After making a low early in the first quarter of 1997, sugar prices edged slowly higher, though the overall increase in prices was about 10%. In the first quarter of 1997, sugar prices were actually somewhat below those of 1996, as the market was reflecting the fact that for 1995-96, world sugar production exceeded consumption by almost 9.0 million tonnes. That, in turn, added to the growing world stockpile of sugar, which had been increasing since the 1992-93 season. F.O. Licht put the world ending stocks-to-use ratio at over .40, a hefty supply of sugar.

Sugar prices have been trending very slowly higher since the lows in January. The market has anticipated that the build-up in world stocks would slow or even decline, as world sugar production was likely to stabilize after rising for the last two years. While that in itself appears to be positive for prices, it is not that positive. The reason is that India has been producing a great deal more sugar in the last two years, which explains most of the build-up in world stocks. This season, the Indian crop is smaller by maybe 30%, and that will level off the build-up. Since India has a huge stock-pile of its own and does not export much sugar, not that much has really changed in the market.

Also supportive for somewhat higher sugar prices were lower exports from Brazil and Thailand, while consumption of sugar worldwide continued to increase. In particular, there has been good demand from countries like Pakistan, Iran and Iraq under the U.N. oil-for-food deal. That steady demand has supported the market. Late in the second quarter of 1997, sugar prices again edged higher on the buying of raw sugar by Russia. China, meanwhile, reduced its imports of sugar.

In the U.S., there was much publicity over extensive flooding in the Red River Valley along the Minnesota- North Dakota line. While beet plantings were delayed and yields will likely decline as a result, beet acreage in other parts of the U.S. was up, with Great Lakes planting reported to have gone very well. For the 1996-97 season, the USDA estimated U.S. sugar production at 7.25 million short tons, while the initial projection for 1997-98 is 7.50 million tons.

Entering the third quarter of 1997, the focus will be on the European sugar beet crop, which has seen improved conditions. Prospects for Russia will be monitored, as plantings again have not gone well. The Brazilian harvest is well under way, the cane crop is larger again, and exports could also be higher.

This year will see a slowdown in the growth of world sugar production, while consumption should continue to increase. This will result in a decline in world stocks of sugar, which is supportive of higher prices, if not bullish. Still, the upside potential in this market looks limited by the fact that prices have already increased more than 10% in the last six months. We expect sugar to trade around 11.00 cents going into the fall.

Walter Spilka

Our January Outlook considered a triangle pattern in the late stages of development, with bearish expectations of a terminal rally to the 11.30-11.60 cents range targeted and a remote possibility of trading to the 12.30 cents level. The rally highs in 1997 have thus far been 11.50 cents in February, 11.66 cents in April and 11.58 cents in June. Prices have repeatedly stalled around the 11.60 cents area, but failed to exhibit any sustaining downside weakness thereafter.

At this juncture, we are most comfortable with considering the pattern from a classic interpretation, as opposed to a wave approach. In the classic tradition, five turns normally produce the last point within the pattern, after which the trend prevailing before the pattern materialized reasserts itself. In this case, a near-term high for the 5th point is implied, followed by a resumption of the down trend, which will take prices through the bottom end of the pattern (under 10.620), and ultimately to lower levels near 7.00 cents. This is a bearish resolution and is slightly favored.

The obvious bullish alternative is a breakout over 11.70 cents, basis the weekly chart, which would justify a target of 13.73 cents–the nine-month rally into the first- quarter-1996 high added to the January 1997 low. Quite clearly, the price action in the next few weeks will hold the key for sugar prices for the second half of the year and should provide a position-taking opportunity.

Rick Lorusso

Late in the fourth quarter of 1996, coffee prices traded at the $1.00 level. The market then staged one of the most dynamic rallies in a number of years. Late in the second quarter of 1997, coffee price traded over $3.00, a price increase of well over 200% in six months. There appeared to be two reasons for the much-publicized bull market. First, stocks of coffee in the hands of consumers have been drawn down since the 1994 bull market, when the Brazilian crop was cut in half. The recent low prices may also have encouraged consumers to use more coffee. Second, arabica coffee production in the important producing countries, from Mexico to Central America and Colombia, has been smaller in 1996-97, further constricting stocks.

In the fourth quarter of 1996, stocks of coffee, both at the CSCE and in consuming countries (as measured by E.D.&F. Man), were at multi- year low levels. World consuming country coffee stocks in December were well under 8.0 million bags, while CSCE stocks of arabica coffee were under 400 bags. At about that same time, there were reports from Colombia and Central America that the 1996-97 coffee crops were not going to be as good as in the previous year. In particular, the Colombian crop would be under 12.0 million bags. In light of the developing tightness, roasters began to buy, turning the price trend higher.

