PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 12, 1997) SUGAR: Since setting a new contract high at 12.55 cents per pound, basis March, on December 1, world sugar futures have come under light downside pressure. The softer tone was partly due to more aggressive origin activity, profittaking and the general absence of new large scale physical off-take.
The market's weaker tone also has been evident in the spread behavior. For example, March futures were trading at a discount to October in late September and had widened to about a 70-point premium earlier this month; that premium has now narrowed to about 48 points.
Table 1 provides a snapshot of the world sugar supply/use balance since 1990/91, including the forecast of the 1997/1998 statistical situation. (The data have been abstracted from the USDA's Sugar: World Markets and Trade report, released in November. Readers interested in comparing the USDA's forecasts with those of other leading statistical sources should consult our just published Quarterly Outlook.) The USDA anticipates that 1997/98 production will fall about 0.5% short of the all-time record of 122.78 million tonnes set in 1996/97, and that global consumption will establish a new record of 124.1-6 million tonnes, up 1.2% from the previous year's level. End-1997/98 stocks are projected to fall to 23.59 million tonnes from the year-ago level of 26.12 million. If realized, the projected stocks figure would be the lowest since 1994/95. The sharp drop versus 1996/97 is potentially long-term bullish for #11 futures, although the impact is somewhat diluted given that most of the global stocks decline is explained by the sharp reduction in India's sugar inventories (India's stock level, however, remains at a level necessitating only moderate imports, and these probably will be deferred until the second half of 1998).
According to trade reports, India completed arrangements to import about 200,000 tonnes of sugar during the first eight months of 1997/98. It is believed that of this amount roughly 80,000 tonnes have now entered the country. Like several other Asian countries, India's currency has depreciated sharply, a development that could lead to cancellation of some earlier business and a slowdown of new import deals. India's net sugar import needs for 1997/98 are estimated at about 600,000 tonnes, and if this figure were to be reduced by a significant amount it would constitute a negative factor for the world sugar market.
One of the most conspicuous features of the current market situation is the divergence between white and raw sugar prices, with the whites premium trading near historically low levels. The weak differential reflects the relatively well-supplied whites market, which is due in part to the surge in sugar output from the European Union. The USDA has forecast EU 1997/98 output at 18.7 million tonnes, up 2.3% versus the year-ago level and the highest production this decade.
The USDA's December 11 report projected U.S. 1997/98 production at 7.86 million tons versus the October forecast of 7.74 million. The new report gave a stocks/use ratio of 15.0%. up from 14.6% in the previous survey.
The EU's weekly export authorizations for the current season and for last year are shown in Figure 2. For 12 of the last 19 weeks, authorizations have been running ahead of the year-ago pace; cumulative 19971/98 authorizations as of December 10 have reached 1.41 million tonnes versus 1.21 million a year ago. The hedge pressure associated with this year's more aggressive marketings has tended to be a negative market factor. The last tender of 1997 will be held December 17, with the first one in the new year scheduled for January 7.
The Sao Paulo Sugar Industry Association recently stated that the cane harvest in the Center-South region was about 95% complete; the region is expected to account for about 82% of Brazilian cane crushed in 1997/98. Center-South sugar production was reported at 10.8 million tonnes as of November 16, about 9% above the year-ago level. On that same date, production of cane-derived industrial alcohol was reported at 12.5 million cubic meters, up from 11.3 million at the same time last year. Anhydrous alcohol, used as a gasoline additive, accounted for 43 million cubic meters, up 21.3% from a year ago. Hydrated alcohol, used as a fuel for alcohol-powered vehicles, showed production of 8.2 million cubic meters, up 5.3% versus a year ago.
Brazil's government recently rejected a proposal that all rented cars used by governmental employees be alcohol-fueled. It accepted a more modest proposal aimed at ensuring that the entire fleet of government-owned cars ultimately would use alcohol for fuel. (The new law would not extend to vehicles used by the armed forces and would also exclude various other categories of cars.) Critics noted that the government's action would affect only about 300,000 vehicles, or roughly 10% of the existing national alcohol-fueled car fleet, and would therefore have little impact on the sugar market. It also was noted that “it was no coincidence” that the government took action on this fuel-related issue while, a major international environmental conference was underway in Japan.
Russian sugar purchases appeared to have eased over the last week or so, although they remained a supportive market factor. Russian purchases have helped keep the Brazilian market firm, with one cargo (for December-January shipment) reportedly being sold at a small premium to March futures; earlier sales had been at a discount of about 5 points.
The market's large open interest leaves futures vulnerable to long liquidation pressure, and we look for more price weakness over the near term; our downside target is about 11.60 cents, basis March. We are maintaining our constructive long-range market posture.
Arthur Stevenson
|
|
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com
