PRUDENTIAL SECURITIES, INC.
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212-778-1000(March 27, 2000) SUGAR: World sugar futures have traded between roughly 5.0 and 5.5 cents per pound, basis May, since the beginning of March, following their previous four-month decline. The slightly firmer price action appeared to represent corrective action given the general absence of fresh, bullish fundamental news. That may have changed late last week with the release of new International Sugar Organization (ISO) data. The major daily advances (such as last Thursday) of the last couple of weeks occurred in conjunction with very heavy volume, pointing to substantial fund-related activity.
The ISO's latest market report has projected a global 1999/2000 supply/use surplus of 3.59 million tonnes, down from its previous expectation of a 4.76-million-tonne surplus. However, despite the downward revision, the current-season surplus comes on top of a 1998/99 surplus of 6.5 million tonnes. Moreover, the current-season forecast would mark the fifth consecutive sugar year in which stocks have expanded, producing a cumulative surplus of about 20 million tonnes. The ISO believes that at least two "substantial" seasonal deficits would be needed to clear the recent sugar stocks accumulation. Its report concluded that, despite the latest downward statistical revision, the world sugar situation remained "seriously over-supplied."
A Russian trade official stated last week that the country imported 900,000 tonnes of sugar during the first two months of the year, and projected the following monthly import levels: 600,000 tonnes in March; 900,000 tonnes in April; 1 million tonnes in May; and 500,000 tonnes in June. (The imposition of a seasonal tariff in June is expected to halt the regular import schedule for the season.) Some trade sources believe these numbers are unrealistically high, especially in view of the country's high domestic stocks level, while others view an average monthly import level near 500,000 tonnes as reasonable. We cannot confirm the January-February imports, but also cannot rule out a monthly import pace of about 500,000 tonnes. In any event, the Russian import factor, while difficult to quantify at this stage, probably has contributed to the recent price strength.
The European Union's Sugar Commission authorized the export of 42,500 tonnes of whites at last week's tender versus 15,400 tonnes in the corresponding week a year ago. Cumulative seasonal export authorizations have now reached 2.33 million tonnes, well above the year-ago level of 1.98 million.
Thailand's seasonal cane crush (as of March 20) was reported at 48.4 million tonnes versus 48.1 million a year ago. Interest in Thai raw sugar, especially from traders having to meet contractual commitments vis-a-vis China and Japan, has picked up recently. As of last Thursday, bids for Thai raws for March-May shipment were reported to be about 25 points over New York futures, up from about a 10-point premium the week before. Interest in Thai whites also was reportedly picking up, with traders citing Indonesia and Myanmar (Burma). We believe that the Thai situation was a price-supportive factor for futures last week.
Cuba's Sugar Ministry stated last week that the cane harvest had about one month to go, and reported average sugar yields at 12%, a 15-year high; milling capacity, however, was only 76% versus the target level of 80%. As it has so often in the past, the government called on Cuba's sugar labor force to make "greater sacrifices." The government clearly feels that unless an extra last-minute effort is made, the country will not reach the upper end of the official production target of 4.1-4.3 million tonnes.
We lean to the upside in the near term. While we still do not view the long-range fundamentals bullishly, #11 futures have inched higher, and we look for an advance to the 5.70- to 6.00-cent level. Near-term constructive considerations include: (1) the current interest in Thai sugar; (2) Russian buying activity; (3) the ISO's downward revision of the anticipated global 1999/2000 surplus; and (4) fund buying.
Arthur Stevenson
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