As coffee prices moved higher, stocks of coffee started to increase. In part, the steeply inverted price structure sent a signal to producers/exporters to sell their supplies as quickly as possible, which they did. By front-loading their exports at the beginning of the season, producers/exporters were able to rebuild stocks of coffee in the consuming nations, and stocks reached 10.0 million bags in April. That was still not a large amount, and it became clear that there was just not a great deal of high-quality arabica coffee left to sell. In late May, the July contract traded over $3.00.

At that point, the market appeared to have over-discounted the situation. The Brazilian harvest was starting, and more coffee was coming to the market, attracted by the very high prices and backwardation. With the Brazilian crop seeing no threat from cold weather, coffee prices staged a precipitous sell-off with extreme volatility; the price decline was over $1.00. With the coldest part of the Brazilian winter still ahead, coffee market participants are well aware that bull markets are historically the result of a weather event in Brazil at this time of year.

Bull markets in coffee usually start in the late second quarter and early third quarter because of cold weather in Brazil. There is no sign that this will occur this year, though it is always possible. If it does, we expect that the market could post new all-time highs. Assuming no damaging weather event, prices should move lower. Stocks of arabica coffee will start to tighten again by August/September, and coffee prices could readily move back toward $2.50. We would not rule out new all-time highs eventually, if the 1997-98 crops from Mexico to Colombia are not as good as expected.

Walter Spilka

At the start of 1997, coffee prices were locked in a one-year trading range following a classic “V” bottom pattern–historically a common formation at coffee market lows. The implication from the extended sideways pattern was for an eventual upside break-out, which was accomplished in January when prices exceeded the $1.385 level. A meteoric rise followed, reaching the $3.1800 level, second only to the all-time high of $3.375 registered in 1977.

Entering the latter half of June, prices thus far are experiencing a sharp sell-off, with support encountered in the low-$1.60 range. Additional support lies at approximately the $1.48 level, a line across the former trading- range highs in 1996 illustrated on the chart.

The long-term trend in this market remains up, but an intermediate correction has set in, with a large three-swing bear market now operative. The first swing to the downside is close to ending. It is sizable and should lead to either a healthy counter-trend bounce in the third quarter of the year, or at worst, a trading-range affair. A minimum rally toward the $1.95-2.00 range appears a reasonable objective, with more significant resistance at the $2.20 level. The strongest resistance is targeted in the $2.60-2.70 range. A final third swing to the downside is anticipated to follow, coincidentally terminating the move down from the 1997 high. An ultimate downside target at this point is indeterminate and will be a function of the high achieved during the third quarter.

Rick Lorusso

Cocoa prices moved lower early in the first quarter of 1997, trading under $1,300 before rallying to over $1,700 in the second quarter. The market then settled back into a trading range around the $1,500 level. As is often the case, the key fundamental development in the market was the size of the West African cocoa crops, specifically in the Ivory Coast and Ghana. Cocoa production is extremely difficult to estimate or forecast. In the case of the 1996-97 crop, where harvesting started in the fourth quarter of 1996, the crop looked like it would be much smaller than the previous year's record output. While the crops were indeed smaller, they turned out to be larger than expected, and that seems to have kept the market from moving much higher.

It now appears that the main crop in the Ivory Coast was about 980,000 tonnes, which is about 7% less than the year before. There is still some question about the mid-crop, which is being harvested now and may be closer to 100,000 tonnes than 200,000, meaning the Ivory Coast crop could be about 1.1 million tonnes. That is about 8% less than last year. The Ghana cocoa crop, including mid-crop, looks like it will be about 335,000 tonnes, or some 18% less than the year before.

One very interesting development this year has been the decision by Brazil to begin importing small amounts of cocoa. Brazil is expected to import about 14,000 tonnes of Indonesian cocoa beans to supplement its declining production. While Malaysian and Brazilian cocoa production have been trending lower, Indonesian production has been trending up, and in 1996-97 it reached just over 300,000 tonnes. Indonesia has planted a great deal more land to cocoa, and further production increases are expected.

One bright spot in the cocoa market has been on the consumption side of the equation. Cocoa grindings continue to trend higher. One reason for this is that countries that had very low levels of per-capita use are now consuming more cocoa products. The best example may be China. E.D.&F. Man indicates that in the 1996-97 season the world cocoa grind will be close to 2.8 million tonnes, or almost 3% more than last year. With global cocoa consumption increasing and production lower this season, the projected ending stocks/use ratio will likely decline to between .36 and .40, which implies that cocoa prices should trade to about the $1,900 level at some point in the season. A more conservative estimate, given the uncertainty of just how much cocoa is actually produced, would be between $1,700 and $1,900.

While cocoa prices have fallen back, we still expect that they will move higher. The catalyst for this may very well be the coming 1997-98 West African cocoa crop. The initial outlook for this crop has not been positive, with the pod set reported to be much less than average. Barring a more positive crop outlook for Ghana and the Ivory Coast, we feel cocoa can trade to the $1,800 level in the second half of 1997.

