is roughly 0.5 million tonnes below what is shown in our July report; most of the reduction is attributable to scaled-back expectations for Indian consumption.
We are forecasting world 2000/01 sugar stocks at 32.8 million tonnes, roughly 3 million below the revised 1999/2000 level and the steepest decline from a year ago (in terms of tonnage) for the 10-year period. In percentage terms, the projected stocks decline of 8.3% matches that of 1992/93 but is slightly below that of 1993/94, when stocks fell by 10.8%. Our new stocks forecast is higher than that shown in our July report and, relative to world production, has slightly less bullish implications for the market. However, since we have also raised the 1999/2000 stocks level, the stocks decline relative to a year ago has remained essentially unchanged vis-a-vis our July report.
The forecasts released by various sources are not directly comparable, given differences in research methodologies, statistical information and market assumptions involved. Our work is based on U.S. Department of Agriculture (USDA) historical data, which reflect individual marketing years of the countries involved. The International Sugar Organization (ISO), on the other hand, uses an October/September global season. The ISO released its first 2000/01 statistical survey in September and forecast global stocks at 54.3 million tonnes, down roughly 3 million from the year-earlier level. A subsequent revision has trimmed the deficit to 2.3 million tonnes. F.O. Licht, the German commodity publishing firm (which uses a September/August international sugar year), has forecast 2000/01 global stocks at 58.6 million tonnes, also about 3 million tonnes below the 1999/2000 level. Finally, the London-based trade firm E.D. & F. Man (whose data reflect an October/September season) projected a global 2000/01 supply-use deficit of 1.2 million tonnes in September but, in its October report, changed this to a surplus of around 1.0 million tonnes. Man's more bearish outlook was based on increased production levels in Brazil, the European Union and India and on weaker consumption expectations for China.
2000/01 Producer Overview
Most of the 12 leading origins, which accounted for roughly 76% of world sugar output in 1999/2000, are expected to see production decline in 2000/01 relative to the previous season. The most severe production setbacks are forecast for Brazil, India, the European Union, Australia and the United States. Most of these countries are discussed in detail in later sections of this report, and we will only note here that, as is the case every year, shortfalls tend to be caused by adverse weather conditions or crop disease rather than reflecting government or private sector planning. The most dramatic weather-induced production setback occurred in Brazil, where an anticipated 23% production loss versus 1999/2000 constituted a major supportive factor in this year's long-range #11 sugar price advance. The anticipated losses for the European Union and for the United States are due more to man-made factors (such as international trade obligations and national price-support programs) than to Mother Nature. In contrast to the other countries, China is expected to see sugar production increase about 12% in 2000/01; however, this figure is somewhat misleading because output last year was exceptionally low due to unusual weather occurrences.
The most significant statistical 2000/01 revision (in terms of market impact) since our previous Long-Term Sugar Outlook report was released in July has occurred for Australia, where a combination of adverse weather conditions and crop disease has caused the July forecast of about 5 million tonnes to be reduced to the 4-million-tonne level. We have also lowered the production forecast for Pakistan, Cuba and the United States. We have raised production forecasts (relative to the July report) for several origins, including the European Union (by about 600,000 tonnes), Brazil (by about 900,000 tonnes) and India (by about 440,000 tonnes).
2000/01 Consumer Overview
Long-term sugar usage trends for the world's 12 major consumer markets, which in 1999/2000 accounted for roughly 65% of world sugar consumption, show that with one notable exception, Russia, 2000/01 consumption in all of these markets is expected to either remain little changed or is projected to show a solid increase from the year-ago level. The largest gains (percentage basis) are foreseen for Indonesia, Iran and India. The seeming anomalous case of Russia can be explained by (1) record-high consumption in 1999/2000, due in part to exceptionally low domestic prices, and (2) expectations of reduced availability, in part due to the introduction of import tariff quotas.
Half of the 12 countries are in Asia and account for roughly 45% of the total sugar consumption of the 12 leading markets. The leading consumer market by far is India, whose 1999/2000 consumption of 17.2 million tonnes is roughly 3 million tonnes ahead of the second major market (European Union). The countries with the largest anticipated 2000/01 consumption increase versus 1999/2000 (percentage basis) are also in Asia (Indonesia, Iran, India). With total Asian consumption accounting for approximately 39% of world sugar intake, it is obvious that this region is the decisive determinant not only of total sugar absorption but also of the overall consumption growth rate. Sugar use in the region is a function of various factors, including (1) population growth, (2) average retail prices (and in several countries, particularly India, the price of competing sweeteners) and (3) availability.
For three of the countries, projected 2000/01 sugar consumption differs markedly from the forecasts included in our July report. In the case of India, anticipated consumption has been scaled back by about 480,000 tonnes, given relatively firm average domestic prices. Indonesian consumption has been raised by roughly 300,000 tonnes because of an upward revision in the sugar requirements of the country's food and beverage sectors. Russia's anticipated sugar use is now seen to be about 200,000 tonnes below the July forecast, in part due to reduced import availability.
U.S. Supply/Use Balance
The USDA's October forecast of 2000/01 (October/September) U.S. sugar production is 8.45 tons versus 1999/2000 output of 9.04 million; the forecast was left unchanged in the November report. Beets are expected to account for 51.5% of total 2000/01 sugar output, with the remaining 48.5% coming from the cane sector. In 1999/2000, beets accounted for 54.8% and cane for 45.2%. The long-term trend in the beet/cane ratio has been running in cane's favor as can be seen with reference to 1996/97, when beets contributed 55.7% and cane 44.3% of national sugar output.
The new forecast is 457,000 tons below the September forecast and is based on a reduced beet acreage as a result of farmer participation in the federal Payment-In-Kind (PIK) program. Cane-derived sugar output was reduced by 137,000 tons from the September forecast, reflecting a lower average Florida cane yield. However, while Florida's average cane yield is now foreseen at 35.2 tons per acre, down from the September forecast of 38.0, technological improvements are an offsetting factor, and the state's seasonal sugar output is expected to be one of its largest ever. In Louisiana, the second major cane-growing state, the harvested acreage is forecast at about 35,000 acres above the year-ago level. The increase reflects relatively weak prices for competing crops. State officials have characterized weather conditions as "difficult," but the expanded use of high-yielding cane varieties indicates sugar output will be close to the 1999/2000 record of 1.68 million tons.
