JAMES M. NEVLER'S CRB FUTURES OUTLOOK

JAMES M. NEVLER'S CRB FUTURES OUTLOOK

THE U.S. DEPARTMENT OF AGRICULTURE'S 250,000 metric ton increase in the U.S. sugar import quota triggered a short-covering rally because it followed the department's recent denial of the Sweetener Users Association's request for the same increase.

However, in announcing the 9.5 percent increase to 2.8 million tons, raw value, for the period ending Sept. 30, 1990, USDA Secretary Clayton Yeutter said: "Continued supply/demand imbalances necessitated an additional adjustment in the quota above the level established last January."The need for more imports stemmed from last winter's frost damage to mainland U.S. sugar cane, which cut the Florida crop by about 130,000 tons and the Texas crop by 27,000 tons.

But the supply/demand imbalance is global. World sugar consumption should exceed production in 1989-90 for the fifth consecutive marketing year, reducing carryover to its lowest level since the bull market of 1980-81.

In March, the USDA projected world demand of 108.5 million tons, raw value, virtually identical to the estimates of 108.1 million tons by the International Sugar Organization and West German sugar statistics firm F.O.

Licht. The ISO and Licht put 1989-90 production at 107.8 million and 107.9 million tons, respectively, but for the marketing years ended Aug. 31 instead of the USDA's Sept. 30. The USDA's forecast is scheduled to be revised in May.

The forecasts all point to a continued stock drawdown. The USDA's estimate of final stocks for the year ended Sept. 30, 1990, was 18.5 million tons, or 17.1 percent of consumption. Licht put ending stocks for the year ended Aug. 31 at 26.81 percent of consumption in line with the U.N. Food an Agriculture Organization's estimate of 26 percent.

In previous years, such levels were associated with strong bull markets. This season, however, the largest gains in consumption are expected to be in several of the largest producing nations. India still should be a major importer, but Pakistan may cut imports. Other major importers are China and the Soviet Union, both of which have hard currency problems.

The U.S. quota increase was bullish for world sugar because the U.S. price is well in excess of the world price, and exporting nations strive to fill their quotas because of the higher prices. While 250,000 tons is not that much in terms of the total free market, it will come off of the top of an already tight supply that is expected to become even tighter this summer.

The potential supply/demand imbalance provides strong underlying support for world futures, attracting serious trade hedge buying whenever prices, especially for deferred deliveries, work lower. However, at times cargoes of prompt raw sugar have been hard to move.

One major trade house reported several cargoes recently were overhanging the market. And despite generally stronger demand for white sugar, Syria's tender for 12,000 tons of May-shipment whites fell through on April 25, and was rescheduled for May 22. White sugar prices had been supported by a steady stream of routine tenders by the usual customers, including a Syrian tender on April 18 for a cargo for May-June delivery at $468 a ton, cost and freight.

While we agree with the market's bullish tone, and would not recommend trading sugar from the short side, we also would be reluctant to chase the market during one of its rallies. The supply drawdowns in the forecasts depend upon importers being able to pay for the sugar, and that remains a problem for the market.