wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 8, 1997) SUGAR: World sugar futures made new contract highs at 12.55 cents per pound, basis March, on December 1, and have since consolidated within the upper part of the 12.0- to 12.50-cent range. The market's price buoyancy reflected improved physical off-take, with some traders contending that Russia had purchased around 200,000 tonnes over the last several weeks. The market's recent strength also was evident in the spreads, with March (which was trading at a discount to October about 10 weeks ago) moving to a premium near 62 points.
The European Union's cumulative export authorizations for the 1997/98 season reached 1.36 million tonnes as of December 3, compared with 1.18 million at the same time a year ago. The larger figure for the current season reflects the EU's improved production picture. Weekly November authorizations were below the year-ago levels. Following the reversal in comparative authorizations seen last week, we anticipate that the figures will continue to run ahead of year-ago for the next several weeks.
One of the most conspicuous features of the current market situation is the price divergence in the whites versus raws that has pushed the whites premium to historical lows. Basically, the market is seeing a glut on the white's side, while raws remain relatively tight. We do not see any end to this situation for the time being. India is expected to initiate large-scale importing activity in the second half of 1998, and it may be that this will help bring a firmer tone to the whites/raws differential.
Of the world's leading sugar producers, Thailand has been the most severely affected by El Nino-induced weather problems, and the country's 1997/98 production and export levels are expected to fall substantially versus 1996/97. Production problems are now being compounded by the growing farmer practice of burning cane fields to facilitate harvesting. (Burning lowers sugar yields. It is estimated that in 1996/97 roughly 77% of the planted cane area was burned, compared with about 27% in 1993/94.) In an attempt to halt cane burning, the Cane and Sugar Board recently announced that farmers would face financial penalties if mills reported receiving burned cane. Conversely, farmers will receive higher prices for delivering fresh cane to the mills.
The potential for El Nino-related crop damage will remain a market factor over the next several months. Among the major producers most vulnerable to possible damage are Brazil, Cuba, Philippines and South Africa.
Strike activity at the Brazilian port of Santos received much press coverage over the last few days. Frustrated by the port's labor unrest and high cost of doing business there, several sugar companies are moving to develop their own terminals at the port. (Roughly 350,000 tonnes of sugar were handled by the port in 1996; the figure is expected to be about 620,000 tonnes in 1997.) Completion of these projects is likely to facilitate commodity flows and could make the companies less vulnerable to strike activity if they are able to conclude new labor agreements.
Open interest for the world sugar market remains very large, with more than 200,000 contracts outstanding. This leaves futures susceptible to speculative long liquidation pressure.
Our long-range price target, basis March futures, is the 13.0-cent level. We expect to see the 11.80-cent level hold on pullbacks.
Arthur Stevenson
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