The USDA announced a PIK Diversion Program on August 1 and opened a two-week signup period on August 21. The program's objective was to assist beet and cane farmers following a protracted period of price weakness. Under the program, farmers can accept sugar held by the Commodity Credit Corporation (CCC) but must then remove from production a given acreage, based on average sugar production for the previous three years. The justification for the federal program includes the following arguments: (1) The program helps to address the problem of domestic overproduction of sugar; (2) the program is expected to lower crop loan forfeitures in fiscal 2001, thereby reducing federal expenditures; (3) the program tends to reduce overall storage costs. The program's overall limit is determined by the CCC's stocks level. Based on the USDA calculations, PIK Diversion Program participants will save roughly $100 per acre in harvesting costs, and it is assumed, therefore, that they will accept a quantity of sugar that is less than the amount of next year's projected production shortfall.
Total domestic sugar deliveries in 2000/01 are forecast at 10.39 million tons, 1.7% above the 1999/2000 level and an all-time record. Roughly 10.23 million tonnes, or 98.5% of the total, is expected to be absorbed by the food and beverage industries.
Tariff rate quota (TRQ) imports have been set at roughly 1.3 million tonnes for 2000/01, the bulk of which--1.12 million tonnes--is the minimum import tonnage that the United States could offer and still meet its World Trade Organization (WTO) commitments. The largest quota allocations for individual countries are: Dominican Republic, 185,346 tonnes; Brazil, 152,700 tonnes; Philippines, 142,169 tonnes; Australia, 87,408 tonnes; Guatemala, 50,549 tonnes, and Argentina, 45,283 tonnes.
Mexico's basic TRQ allotment for 2000/01 was set at 7,258 tonnes. However, the North American Free Trade Agreement (NAFTA) places U.S.-Mexico trade in a separate category. Based on the U.S. interpretation of the agreement, which is disputed by Mexico, Mexico's total TRQ allocation for fiscal 2001 was raised to 116,000 tonnes (from 25,000 tonnes the previous year). The two countries have long been at odds over the interpretation of the agreement, and various related disputes (such as the U.S. charge that Mexico's use of anti-dumping duties on high-fructose corn syrup shipments from the United States violated WTO guidelines) remain unresolved. A new president assumes office in Mexico December 1, and it may be that this will make it easier for representatives of the two countries to break the deadlock surrounding various sugar-related trade issues.
Figure 4 shows recent price trends in the domestic #14 January sugar contract. After trading below the 17.50-cent level at the beginning of August, prices staged a substantial turnaround, gaining more than 100 points during the month and extending their advance in September and early October to the highest level since mid-1999. By early November, the January contract had reached the 21.65-cent level, not far below the average beet sugar loan rate of 22.90 cents per pound. The initial price advance was triggered by a combination of factors, including (1) announcement of the PIK Diversion Program, (2) the uncertain fiscal 2001 domestic sugar production outlook and (3) the breakdown of the U.S.-Mexico sugar trade talks. The massive price surge of October 2 reflected, in part, the end of fiscal 2000 sugar loan forfeitures. (Since September 30, the last day of the fiscal year, fell on a Saturday, beet and cane processors were given until Monday, October 2, to either repay their federal loans or forfeit the sugar equivalent.)
Figure 4
January 2001 #14 Sugar
cents per pound
Source--CQG
In early October the USDA stated that total fiscal 2000 defaults under the non-recourse loan program came to 1.034 million tons or roughly 11.4% of domestic sugar output. (Under the program a borrower's anticipated crop is treated as collateral, giving him the option of repaying the loan via forfeited sugar when the market price falls below the loan rate.) The forfeitures--the first under the U.S. sugar program since 1994--translate into an overall cost of about $322 million to the taxpayer and are certain to keep the loan program in the political spotlight. The support program is opposed by various members of Congress but, so far, has survived several attempts to have it set aside. A spokesman for Congressman Dan Miller of Florida recently stated the issue would come under renewed scrutiny as part of the hearings on the Freedom to Farm Act in 2001.
Under a House-Senate ruling adopted in early October, all federal loans to sugar producers in the United States will be non-recourse. (Price-support loan rates, set at 18.00 cents per pound for raw cane sugar and 22.90 cents for refined beet sugar since 1995, have been left unchanged for fiscal 2001.) Some market observers believe that it will not be until fiscal 2003 at the earliest that changes (if any) are made in the non-recourse program.
On October 31 U.S. Secretary of Agriculture Dan Glickman announced a $300 million subsidy program designed to encourage bio-fuel production in the United States. (Bio-fuels include ethanol derived from corn and sugar.) The program is aimed specifically at small-scale producers and is limited to $7.5 million for any producer of "environmentally friendly fuels." Signup is set for December, with half of the $300 million to be allocated for fiscal 2001 and the other half for fiscal 2002. We view the loans essentially as a pilot program and do not expect sugar-related ethanol production to have any statistically significant relevance for the U.S. sugar supply/use balance for the foreseeable future.
Pivotal Regional Sugar Markets
In keeping with the practice adopted in our previous long-range sugar market surveys, we are highlighting important trade and policy developments in several selected regional and national sugar markets. The importance of these markets, both in terms of production and trade, gives them the greatest potential to influence #11 sugar futures prices over the next several months.
European Union
The 15-member European Union is forecast to produce about 17.6 million tonnes of sugar in 2000/01 (October/September), down from the previous season's record 19.5 million tonnes but roughly 600,000 tonnes above the forecast shown in our July Long-Term Sugar Outlook report. The improved production prospects relative to July reflect favorable growing conditions, including beneficial rainfall in mid-summer that boosted average beet root weight, particularly in the northwestern areas of the European Union, and near-optimal periods of sunshine in August and September, which raised beet sugar yields.
