SOVIET SUGAR PURCHASES AND THE WORLD MARKET SITUATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030007-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 7
• Publication Date: January 1, 1972
• Content Type: IM

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A 1.4141Y ku-:V-
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Soviet Sugar Purchases and the World Market Situation
Confidential
ER IM 72-7
Januaryy1972
Copy No.
73
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WARNING
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defense of the United States, within the meaning of Title
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Its transmission or revelation of its contents to or re-
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OROUP I
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
January 1972
INTELLIGENCE MEMORANDUM
SOVIET SUGAR PURCHASES
AND THE WORLD MARKET SITUATION
Introduction
1. During the past few weeks, the USSR has purchased about
750,000 metric tons of sugar on the world market at a total cost that
probably exceeds $100 million. These purchases were made through brokers
in London and New York, with most of the amount covered by Brazilian
sugar plus smaller volumes from Australia and various other non-Communist
sources. It had been anticipated that world sugar supplies might be tight
during 1972, but large-scale Soviet buying on the world market was
completely unexpected. These purchases have combined with other factors
at work in the market for some time to drive world sugar prices to their
highest levels since the boom of 1963. The world spot price nearly doubled
between late November and early January, rising to more than 8 cents per
pound. This memorandum examines ,he impact of Soviet purchases on the
world sugar situation within the context of other forces already apparent
in the market. It also assesses the 1972 outlook for the sugar market and
the windfall gains accruing to major sugar exporting countries, including
Cuba.
Background
2. The world sugar market is a complex structure cons'' kting of a
number of special markets more or less insulated from one another. The
domestic markets of the sugar producing countries are generally regulated
to protect local producers and facilitate participation in various international
trading arrangements. The international markets consist of the free market
and several preferential markets - the most important being the US market
for Philippine, Latin American, and some other sugar; the UK market for
Note: This memorandum was prepared by the Office of Economic
Research.
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Commonwealth sugar; and the Communist area market for Cuban sugar.
These preferential markets maintain price-fixing arrangements, together with
import quotas. The free market is the residual outlet for the world's sugar,
and only that production not earmarked for domestic consumption or for
one of the preferential markets is exported to it. Some 70% of total sugar
output is consumed by the countries that produce it, and considerably more
than half of the sugar entering international trade is exported to preferential
markets.
3. The free market's status as an outlet of last resort forces it to
assume nearly all the burden of adjusting to changes in world supply and
demand. Because these changes are focused on a marginal segment of the
total world market and because demand for sugar is relatively inelastic,
free market prices (see Table 1) tend to be highly volatile, falling sharply
during periods of abundant supply and rising excessively when supplies
tighten. Free market prices generally run considerably below preferential
rates, however, and various international agreements have been worked out
since the early 1930s in an effort to stabilize them at levels reasonably
profitable for the exporting countries. The new arrangement established in
late 1968 under the International Sugar Agreement counts all but a few
of the world's sugar exporters as participants and has been fairly successful
in buoying up free market prices. Under this agreement, the International
Sugar Organization controls the volume of sugar allowed entry into the
market but suspends all export quotas when sugar prices rise above
5-1/4 cents per pound.
Recent World Market Trends
4. The current tight market has been in the making for several years.
During 1968-70, production and consumption were in close balance, and
world sugar stocks grew very slowly (see Table 2). In fact, the ratio of
stocks to consumption declined during thes years. In 1971, stocks declined
in absolute terms as well, as a result of mediocre crops and the continuing
growth of demand. Because production apparently is recovering only
moderately, stocks are expected to decline further at least through the first
half of 1972. A stock decline two years in succession would be unusual.
The last time it occurred, the sugar market boom of 1963 was the result.
5. Because of this tightening supply trend, future prices began to
increase as early as mid-1971. Spot prices, however, did not rise sharply
until &- ember, when a series of extraordinary d. velopments exerted
additional pressure on the market. Soviet purchases on the free market
probably were the most important of these developments, but rising tensions
in the Middle East, the war between India and Pakistan, and growing
confusion in the world money market immediately preceding the dollar's
-- 2-
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15 Jan
1961
1962
1963
1964
1965
1966
1967
1960
1969
1970
1971
1972
Free market
2.9
3.0
8.5
5.9
2.1
1.9
2.0
2.0
3.4
3.8
4.5
8.0
Preferential markets
United States
5.4
5.6
7.3
6.0
5.8
6.1
6.4
6.5
6.8
7.0
7.8
8.2
United Kingdom ,
5.7
5.7
5.8
5.7
5.8
5.9
5.7
5.0
5.0
5.0
5.0 b/
6.4 b/
Communist countries ,
4.0
4.1
6.3
6.0
6.0
6.0
6.0
5.9
5.9
6.0
6.0
6.0
a. Negotiated prices under the Commonwealth Sugar Agreement. These prices include some freight and
insurance. Following 1964, they also include special payments to the les- developed Commonwealth
members only. Lower pricey in 1968 and 1969 primarily reflect devaluation in 1967.
b. Estimated.
c. Average prices paid for Cuban sugar only.
