PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
212-776-1000(March 13, 2000) SUGAR: World sugar futures posted modest gains last week. The market was supported by improved physical offtake, with some reports focusing especially on Russian activity. Russian traders were said to be stepping up their buying in order to beat an anticipated rise in import duties in April.
The market's improved tone has spilled over to the spread structure, which has firmed modestly. The recent trend in the May/October spread shows May moving from a slight premium late last year to a discount of about 80 points in February. By late last week, the discount had narrowed to about 50 points.
The recent trend in the whites/raws premium, basis May futures shows the relatively stronger offtake in the refined physical market has strengthened the London premium, which was trading near $58 per tonne late last week.
The European Union's export data illustrate the relatively strong demand for refined sugar. At its latest weekly tender, the European Union authorized the export of 55,500 tonnes of whites, more than double the 22,750 tonnes for the corresponding week a year ago. Cumulative seasonal export authorizations (as of March 8) were reported at 2.24 million tonnes, up from the year-ago level of 1.96 million.
Last week, the European Union Commission projected EU 1999/2000 sugar production at 17.99 million tonnes, white value, roughly 88,000 tonnes above its previous forecast. Coming this late in the season, we doubt the revision will have any price impact.
Recent television coverage has shown scenes of extremely serious flooding in several parts of southern Africa. The most adversely affected area is Mozambique, but this is not a significant sugar producer. The major regional sugar producer is South Africa, whose 1999/2000 output was projected at 2.65 million tonnes by the USDA in January, down from 2.81 million tonnes produced in 1998/99. Recent South African press reports indicated production in 2000/01 is expected to come in near the previous-season level, which was reported at 2.53 million tonnes.
A dire warning was sounded by the Indonesian press last week, which declared that unless the country's cane mills (numbering about 50) were granted relief from large-scale sugar imports, the domestic sugar sector could collapse within two years. Mill operators are urging the government to win the IMF's approval to set aside an earlier trade agreement and either impose a steep increase in sugar import duties or restrict the import volume. The press reports claimed some members of the government are sympathetic to the processors' position and believe that foreign sugar is being unfairly "dumped" in Indonesia.
India's finance minister last week sought parliamentary approval for a sharp increase in the import duty level to 60% from 40%. As in Indonesia, the domestic sugar sector has long been clamoring for protection, claiming large-scale imports were putting domestic processors out of business. Measures of this type, designed to stifle or restrict imports, obviously are potentially negative for #11 futures.
We maintain our long-term negative price view. Any near-term price rally is likely to be a prelude for another move southward. May futures have nearby chart resistance at the 5.50-cent-per-pound level.
Arthur Stevenson
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