A major reason for the anticipated sugar production decline relative to 1999/2000 output is that European farmers, anticipating a mandated quota production cutback (discussed below), elected to reduce the area planted to beets. According to the October U.S. agricultural attache report, total E.U. beet acreage for 2000/01 fell 7% from the 1999/2000 level. The average E.U. yield (tonnes of beet sugar per hectare) in 2000/01 is forecast at 9.43, down from the 1999/2000 level of 9.78, with the range running from 4.78 for Finland to 12.04 for France. Sugar production for the leading individual origins, with 1999/2000 output in parentheses, is forecast as follows: France, 4.67 million tonnes (5.30 million); Germany, 4.19 million tonnes (4.76 million); Italy, 1.70 million (1.85 million), and United Kingdom 1.52 million (1.66 million).
Under WTO guidelines, the European Union was given a five-year grace period to comply fully with the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). During this period the Uruguay Round ceiling on subsidized exports and the related export refunds included sufficient leeway to allow the region's producers to adhere to earlier production quotas. With the five-year transition period drawing to an end, the E.U.'s Sugar Management Committee was forced to take action to ensure continued compliance with GATT trade rules. On September 13 it voted to reduce the 2000/01 production quota by 498,800 tonnes. Roughly 20,523 tonnes of the total cut fall on isoglucose and insulin, leaving a reduction of 478,277 tonnes applied to the "A" and "B" sugar quotas.
To make good the E.U.'s export subsidy expenditures for quota sugar exports to destinations outside the European Union, the E.U. has imposed various producer levies. The "A" and "B" sugar quotas are subject to a basic levy of 2% of the intervention price, with an additional levy of up to 37.5% on "B" sugar output. Supplemental levies may be introduced if existing levies fail to eliminate sugar surpluses. Sugar produced above the "A" plus "B" levels is identified as "C" sugar and must either be sold on the world market without subsidy or carried over into the following marketing year. Although the quota reduction cannot be automatically equated with an overall (i.e., "A" plus "B" plus "C") reduction in sugar output, it does make European producers more vulnerable to the vicissitudes of the world market by enlarging the relative portion of "C" output. Roughly 1.6 million tonnes, white value, of "C" sugar were carried over into 2000/01 from the previous season and, according to the European Commission, 1.7 million tonnes will be carried over from the current marketing year into 2001/02. The final size of the carryover will depend, in large part, on international sugar prices as well as on other considerations, such as the Euro/U.S. Dollar differential.
The E.U.'s 2000/01 sugar exports are forecast at 5.2 million tonnes versus the 1999/2000 level of 6.8 million. The 2000/01 export campaign opened on August 2. As of November 8, cumulative seasonal exports were reported at 0.97 million tonnes versus the year-ago level of 1.33 million.
The E.U.'s sugar regime is now about 32 years old. During this period the regime has seen relatively little reform because, in contrast to various other agricultural commodities that are generally financed through E.U. budgetary outlays, the sugar regime is based mostly on producer levies. With sugar accounting for only a small fraction of overall household expenses, the sugar regime has largely escaped criticism on the part of the general public, and calls for reform have come mostly from specialized groups, notably the food processing and soft drink sectors that absorb an estimated 80% of total E.U. sugar consumption. With the E.U.'s existing sugar regime due to expire June 30, 2001, however, the E.U.'s political establishment can no longer postpone the reform issue, and various structural changes are under review. As might be expected, opposition to reform is strongest in the major origins such as France and Germany, as well as in high-cost producer countries such as Finland. The political issues, of course, ultimately focus on money, with the cost of farmer compensation likely to be decisive in defining the minimum level of reform that individual E.U. member governments are willing to endorse. The political "clout" of farm interests is also an inhibiting factor for several E.U. member governments. In Belgium, for instance, sugar-related income is viewed as a crucial element in the overall economic health of the farming community, and the government has expressed concern that any major overhaul of the E.U. sugar regime could trigger the financial collapse of part of the country's farming sector.
In mid-September the E.U. farm commissioner unveiled various reform proposals that, he said, would address a number of immediate issues pending more far-reaching or fundamental reform in 2002/03. The proposals included: (1) a permanent annual 115,000-tonne reduction of the E.U.'s overall production quota (this is viewed as half of the structural production surplus above the GATT ceiling); (2) termination of sugar storage cost reimbursements, which would tend to reduce overproduction of non-quota sugar and which, according to some sources, would trim about 300 million euros from the E.U.'s agricultural budget, and (3) the abolition of minimum stocks requirements. It had originally also been proposed that financing of sugar use refunds to the chemical industry be excluded from the E.U. budget, but in early September the European Commission decided to retain this feature, at least until June 30 of next year. The various reform proposals will now be examined by individual E.U. governments but have already encountered substantial hostility, with the French and Belgian agriculture ministers labeling them as "unacceptable" and calling for the extension of the existing system.
Russia And Ukraine
Russian sugar output in 2000/01 (October/September) is forecast at 1.5 million tonnes, essentially unchanged from the previous season's level but roughly 200,000 tonnes above the earlier three-year production trough during which average annual sugar output was only 1.3 million tonnes. Seen in an historical context, Russian production remains well below its potential. The 2000/01 forecast, for example, if borne out, is roughly 1.2 million tonnes short of the 1993/94 production level. Beet production and processing, like the entire farm economy, are burdened by numerous financial, managerial and political problems, and major economic reforms at the national and regional levels are a prerequisite if the sugar sector is to see a significant and sustainable turnaround.
An active beet replanting effort was able to overcome earlier beet losses, enabling farmers to boost 1999/2000 beet output by roughly 4% versus the previous year's figure. Although last year's total beet acreage remained unchanged vis-a-vis the 1998/99 level, the area was expanded by an estimated 10% in the current season. Generally, however, the area harvested tends to fall well short of the planted area, with large crop losses reflecting adverse weather conditions and inefficient harvesting caused by a lack of mechanization, fuel shortages, etc. In mid-October the Union of Russian Sugar Producers, which has identified the "revival" of the beet sector as its "major task," painted a rather negative picture, reducing its 2000/01 beet production forecast to 13.3 million tonnes versus an earlier forecast of 14.0 million. In contrast to the U.S. agricultural attache, whose October report showed a 10% beet area increase from the 1999/2000 level, the Union stated that beet plantings had actually decreased by that amount; a Union spokesman also expressed concern that, as a result of extensive harvesting delays, a large part of the beet crop would be lost. This seemed to be confirmed by an official with the Federal Weather Center, who stated that, as of mid-October, only 67% of the planted beet area had been harvested, roughly 23% below the year-ago level. The situation appeared to improve dramatically during the second half of the month: No significant frost occurrences were reported and, by end-October, the harvest was trailing the year-ago pace by only about 2%.