Table 1
Sugar Prices in the Principal World Markets
Annual Averages in Cents Per Pound, F.O.B. --iribhean
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devaluation all contributed to the sharp rise in sugar prices. During the
first part of December, rumors of Soviet and East European interest in
the free market began to appear. As additional information concerning the
Soviet purchases became available, it added to the spate of speculation
already under way. Rumors concerning additional Soviet import
requirements in the face of shortfalls in Communist area sugar supplies
continue to buoy up the market.
Production and Stocks in Communist Areas
6. Total sugar output in the USSR, Eastern Europe, and Cuba
stagnated during 1966-70 and dropped by about 6% in 1971, partly because
of drought (see Table 3). This production record and a continued rise in
consumption by more than 3% annually are important factors in the present
tight market situation. The three areas combined account for more than
one-fourth of total world production. After 1965 the USSR reduced the
area planted to sugar beets because of the availability of Cuban sugar, but
increased yields maintained production at high levels in some years. East
European countries also reduced their plantings somewhat, probably because
low world prices made sugar production for export unprofitable. Cuban
production was plagued by labor shortages, the failure of mechanization
programs, and a generally inefficient harvest organization.
7. The widening gap between total Communist production and
consumption has been met by reducing both exports and stocks. Eastern
Europe in 1965 was a net sugar exporter by more than 700,000 tons; by
1971 it had shifted to a net import position exceeding 300,000 tons. Since
1965, Cuban stocks have been reduced slightly; since 1969, Soviet stocks
have been cut substantially. In 1971 alone, total Soviet requirements for
consumption and fulfillment of export contracts may have exceeded the
USSR's production plus imports from Cuba by upwards of 500,000 tons.
8. The marked decline in Soviet. sugar stocks since 1969 is a partial
explanation for its recent sugar purchases. Another factor, however, may
be the dim outlook for imports from Cuba during 1972. Cuba normally
provides about one-sixth of total Soviet sugar supplies, and good Cuban
crops have tended to offset poor Soviet harvests (see Tables 3 and 4). In
1971, however, both countries suffered from relatively poor crops, and Cuba.
is faced with still another had harvest in 1972. Its production is expected
to fall from 5.9 million tons in 1971 to 5.0 million tons or less this year.
Market Prospects for 1972
9. Fluctuations in world sugar prices correlate closely with deviations
of stocks from normal levels (see the chart, wherein normal is defined by
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World Sugar Stocks and Free Market Prices
0l J - I I I I I I I I I I I I I I I 1 .
1951 1956 1961 1966 1971
'Estimated seasonally adjusted stock level as of 30 Jun 1972
"Estimated range of world sugar prices: Jan-Jun 1972
512053 1.72
the long-term trend line). Stocks at the ' end of 1971 were only slightly
below normal but evidently were being drawn dow-i very rapidly. World
sugar production in the 1972 crop year* probably will fall at least 6%
below requirements for consumption plus normal additions to stock. By
next summer, stocks may be as far below normal as in. 1963, when free
market prices averaged 8.5 cents per pound.
10. This prospect probably will dominate the market during the first
half of 1972. Beyond that point, production prospects for the 1973 crop
year will gradually become the primary price determinant. There is a good
The sugar crop year ends on 31 August of the stated year.
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a. Includes some East European countries not included
in stock data shown the chart.
b. Pre Ziminary.
World Sugar Production, Consumption,
and Apparent Stock Changes
Thousand Metric Tons
Year
Production Consumption
Apparent
Stock Change
1960
52,090
48,763
3
327
1961
54,726
52,756
,
1
970
1962
51,329
54,277
,
-2
948
1963
51,949
54,451
,
-2
502
1964
59,768
54,765
,
5
003
1965
64,863
59,580
,
5
283
1966
64,044
61,700
,
2
344
1967
66,380
63,675
,
2 , 705
1968
66,794
66,571
-177
1969
69,544
69,260
284
1970
72,951
72,262
689
1971
71,890
b/
75,000
b/
-3,110
Sugar Production in the USSR,
Eastern Europe, and Cuba
a. Estimated.
b'. Computed from data on refined beet sugar productio'
on the basis of 92 parts refined to 100 parts raw.
