A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
314-955-3050(March 23, 2000) SUGAR: Although Brazil produces a massive amount of sugar cane each year, only about two-thirds of the product was processed into sugar during the 1988-99 crop year. The balance of the cane is used as a feed stock for Brazil's fuel-alcohol program. The percentage used in producing ethyl alcohol has actually declined considerably from the early 1990's, when approximately 60% of the cane crop was used to produce alcohol.
Brazil reduced its commitment to its fuel alcohol program during the 1990's, due largely to low energy prices and government cost cutting. In addition, the federal government held several auctions of surplus alcohol stocks in recent months. However, the devaluation of the Brazilian real in 1998, along with soaring petroleum prices, have changed circumstances considerably in the past 18 months. Fuel alcohol demand could soar during the 2000-2001 crop year, just when farmers reportedly are cutting back on plantings. One Brazilian analyst recently suggested cane plantations in the center-south region would decline by 400,000 hectares (almost one million acres) from the 1998-1999 total. Consequently, sugar exports from that region could decline by 45% in the 2000-2001 crop year. Such a decline would support sugar futures this fall and winter.
We now believe the prospect of higher Russian sugar tariffs in the short term, along with likely quotas on imports in 2001, will cause exporters to Russia to delay shipments to Russia. That is, they have a 15-day window in late December in which they will be able to move the sugar ashore with only a 5% charge. We suspect large amounts of sugar will be sitting in bonded warehouses on Black Sea docks on December 15 (when tariffs decline). That is exactly what they did in late 1999. Given this conclusion, we suspect the short-term rally has largely run its course, and expect prices to slide during the second quarter. We are seeking selling opportunities.
Dan Vaught
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