Sugar self-sufficiency has been proclaimed a national goal by Russia's government, and some government planners believe that the domestic market will be able to meet half of the nation's sugar requirements by 2002; a longer-term plan foresees production at the 4-million-tonne level, white basis, by 2005. The government has proceeded on the assumption that protection and expansion of the domestic sugar sector required a cutback in the import level and announced in July that import restrictions would be introduced. After some delay, a commission was formed October 12 to draft the rules for, and oversee, the allocation of a new raw sugar import tariff quota system. Under the government's import quota plan, adopted in part at the behest of the Union of Russian Sugar Producers, the first auction of import rights is to be held at Moscow's Eurasian Commodity Exchange on November 27. The quota, which has been set at 3.65 million tonnes of raws, applies to 2001 and is to go into force December 16. The government believes that the entire quota allocation will be sold at the first auction but, should demand be weaker than expected, a second auction is to be scheduled before the end of the year.
The total import quota of 3.65 million tonnes is to consist of 146 25,000-tonne lots, with participation at the auction open to all domestic holders of foreign trade permits. The quota will be subdivided on a quarterly basis, with the import levels set as follows: December 16, 2000, through March 2001, 1.15 million tonnes; April-June, 1.5 million tonnes; July-September, 600,000 tonnes, and October-December, 400,000 tonnes. Imports within these quota limits will be subject to a 5% duty, while imports above the quota ceiling will be subject to a 30% duty. (According to an ISO economist, this compares with an average weighted world raw sugar import duty of 70%.) A government representative has indicated that, depending on the country's changing import requirements, the government was willing to consider a later quota enlargement.
Predictably, the planned import quota system has been surrounded by considerable controversy. Although some potential auction participants and other market observers were pleasantly surprised at the apparent openness of the auction, critics charged that the quota was set too low and would fail to meet the country's sugar needs. Some importers also objected to the quota's quarterly system on the grounds that this was too rigid and would prevent trading firms from adjusting their strategies to rapidly changing market conditions. Some observers also rejected the government's contention that import quotas would serve to boost domestic sugar production.
It is impossible at this point to state with certainty what final impact quotas will have on overall Russian import activity. High domestic prices have kept the prevailing punitive seasonal import duties of 40% for raws and 45% for whites from acting as a deterrent to imports (there were recent reports that up to about 150,000 tonnes of raws had been unloaded and that refined sugar imports were rising). It is likely that, depending on domestic/world sugar price differentials, imports in 2000/01 will be 0.5-0.8 million tonnes higher than the 3.8 million tonne level projected. We anticipate that 2000/01 import activity will pick up immediately following the November 27 auction. Monthly import levels for the last two seasons are shown in Figure 6, and we expect that the new-season import pattern will be similar and will be potentially price-supportive for #11 futures over the next 4-5 months.
Figure 6
Russia Sugar Imports
Source--F.O. Licht
Ukraine's sugar output in 2000/01 is forecast at a dismal 1.65 million tonnes, down from the 1999/2000 level of 1.72 million and an astonishing 60% below the 5.37 million tonnes produced in 1990/91. Russia's major source of sugar during the Czarist and Soviet periods, Ukraine has seen its sugar market contract to the point where the country is now a net importer of sugar. As is the case in neighboring Russia, the sugar sector remains hampered by the existence of numerous restrictive Soviet-era labor laws, inefficient managerial practices, low economic inputs, fuel shortages (which delayed this season's beet harvest) and antiquated processing machinery.
Beet farming in Ukraine has generally ceased to be profitable, explaining the long-term contraction in land planted to beets. The beet area was reported at 1 million hectares in 1998; this year it was down to 880,000 hectares, with the area actually harvested estimated at 800,000 hectares. In early November an official in the Ministry of Agriculture stated that in 2001 the area planted to beets would be expanded to 1.2 million hectares. According to the State Statistics Committee, beet farmers' average return per dollar invested has fallen from 31.2 cents in 1995 to a loss of 12 cents in 1998. At the beet processing level, average production costs, reported at $270 per tonne in 1999/2000, are expected to be up roughly 45% in the current season, and only 90 out of almost 200 processing factories are reportedly fully functional this year. This somber picture suggests Ukraine will remain a net importer for the time being. Sugar imports are forecast at about 400,000 tonnes in 2000/01, while exports are down to a statistically insignificant 20,000 tonnes. We believe that imports could approach the 600,000-tonne level in 2001/02.
Cuba
After falling to an historic low of 3.2 million tonnes in 1997/98, Cuba's sugar production rebounded in the following two seasons, reaching 4.1 million tonnes in 1999/2000 (November/October). The country's sugar establishment seemed confident that the long-range production recovery would be maintained. As recently as September, Sugar Ministry officials insisted that, although output would fall short of the initial target of 4.3-4.5 million tonnes, production would hold above the 1999/2000 season's outturn of 4.1 million tonnes.
It now seems clear that the government's optimism will not be borne out. We are forecasting 2000/01 sugar output at 3.9 million tonnes compared to the 4.0-million-tonne forecast shown in our July Long-Term Sugar Outlook report and about 5% below the year-ago level. This reassessment takes into account a roughly eight-month drought, which caused irreversible cane damage in various parts of the island. Only about 15% of the island's cane area is irrigated. Drought conditions ended in September, but this was too late to brighten production prospects for the new season. The seriousness of the situation was recognized in a recent government radio report, which noted that Holguin, the leading sugar-producing province, had lost an estimated 15%-20% of its cane relative to year-ago levels. To cushion the looming production shortfall, the government is extending the maturation period by postponing the start of the cane harvest to mid-December.
