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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 3, 1997) SUGAR: World sugar futures set new life-of-contract high last week. Russian beet harvesting delays and Cuban production problems were supportive market factors. The March/October spread also firmed, widening to a roughly 43-point March premium.
Turmoil in Asian currency and equities markets spilled over to Wall Street last week, raising the question of what it might mean for various commodity markets. While the jury “remains out,” one obvious point that can be made is that the depreciation of various Asian currencies will make it more expensive for Asian traders to import commodities. This development could reduce the flow of sugar imports to the Far East, a potentially negative factor for #11 futures.
Australia exports roughly 600,000 tonnes of sugar annually to Malaysia and South Korea, two Asian countries that have been hurt by the recent economic slump. A spokesman for the Queensland Sugar Corporation noted that while sales to these markets could suffer over the long term, Australian exporters expected to develop new outlets in the Middle East and elsewhere in Asia.
There was talk last week that earlier reports that India may have bought up to 300,000 tonnes of sugar over the last two to three months were highly unrealistic, and that the country's actual purchases were probably no greater than 50,000 tonnes. Given its massive stocks (with some estimates as high as 6 million tonnes), India may simply not need the large imports that had been projected. Also, with the cane crush just beginning, domestic stocks will soon see a buildup, further undermining the argument for massive imports at this time. Indian government stocks apparently are insufficient to supply the so- called ration shops (stores selling food at government-controlled prices), but the cane milling industry seems willing to divert up to 500,000 tonnes to the government, The market's current thinking appears to be that large-scale imports will not take place until the latter part of the 1997/98 crop year.
Russia's beet harvest continues to run well behind last year's pace, although local sugar officials believe that if weather conditions improve soon (clearing the way for accelerated harvesting) it may still be possible for the final harvest to come in above the year-ago level. As of October 24, farmers had reportedly harvested 7.82 million tonnes of beets, roughly 40% less than at the same time a year ago. Rainfall has become less intense recently, and harvesting conditions are forecast to remain generally favorable until late November. According to a representative of Semsvekla, a state beet company, if the weather turns out to be as good as expected the overall seasonal beet delivery to processors could reach 15.33 million tonnes (up from 14.77 million in 1996), which could yield 1.5 million tonnes of refined sugar versus 1.4 million last year.
The European Union's weekly export authorizations continue to run strongly ahead of year-ago levels, reflecting the region's expanded sugar production. The October 29 authorization was for 141,000 tonnes of whites, up from 104,950 tonnes at the same time in 1996. The cumulative seasonal export authorization reached 1.15 million tonnes on October 29 versus the year-ago level of 811,600 tonnes.
Cuba's government surprised the sugar market last week by naming the country's chief of the general staff and first deputy defense minister as its new sugar minister. The appointment of a military figure to oversee Cuba's sugar production effort seems to reflect the grave crisis engulfing the country's sugar economy as well as the government's determination (or desperation) to try and boost production over the longer term.
The consensus of foreign sugar industry representatives who recently visited Cuba in conjunction with the 35th anniversary of the official exporting entity, Cubazucar, was that despite the government's efforts, Cuba would fail to improve on last year's output of roughly 4.25 million tonnes during the current season, and that output could dip below 4 million tonnes. (The earliest reasonably reliable 1997/98 production indications are not expected until December.) One potentially ominous sign that 1997/98 production may be in trouble was talk that government planners were willing to forego harvesting some young cane this season, thus providing for a longer maturation period and increasing the chances for a production recovery.
The long-term drive by Associated British Foods to expand its foreign sugar operations received new impetus last week with an announcement that, subject to approval from regulatory entities, the company would invest in Poland's Glinojeck sugar factory and raise its processing capacity to 1,000 tonnes per day from 750 tonnes. The company also is investing in a cane processing plant in China's Guangxi province, whose annual processing capacity is to be raised to 80,000 tonnes from the existing 20,000 tonnes.
In our August 25 Quarterly Outlook, we forecast a long-range price objective of 12.60-13.20 cents, basis March. It looks as though prices are on track to meet this target.
Arthur Stevenson
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