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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) SUGAR: World sugar futures were relatively firm last week, but were unable to take out the highs set in late August. Spread action also was fairly steady, with March futures moving to a modest premium, after having traded at about a 20-point discount to May in late September. The market's steady tone, which has been in place since the October contract's relatively firm expiration on September 30, reflects the general expectation of a substantial drawdown in global stocks during the 1997/98 season.
The International Sugar Organization (ISO) released its first global 1997/98 forecast last week. The outlook calls for a supply/use deficit of about 1.7 million tonnes, the first global sugar deficit since 1993/94. The ISO's statistical conclusion brings nothing new to the market, however. Indeed, in our August 25 Quarterly Outlook we wrote that preliminary indications pointed to a global 1997/98 sugar deficit. It can be argued, however, that even though the ISO's statements were not viewed as a surprise, they helped boost sentiment, given the organization's authority as a statistical source.
The ongoing El Nino remains a background supportive market factor. According to the ISO, an El Nino tends to “affect more the mood of the market than it does the supply/demand situation.” In any event, the El Nino's global impact (if any) is more likely to be felt in 1998/99 than during the current season. (A detailed statistical analysis of El Nino-related production effects Is in the August 25 Quarterly Outlook.)
The new U.S. agricultural attache report for India concluded that a growing supply/use deficit would force that country to import about 800.000 tonnes of sugar in 1997/98. Imports of this magnitude would turn India, historically a net exporter, into a net importer of sugar. We view this as a potentially bullish long-range market consideration.
Recent trade reports that indicated China had purchased one cargo of sugar set off a flurry of rumors that this could be the beginning of large-scale purchases by that country. We believe this is unlikely. The cargo involved appears to have been bought for tolling purposes only, and does not appear to herald the beginning of significant purchases intended for internal consumption.
We remain moderately bullish over the longer term. Near term, March futures face chart resistance at about 12.20 cents per pound, and this level needs to be exceeded in order for the upmove to resume.
Arthur Stevenson
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