A large-scale, long-term national effort to revive the country's shrinking sugar economy was launched by Cuba's government in 1996. The object of the program is to restore seasonal sugar output to 6-7 million tonnes. To achieve this goal, the government initiated a major cane replanting effort and claimed that 1 million acres of land were planted to cane in 1997 (the average germination level, however, was only 70%). The following year saw the replanting of 850,000 acres, with the germination rate reported at 80%-85%. An additional 726,000 acres were replanted in 1999; the germination level was not announced but was reportedly an improvement over the previous year's figure. Government planners have said that this year's replanting drive is on target, with 800,000 acres replanted as of October 31. The target for 2000 was originally 800,000 acres, but the adverse impact of the drought has caused this to be raised to 900,000 acres.
An energy shortage is one of the many problems plaguing the Cuban economy and, in fact, is cited frequently by officials seeking to explain the sugar sector's long-term decline. During President Fidel Castro's state visit to Venezuela in October, the two countries concluded a trade agreement that, in the view of some critics, provides Cuba with various subsidies for its cash-starved economy. Under the agreement Venezuela will provide one-third of Cuba's petroleum requirements at below world market prices and will also extend low-cost long-term credits. It remains to be seen how this arrangement will be effectuated, but on the surface, at least, it looks as though it might ease Cuba's perennial cane transportation and processing problems.
Brazil
Brazil is forecast to produce 15.4 million tonnes of sugar in 2000/01 (May/April), down dramatically from 20.1 million tonnes in the previous season and the country's lowest sugar output since 1996/97. The sharp production decline reflects adverse weather conditions in the most important cane-growing areas and was a major explanation for this year's #11 sugar bull market. The new production forecast is almost 1 million tonnes greater than the one shown in our July Long-Term Sugar Outlook report and reflects the increased diversion of cane from potential alcohol use to sugar production.
The total area planted to cane is estimated at 4.70 million hectares and remained unchanged this year relative to 1999/2000. The harvested area, pegged at 4.65 million hectares, is also unchanged vis-a-vis the previous season. Total cane output for 2000/01 is projected at 260 million tonnes compared to 1999/2000 production of 305 million. Roughly 43% of this season's cane output will be processed into sugar, with the remaining 57% used for industrial alcohol production. The previous season's corresponding numbers were sugar, 47%, and alcohol, 53%.
Brazilian cane processors have the infrastructure--and the market--for two cane-derived products (sugar and industrial alcohol), giving them a degree of flexibility not enjoyed by their foreign competitors. The amount of cane diverted to the sugar sector depends not only on domestic and world sugar prices but also on sugar/alcohol price differentials. Alcohol prices can be influenced by government action, as was the case in August when the government authorized a cut (from 24% to 20%) in the proportion of anhydrous alcohol added to gasoline. According to some estimates, this could boost sugar availability by up to 1.3 million tonnes. Concerned about rising industrial alcohol prices, the government has also authorized alcohol stock sales via auction. Industrial alcohol production in 1999/2000 is estimated at 12-13 billion liters and is expected to fall to about 11.5 billion in 2000/01.
Brazil's cane production is centered in two geographically distinct areas: the Center-South, which has an April to March crop year, and the North-Northeast, whose crop year runs September to August. Protracted drought conditions in the Center-South caused considerable crop losses, and 2000/01 cane output, forecast at about 236 million tonnes earlier this year, is now projected at 212 million, a roughly 21% drop from the 1999/2000 level. (The region's cane areas, particularly in the states of Parana and Mato Grosso do Sul, suffered additional frost-related damage in July.) Weather conditions in the North-Northeast have been generally favorable, and that region's 2000/01 cane output is foreseen at about 48 million tonnes, up from the year-ago level of 38 million.
Cane and sugar production within the Center-South region is highly concentrated, with Sao Paulo state accounting for 74% of the region's cane crop (64% of total Brazilian cane) and 78% of the region's sugar (68% of Brazil's sugar) in 1999/2000. Parana state comes next, accounting for 9% of the region's cane and 8% of the sugar. In 1999/2000 the five leading states accounted for roughly 95% of the region's cane production (82% of Brazilian production) and 96% of the region's sugar output (83% of total Brazilian sugar output). Given the potentially decisive price-making impact the region's weather can have on the #11 sugar market, local weather conditions can be expected to be a closely watched market factor over the next several months.
Although October precipitation in the Center-South was less than optimal, long-range weather forecasts indicate a return to normal conditions and, on this assumption, it appears that cane production will recover markedly in 2001/02. Brazil's agriculture minister stated in mid-October that new-season production would be "much, much stronger" than the 2000/01 level, and local trade sources are projecting that cane output will be up by roughly 15%. This optimism is based not only on the more favorable weather outlook but also on farmers' increased economic inputs, given this year's more attractive prices for sugar and for cane-derived industrial alcohol. (In late October the Brazilian Fertilizer Industry Association projected that fertilizer sales in 2000 would be up 16% from the 1999 level and attributed a major part of the growth to the cane sector.) Moreover, the increased profitability of cane-based products is encouraging farmers to expand cane plantings - in Sao Paulo, for instance, some properties formerly used for orange production are now being rented to cane millers. The National Commission of Agriculture has stated that Brazil's cane production of roughly 260 million tonnes in 2000/01 could expand to 300 million in 2001/02 and to 330 million in 2002/03, which clearly carried potentially negative long-term price implications for #11 futures.
Brazil's efforts to have its partners in the Mercosur trading bloc waive import duties on Brazilian sugar shipments have made little headway, with these countries, particularly Argentina, insisting on transition periods of as much as 10 years. Argentine officials have stated that no progress could be expected until their country had solved some of its outstanding economic problems. There have been indications, however, that Argentina might be willing to consider ending sugar import duties in exchange for access to Brazilian alcohol technology. The Brazilians seem favorably disposed and, if progress is made in upcoming talks, will offer an additional inducement in the form of market access to Argentine gasoline and naphtha shipments.
India
India's 2000/01 (October/September) sugar production is forecast at 17.8 million tonnes. If borne out, this would be about 11% below the previous season's record outturn but would still be a very strong performance by historical standards and would signal that the country's long-range expansionary production trend remains in place. Improved late-season cane availability boosted 1999/2000 sugar output, which has been revised to 20.1 million tonnes, up from an 18.9-million-tonne forecast shown in our Long-Term Sugar Outlook report of July 26.
