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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(August 11, 1997) SUGAR: World sugar futures traded quietly during the week, with October holding above 10.50 cents per pound, but unable to advance to new highs. The October/March contract firmed slightly, but remained well below its mid-June level, when October was trading at a premium to March. Trade reports mentioned Russian buying interest, but this seems to have been little more than routine business. The other potentially large-scale buyer, China, has remained on the sidelines. Quiet physical dealings have continued to keep a cap on the futures market. Another potentially restraining factor has been the perception that the huge open interest (about 195,000 contracts overall and about 111,000 for the October contract) has left the futures market vulnerable to long liquidation pressure.
In view of Europe's importance as a sugar producer and trader, market attention has now shifted to that continent's news of beet development. Europe accounts for about 25% of global sugar output, with Western Europe's share at about 16.8%. The 15 countries in the European Union produce about 15% of world sugar output but, as the world's leading producer and trader of refined sugar, account for about 33% of global whites exports. The major European beet-growing nations are now beginning to release their initial beet test results, and these will be watched with interest to see what clues they might provide as to overall production trends. Last week, Germany's first test of the season showed an average sugar content of 12.6% versus 13.9% a year ago; average root weight was 376 grams, up from 346 the previous year. In Belgium, the first beet test for 1997/98 showed an average sugar content of 13.3%, down from last year's first test result of 15.9%; the average beet yield this year was calculated at 39.7 tonnes per hectare, up from 31 tonnes a year ago. British average sugar content was reported at 14.7% versus 15.5% last year; the French average was 15.1% versus 17.6% a year ago.
There have been rumors that Mexico and the United States might renegotiate the NAFTA provision under which Mexico could ship no more than 25,000 tonnes to the United States in 1997; some traders believe this ceiling would be doubled to 50,000 tonnes. Last week, the Deputy U.S. Trade Representative emphasized that there had been no change in U.S. policy, and that the U.S. government would insist that Mexico abide by its NAFTA commitments. Sweetener trade relations between the two countries recently took a turn for the worse, with Mexican governmental sources claiming that American manufacturers of high fructose corn syrup were “dumping” their product in Mexico.
In its June Sugar and Sweetener report, the USDA forecast Thailand's 1997/98 output at 6.4 million tonnes, up from the year-ago production of 6.3 million. Local trade sources now state that low rainfall levels (probably associated with the El Nino) will hurt the cane crop, and are projecting sugar output between 4.7 million and 5.2 million tonnes. Some trade sources claimed that the potentially tighter availability situation was causing some Thai cane millers to reduce sugar flows. As a result, these sources lowered their projections of third-quarter exports to about 450,000 tonnes versus about 500,000 tonnes in the comparably period last year.
The director general of India's Sugar Mills Association projected last week that 1997/98 (October/September) output would be 11 million tonnes, down from the year-ago figure of 13.0 million, representing a decline of roughly 15%. The USDA is forecasting India's output at 13.7 million tonnes, which would constitute an 8% drop from the previous season. Obviously, there is a substantial difference between the two forecasts, although both point to a significant production decline. While the market has long anticipated reduced Indian output, it remains a supportive long-range background factor. According to the Indian sugar official, the massive buildup in the country's sugar stocks would prevent the likelihood of imports in 1997/98, despite the significant drop in year-over-year production.
In our June 3 Quarterly Outlook report, we stated our price target over the next three to four months was the 12.50-cent level; we are maintaining that objective. However, as noted above, the market's large open interest leaves futures vulnerable to a downward correction, and we would not be surprised to see October futures trade down to the 11.20-cent level over the near term.
Authur Stevenson
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