wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 20, 1997) SUGAR: Sugar futures traded indecisively last week; daily price ranges were modest and trading volume was small. The news screen for price-making fundamental developments was largely blank, and physical business was only routine. However, some traders believe recent Chinese purchases that originally were thought to have been for tolling purposes might actually reflect end-user buying activity.
The spreads also reflected the generally lackluster activity. The March contract was trading at a 20-point discount to May in late September, but moved to a modest premium in early October. However, this spread has failed to widen further and over the last few sessions March/May has been trading within a narrow band around parity.
F.O. Licht recently projected the European Union's 1997/98 output at 19 million tonnes, up from 18 million the previous year. Improved production has translated into enlarged weekly EU export authorizations exposing prices to additional hedge-related sell pressure. We view the European export picture as one of the market's chief negative fundamental factors over the last few weeks, and anticipate that the European Union's weekly export levels will continue to run ahead of the year-ago pace for the next two to three months.
At the other end of the continent, in Poland, production has turned sharply lower due to a smaller planting area this year. Polish government sources are projecting the country's 1997/98 production at 1.9 million tonnes, down from the previous season's 2.3-million-tonne output.
Last week, the Sao Paulo Sugar Industry Association projected 1997/98 (May-April) output in Brazil's Center-South region at 11 million tonnes versus 10.45 million in 1996/97. Anhydrous alcohol production was projected at 4.2 million cubic meters, about 10.2% above the year- ago level.
Cuba's Communist government recently concluded its Fifth Party Congress. Despite the collapse of communist systems in various parts of the world, the Congress adopted no genuine policy innovations and remained rigid in its endorsement of continued Communist rule. In a major speech, President Fidel Castro indicated that he regarded his brother Raul as his eventual successor.
Exceptionally favorable freight rates have reportedly encouraged South Korean refiners to buy about 200,000 tonnes of Guatemalan sugar for first-quarter 1998 shipment. This purchase has led to an easing in the Thai raw premium, which is likely to narrow further given expectations of more Latin American imports by Asian traders.
In the Philippines, the governmental weather service recently reported that El Nino-related factors had caused below- normal rainfall in most areas of the country from April through September. Drier-than-normal conditions were projected until the end of March; we have seen no governmental crop loss evaluation.
The U.S. Climate Prediction Center has stated that this year's El Nino, which is now generally expected to be the most serious event of its kind this century, is projected to persist until March-May 1998. El Nino-related developments will remain a major underlying long-term market factor given the potential for crop damage in various parts of the globe, especially in terms of 1998/99 production. Over the near term, it will be wise to heed the International Sugar Organization's observation that an El Nino tends to “affect more the mood of the market than it does the supply/demand situation.”
We continue to look for long-range price appreciation. We anticipate that any near-term pullback will hold near 11.40 cents per pound, basis March. A move through the 12.20 level, basis March, would signal the upmove's resumption.
Arthur Stevenson
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