The new season represents the downleg in India's cyclical cane production cycle, and the 2000/01 sugar production forecast might have been lower but for some offsetting considerations. These include a drop in the diversion of cane to competing sweeteners, such as gur (due to falling gur prices) and khandsari. Production of khandsari is forecast at 683,000 tonnes (down from the 1999/2000 level of 745,000 tonnes) and would probably have been even lower but for the earlier closure of a number of cost-inefficient production facilities. Several cane-growing areas (e.g., Bihar and Uttar Pradesh) experienced substantial production problems due to flood problems, but overall cane losses were minimized, given exceptionally strong production in other areas. Production has also been helped by an estimated increase of around 200,000 hectares in the overall cane area. (The improved production prospects are reflected in the new 2000/01 forecast, which is about 440,000 tonnes more than the forecast shown in our previous Long-Term Sugar Outlook report.) New-season cane crushing began in October, and the early sugar yield was reported at slightly above 9% versus the usual 8.5%-9.0% level.
Despite prodding by the government, the cane millers' payment arrears to farmers have not been resolved and are variously estimated at up to $330 million. Payment arrears have seemingly become a permanent feature of India's sugar landscape, and every year there is speculation as to how they might affect sugar production. According to a September U.S. agricultural attache report, the arrears were not expected to have an impact on 2000/01 sugar output, but they could persuade farmers to reduce cane plantings in 2001/02.
In early October the Indian cabinet raised the statutory minimum cane price for 2000/01 to 595 rupees per tonne versus the 1999/2000 minimum price of 561 rupees. Farmers were offered an additional incentive in the form of a 7-rupee-per-tonne supplement for every 0.1% sugar yield increase above the 8.5% level. The actual price received by farmers differs for various parts of the country because state governments have authority to increase the price mandated by the federal authorities. As of late October several state governments had still not specified their pricing policy for the season, raising concern that this could delay the start of the cane crush in some areas of the country.
Although India's government has loosened some of its controls over the country's sugar sector, its continued role is fairly comprehensive and, broadly speaking, India's sugar economy remains one of the most regulated in the world. For instance, the government continues to specify the amount of sugar that can be released to the domestic market and also establishes a minimum price on 30% of the sugar (levy sugar) sold to domestic consumers. In mid-September the government set the free-market ceiling at 1.05 million tonnes in October and at 0.95 million tonnes each in November and December. The monthly levy sugar sales quota for the quarter was set at 415,000 tonnes. In early October the Reserve Bank of India declared that the country's commercial banks would henceforth be able to set their own free-sale lending rates but retained control over levy sugar lending rates.
India's sugar stocks were pegged at 7.4 million tonnes in 1998/99 and, given the following season's huge production increase, are believed to have risen to a record 10.7 million tonnes in 1999/2000. The burdensome stocks level prompted the government to issue an import ban early in the year, which, in turn, has led to a rise in domestic sugar prices. Domestic price levels are expected to moderate once the 2000/01 cane crush moves into high gear, but this will do little to lower inventories, which are forecast at a near-record 10.1 million tonnes in 2000/01.
Increasing warehousing problems have caused cane millers to seek government relief, and the government is reportedly considering the establishment of a 2.5-million-tonne buffer stock. The government has also moved to ease export rules and has stated that the export ceiling, set in July at 1 million tonnes for fiscal 2000/01 (April/March), may be raised. (To encourage exports, the Agriculture and Processed Food Products Development Authority recently announced that private trade houses and cane millers would not need to provide bank guarantees and would be able to operate through third parties.) India's exporters have identified Russia and China as potential markets and, given the shrinking world whites/raws premium (as well as Indian whites quality problems in some markets), believe their emphasis will increasingly be on raw sugar exports. The U.S. agricultural attache has projected India's sugar exports in 2000/01 at 0.5 million tonnes. The country's emergence as a net exporter for the first time since 1996/97 is a potentially bearish factor for the #11 sugar market.
In late October the Consumer Affairs Ministry stated that the government was prepared to authorize sugar futures trading in India. The National Federation of Cooperative Sugar Factories, which accounts for approximately 60% of national sugar output, supports domestic futures trading. Allowing futures trading would be in harmony with the government's plan to reduce regulatory control over the sugar market and has been justified "to ensure better price discovery and stability in domestic prices."
Thailand
The September U.S. agricultural attache report projected Thai 2000/01 sugar production at 5.6 million tonnes, roughly 100,000 tonnes less than the revised 1999/2000 output and well below the 6.2-million-tonne production peak achieved in 1995/96. (The USDA uses a December/November sugar marketing year. Thailand's seasonal cane crush generally begins in November.) While the country's sugar sector continues to recover from the El Nino-related production crash of 1997/98 and from the economic crisis of 1997, the new-season outlook is clearly not as bright as some had hoped and indicates that various hurdles have yet to be overcome.
The attache report has projected 2000/01 cane production at 52.0 million tonnes, down from the year-ago level of 53.1 million. The area planted to cane, as well as the area harvested, have shown little change over the last several seasons, and no changes are foreseen for 2000/01. Rather, the anticipated production decline reflects adverse weather conditions as well as the impact of crop disease and insect pests. Farmers in the northeast region, where roughly 40% of the country's cane was grown in 1999/2000, have had to contend with heavy rainfall and related flood problems, while other growing areas have also been negatively affected by excessive precipitation. White leaf disease and maggot infestations have been reported in various areas. Government financial aid to combat these problems, while promised, has not been released to date. The average cane yield for 2000/01 is estimated at 56.52 tonnes per hectare versus the 1999/2000 level of 57.75.
Low productivity has long been a problem for Thailand's sugar sector and, to enhance the country's competitiveness, industry consultants have urged the government to take a number of steps. Some of these, summarized in a recent F.O. Licht report, include:
--Promote new and higher-yielding cane varieties;
--Provide greater access to subsidized fertilizers and pesticides;
--Improve agricultural extension services focusing on water distribution and irrigation;
--Encourage greater mechanization of the farming and processing sectors;
--Encourage the closing of the country's least efficient cane-crushing mills.