Walter Spilka

Extensive sideways trading during 1994-96 between approximately $1,200 and $1,447 was finally resolved in March of this year, although not before a final break down to $1,210. In our Outlook '97 analysis, we thought that prices below $1,284 would be reason to re-evaluate our bias, which favored an eventual upside exit from the broad trading range. Although that level was violated, follow-through selling pressure was checked at the range low, and an impressive March rally reversed January's technical damage.

The explosive March advance cleared 1995-96 resistance between $1,400 and 1,450, with a thrust up to $1,532. From there, prices reversed in a classic pullback to the top of the broad range and consolidated there into June. Weakness was contained above the rising 26-week moving average. Prices put in another show of upside fireworks in the first half of June, traversing $187 in one of the largest weekly ranges of the past four years, and having pushed above $1,700, are at levels not seen since 1989.

The substantial consolidation that occurred after the March high and the expanded weekly range thrust into new high ground in June confirms the upside breakout and establishes a new up leg in a long-term up-trend context. Completion of the 1994-96 range implied an initial target in the $1,600 area, which has been made. Since prices did not proceed directly to that level in the wake of the March upside exit, but rather put in considerable consolidation, up-trend potential eventually should transcend the $1,600 area by a substantial distance. Consolidation in the $1,500- 1,600 area might interrupt second-half up-trend development toward $1,800-2,000.

Jim Nason

Frozen concentrated orange juice (FCOJ) prices trended lower over the first half of 1997, though there were some impressive rallies along the way. The best was in late January, when there was a freeze in the Florida citrus groves, causing a great deal of concern about possible losses. Because of the lateness of the event, the crop was not nearly as vulnerable as it would have been a month earlier. In addition, the size of the crop was large to begin with, so any damage that occurred would have less net impact than if the crop had been smaller. As a result, despite quite low temperatures, there was minimal damage to the crop. After a sharp weather rally, prices renewed the down- trend, pushing to new contract lows.

New lows were recorded in the second quarter of 1997, as the record crop was processed and the inventory of FCOJ in Florida continued to grow larger. The USDA estimated the 1996-97 Florida orange crop at 994.2 million boxes, up more than 10% from the previous large crop. The yield, at 1.58 gallons per box, was 4% above the previous season.

The U.S. orange crop was 297.92 million boxes. While the record crop added to the Florida inventory, putting pressure on prices, the U.S. continued to import FCOJ. Late in the second quarter of 1997, cumulative imports of FCOJ were more than 24 million gallons.

While imports were showing signs of slowing, there was a good possibility that they would start to increase again. The USDA reported that another large crop was on the way in Brazil. Its 1997-98 season orange juice output was estimated at 1.22 million tonnes, compared to 1.11 million in 1996-97. The Sao Paulo crop was forecast to be a record 400 million boxes, up 9% from a year ago. The USDA forecast Brazilian exports at 1.16 million gallons, some 2% more than last season.

Late in the third quarter, the Florida inventory reached more than 168 million gallons, a huge amount of product. Despite the fact that the inventory has begun to decline, there is still such a large amount of FCOJ that prices have continued to move lower. Projecting movement and imports for the remainder of the season, the FCOJ carryout is likely to exceed 70 million gallons, still a large amount of product.

With so much product on hand, the focus of traders will be the prospects for the 1997-98 crop. Initial ideas point to a crop larger than the record 1996-97 outturn. The reason for this is that trees planted in the late 1980's are now coming into their peak production. Thus, the FCOJ market will be faced with the prospect of a record crop in both Brazil and Florida, on top of burdensome stocks.

Given the amount of juice on hand and prospects for still larger crops, it is difficult to forecast higher prices. It appears that in the third quarter, FCOJ will trade between 65 cents and 70 cents. The fourth quarter will be focused on the crop and the weather as winter approaches. If the crop is as large as it looks, prices are likely to stay under $1.00.

Walter Spilka

At the end of 1996, declining stochastic indicator readings pointed to potential for an interim price bottom and the possibility of counter-trend rally efforts in the first quarter of this year. Both of those possibilities were realized. After an initial January low, rallies have diminished in a generally sideways range between 72-87 cents.

Price weakness in June featured a low below the bottom of the range. Prices traded lower than at any time since the 1993 cyclical low near 65 cents. Since the new price low has not been confirmed by the stochastic indicator, a momentum/price divergence exists (arrow) but is yet to be confirmed.

Since divergence is often an ingredient of a trend bottom and reversal, the second half of the year should favor higher, rather than lower, price potential, although an attempt to break the 65 cents mark could occur prior to sustained upside price response.

The high weekly close of this year is 87.35 cents, which has been twice tested and proved unbreakable. That price defines the level above which prices must recover in order to confirm the 1996 trading activity as that of a potential base. Given confirmation of the above-noted divergence, we would look for that to occur as year-end approaches. Price above 87.35 cents would indicate intermediate-term rally potential into the $1.00-1.07 area.

Jim Nason

July 1997 David Rinehimer, Director of Futures Research

Smith Barney

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