To help the sugar sector, the government has authorized an increase in the wholesale refined sugar price from 1,100 baht per 100-kilogram bags to 1,177 baht. More recently, a Commerce Ministry official stated the government was considering authorizing manufacturers and exporters of food products to buy up to 100,000 tonnes of domestic refined sugar at fob export prices, which are roughly $4 per tonne below the average domestic sugar price. Additional financial relief seems also to be on the way via the banking sector, which, because of rising world sugar prices, is extending loans "enthusiastically" following three years of credit restraints. The U.S. agricultural attache report indicated that, "hopefully," the Bank of Agriculture and Agricultural Cooperatives would release an overall credit line of 10 billion baht to help farmers during the 2000/01 season.
The amount of raw sugar remelted into whites was reported at 264,181 tonnes in 1998/1999 but leapt to 656,497 tonnes in 1999/2000 as a result of depressed international raw sugar prices. The cane millers' large-scale indebtedness put them under additional pressure to convert more sugar into the higher-value refined product. Also, raw sugar stocks, if stored too long, can show quality deterioration, providing millers with another incentive to refine more sugar. Thai trade sources have indicated that, because of a likely profitability drop in the processing of raw into refined sugar, heightened competition from other refined sugar exporters (particularly India) and an anticipated pickup in raw export demand in 2001, the remelting of raw into refined sugar could be down by as much as half in 2000/01 versus the 1999/2000 level. If realized, this scenario will strengthen Thailand's export profile in the raw sugar market.
Thailand's sugar exports in 2000/01 are forecast at 3.8 million tonnes (with raws accounting for about 63% of the total). Although roughly 7% below the year-ago level, that would still be one of the country's strongest performance levels in more than 10 years. Thai trade sources appear to be optimistic that they will be able to profit from China's presumed import needs, while Australian production problems offer additional export opportunities. Although India is viewed as a regional competitor, some Indian shipments have encountered quality problems, providing additional leeway for the Thai sugar trade. With the March/May #11 differential recently running at more than 60 points, Thai exporters were said to be aggressively looking to lock in business for March shipment.
China
China's 2000/01 (October/September) sugar production is forecast at 8.1 million tonnes, roughly 0.9 million tonnes above the 1999/2000 level but 0.9 million tonnes short of the production record set in 1998/99. The seemingly huge increase vis-a-vis 1999/2000 is somewhat misleading because severe frost-induced cane damage in December 1999 caused China's 1999/2000 sugar output to crash to 7.2 million tonnes, the country's lowest production level since 1995/96. Roughly 6.7 million tonnes, or 83% of total sugar production, is expected to be derived from cane, with the remainder coming from the country's beet sector.
Bloated national sugar inventories and inefficient sugar processing factories have for several years represented a financial drain for China's central government and various provincial authorities, and a cutback in sugar production has become official government policy. One aspect of this policy has been an officially decreed reduction in the acreage planted to beets and cane, which, while relatively successful in beet areas (where financial losses had already forced processors to pay farmers in IOUs rather than cash), encountered considerable local resistance in southern cane-growing areas. Only this year was the central government able to prevail over the support programs of provincial authorities, with the result that cane plantings have been cut by about 14%.
Guangxi is China's leading cane-growing province, accounting for roughly 42% of the country's total cane crop. This year large areas of the province experienced protracted drought conditions, and newswire reports as well as a Beijing-based website have reported large-scale cane losses. We have not been able to determine whether the loss information is based on planned area reductions only or whether it incorporates drought-related damage. In any event, drought-induced losses may turn out to be considerable, and it could be that the 2000/01 production forecast will be scaled back when more information becomes available.
The production crash of 1999/2000 has triggered a surge in domestic sugar prices. Alarmed that this could cause the government's sugar policy to unravel (by encouraging farmers and processors to boost output), the State Council announced in July that it would authorize a series of sugar auctions to both lower domestic prices and reduce burdensome government sugar stocks. Recent reports indicated that despite ongoing sales from state inventories, domestic prices were still very high. Sugar inventories, which had been rising as a consequence of the government's earlier support price program, were reported at about 2.5 million tonnes in 1998/99 and have now shrunk to roughly 1.1 million tonnes. They are forecast to fall to the 0.78-million-tonne level by the end of 2000/01.
China's State Economic and Trade Commission recently estimated that the country's sugar refineries had lost roughly $1.2 billion over the last four years, making the sector one of the poorest performers in the entire light industry spectrum. These huge financial losses were a major factor in forcing the government to restructure the sugar sector and, as part of this program, 149 sugar mills were ordered closed in 1999, with a further 152 to be shut this year. The closure of the major money-losing factories appears to be bearing fruit. In August the official Xinhua news agency made a surprising announcement: The sugar sector had reported a profit of $3.5 million for the first seven months of 2000. These profits, however, may be misleading in that they have probably been inflated by the rapid rise in domestic sugar prices. In any event, the government seems determined to continue its restructuring program, which is aimed at limiting annual sugar production to 7.8 million tonnes, and further factory closures are planned to take place next year.
China's supply/use sugar profile is heavily affected by the large-scale use of sugar substitutes, notably saccharine. To put this into perspective, the recent U.S. agricultural attache report noted that the estimated 13,000 tonnes of saccharine used in 1998 displaced 3-5 million tonnes of sugar. According to government statements, 9 of 14 saccharine production plants have been closed and production, pegged at 29,000 tonnes in 1998, was reduced to 20,000 in 1999 and will be lowered further to 16,000-18,000 in 2000. The government is attempting to channel most of the saccharine to the export sector and claims that domestic use, which stood at 8,000 tonnes in 1999, was cut to a mere 1,280 tonnes during the first half of this year. However, this is disputed by some private industry sources, who state that in some parts of the country the use of sugar substitutes has grown. Once again, the problem is one of the government's own making because it was government planners who originally encouraged saccharine production and who are now having to deal with its adverse implications for increased sugar consumption.
Preliminary trade data show that China imported about 488,000 tonnes of raw sugar during the first nine months of 2000, about 76% above the year-ago level. The government's long-range plan to keep the annual production level of 7.8 million tonnes, ongoing sales of state-controlled sugar inventories, the government's ability to control domestic saccharine use and world/domestic sugar price differentials are some of the major factors that will determine future sugar import levels. Another major determinant could be the country's pending membership in the WTO, with some sources indicating that WTO membership could boost China's sugar imports by up to 2 million tonnes per year. China's import requirements will be monitored closely by world sugar traders over the next several months, and we regard the import level as one of the #11 sugar market's major long-term price determinants. Preliminary indications are that China's net imports, at roughly 350,000 tonnes in 1999/2000, could rise to about 745,000 tonnes in 2000/01, and we view this as constructive for #11 futures.
Fund Activity In The #11 Sugar Futures Market
The Commodity Futures Trading Commission's Commitments of Traders reports show that, beginning in early April to mid-September, the funds maintained a net long exposure, which peaked at 58,839 lots in late May. Their net exposure then declined and shifted briefly to the minus column in late September, reversing to the plus side in October. The funds' net long exposure was reported at 26,484 lots as of October 17 but fell to 8,987 as of October 31. (These data do not include non-reportable positions.) The sharp increase in the funds' net long position in early and mid-October was a significant factor supporting the #11 sugar futures price advance during the first half of October. We do not know what these market participants will do next, but it can be argued that they have substantial room to expand their net long position. An additional move to the plus side by the funds would make it relatively easier for #11 sugar futures to post additional gains.
The Commitments of Traders reports were formerly issued twice a month but are now released on a weekly basis. The increased frequency of these reports will tend to lessen their potential "shock" impact on the market.
Summary And Conclusion
In our previous Long-Term Sugar Outlook report, released July 26, we projected that nearby futures would advance to the 12.00- to 13.00-cent level within about three months. Although futures stopped short of that price target, our moderately constructive posture was borne out, with the March contract making a high of 11.40 cents on October 16. Prices then began to reverse, extending their southward move in early November. The move was accompanied by a shift in market sentiment to a more bearish outlook.
The market's earlier strength was based on expectations that global sugar stocks, which had risen by about 5 million tonnes in 1998/99 and by a similar amount in 1999/2000, would decline significantly in 2000/01 due to anticipated production setbacks in several major origins. Although those setbacks are still expected, they have now been at least partly discounted. The market has thus lost, at least for the time being, its major bullish driving force. Sentiment has also been dented by a shift in focus to several near- to intermediate-term fundamental factors, which on balance are potentially negative. Finally, prices have recently been undermined by traders taking profits on long positions and by a sharp retreat by the funds from their earlier net long exposure.
We are projecting global 2000/01 stocks at 32.8 million tonnes. If borne out, this would represent a decline of roughly 3 million tonnes from the year-earlier level. This shift in the seasonal supply/use balance is potentially price-constructive but, as noted above, is now substantially in the market. Our stocks forecast compares with a forecast of 29.5 million tonnes in our July report. In absolute terms, the new number is less bullish, although, allowing for 1999/2000 revisions, the two forecasts show a similar decline relative to the year-ago level.
Two well-known statistical sources recently issued revised 2000/01 sugar data, reflecting a shift from their previous bullish market posture. In late October the London-based trade firm E.D. & F. Man projected a global supply/use surplus of about 1 million tonnes, reversing its September forecast of a deficit of 1.2 million tonnes. The International Sugar Organization released its first forecast of the global supply/use balance in September, projecting a stocks drawdown of 3.1 million tonnes. In early November, however, the anticipated deficit was lowered to 2.3 million tonnes.
Anticipation of a sharp reduction in Brazilian sugar production had been the market's most potent bullish factor. Brazil's 2000/01 sugar output, which was projected at 14.5 million tonnes in our July report, is now foreseen at 15.4 million. More to the point, however, is that with Brazil's sugar year opening in May, attention has now shifted to the 2001/02 season, which (assuming normal precipitation patterns and higher-priced economic inputs in the major cane-growing areas) could see sugar output rebound to the long-term trend. Australia is another leading producer whose 2000/01 sugar availability was sharply reduced due to serious weather-induced crop losses. Australian sugar officials believe the country will be able to get an early start on the 2001/02 season and seem optimistic that this year's shortfall will be viewed as a one-time aberration.
The buildup of burdensome stocks in India has emerged as a bearish factor because India is now likely to become a net sugar exporter for the first time since 1996/97. A recent U.S. agricultural attache report has projected the country's exports at about 500,000 tonnes (no exports were forecast in our July report), with Indian government sources indicating the final level could be more than 1 million tonnes.
In our July report we showed China's likely 2000/01 imports at 1.4 million tonnes, a potentially bullish factor. Now, however, the country's imports are seen at no more than about 1 million. Moreover, an ongoing series of auctions of government-controlled stocks could reduce potential imports further and will, in any event, postpone the time period in which the imports are needed. This is another example of a potentially price-supportive factor that has weakened relative to earlier expectations.
Russia represents another example of a potentially bullish factor that may have lost some of its expected impact. Earlier this year the USDA had projected Russia's 2000/01 imports at 4.2 million tonnes, but due in part to the planned introduction of an import tariff quota system, the latest agricultural attache report has scaled this back to about 3.8 million. Some industry sources have indicated the final import level could be even lower. (We do not agree and expect to see imports at around the 4.6-million-tonne level.) Also, because the government auction of import allocations will not take place until November 27, importer plans, in a sense, were put on hold or at least postponed. If the country's imports come in at the low end of the range of expectations or if they are delayed again, their potentially bullish impact will have been weakened.
Market sentiment has clearly shifted and, we believe, the bears could dominate the sugar pit for the near- to intermediate-term period. However, we expect additional weakness to be limited and look for nearby futures to hold above the 7.80-cent area. Longer term, we look for prices to rally, though not as high as was the case in July. In the absence of renewed production problems, a long-range rally would be largely dependent on the scope of Russian and Chinese buying, and we would expect nearest futures to possibly reach the 11.00- to 12.00-cent level.
November 10, 2000 Arthur Stevenson Prudential Securities, Inc. One New York Plaza, New York, New York 212-778-1000