Million Metric Tons, Raw Basis
1965
1966
1967
1968
1969
1970
1971
USSR
9?.7
9.0
9.1
9.8
10.1
8.8
9.3
Eastern
Europe
3.8
4.5
4.7
4.1
3.9
3.7
3.7
Cuba
6.1
4.9
6.2
5.3
5.5
7.6
5.9
Total
19.6
18.4
20.0
19.2
19.5
20.1
18.9
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Tab] e 4
Cuban Sugar Exports, by Destination
Thousand Metric Tons, Raw Basis
1965
1966
1967 1968 1969
1970
1971
0
O
Communist countries
3,610
3,257
3,931 3,201 2,875
4,802
3,250
Z
Oil
0-4
1
USSR
2,110
1,815
2,473 1,832 1,352
3,105
1,500
lz~
Eastern Europe
669
788
768 808 863
961
1,050
y
a
Far East
831
654
690 561 660
736
700
r
Non-Communist
countries
1,706
1,178
1,752 1,412 1,924
2,104
2,000
Total exports
5, 316
4J435
5.9683 4J613 4.9799
6.V906
5, 250
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chance tat sugar availability will increase sharply by mid-1973 because
producers will respond to the current high prices and because better weather
probably will return to the Communist countries. It is by no means sure,
however, that the increase will be sufficient to cover the existing production
deficit, the growth in consumption, and the additions to stocks needed
to move them toward more normal levels. At present there is considerable
pessimism in the market concerning possible improvement in the stock
situation during the next year or so.
Benefits for Exporters
11. Cuba, the world's largest exporter, stands to benefit most from
the sugar market boom, but its earnings still will not necessarily be much
higher than in 1971. Cuban sugar export volume in 1972 could fall 1.0
million tons below the estimated 5.2 million tons sold last year, which
would cause its total export earnings at 1971 prices to decline from $825
million to about $700 million. This prospect is now changed. Cuba could
increase its total export income slightly this year if the sugar price obtained
on its free market sales averages close to current market levels.
12. The USSR - a major exporter to the free market -will benefit
relatively little from this year's high prices, because it has been forced into
the market as a buyer to cover its export commitments. Net Soviet exports
to the free market may amount to no more than 400,000 tons in 1972
compared with an average of more than I million tons in recent years.
Eastern Europe also continues to be an important exporter to the free
market and could derive considerable benefit from current high. prices. These
exports, however, are made possible only by large imports from Cuba. In
1970, Eastern Europe exported close to 1.1 million tons to the free market
but imported nearly 1.0 million tons from Cuba. Prices paid to Cuba, which
average close to 6.0 cents per pound, are fixed on a long-term basis and
are not likely to be affected by the current market situation.
13. Many non-Communist producers, the Philippines and most
Commonwealth coiintric in particular, will benefit little if at all from the
market boom because all but a small part of their sugar is exported to
the US and UK preferential markets, where prices have increased only
moderately. The Commonwealth Sugar Agreement's negotiated price was
increased recently from 5.0 cents per pound to 5.8 cents. In addition, the
special payment made to the less developed Commonwealth members was
raised from 0.175 cent per pound to 0.810 cent. Preferential prices paid
by the United States have increased from 7.5 cents per pound (f.o.b.
Caribbean) in mid-1971 to about 8.2 cents in mid-January 1972. This
increase appears to reflect concern on the part of domestic sugar traders
that foreign suppliers will shift exports to the free market if US prices
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fall below world :n:irket levels. This fear is not well founded, however.
Little diversion of this sort occurred during the boom of 1963, and it is
doubtful that exporters would risk long-term benefits from access to the
US preferential market to exploit an advantage that probably will be
relatively short-lived.
14. Finally, there is a broad group of countries that export both to
the free market and to preferential markets. Among the Commonwealth
countries, Australia is the most important exporter in this group, with more
than 60% of its annual exports of more than 1.5 million tons of sugar
going to the free market. If prices remain high, Australia would earn an
additional $85 million on its normal volume of free market sugar sales -
a gain of minimal importance to its balance of payments. Windfall earnings
will be of far greater significance to less developed countries such as Brazil,
the Dominican Republic, Taiwan, and India, which also are major exporters
to the free market. All of these countries will benefit substantially from
high world sugar prices, but Brazil and the Dominican Republic probably
will benefit most of all because they have large stocks available and can
take maximum advantage of the current market.
15. Brazilian sugar will be used to fill about three-fourths of the
recently contracted sales to the USSR - an amount approximately equal
to Brazil's normal annual sales to the free market as a whole. Because of
its large stocks, Brazil may be able to maintain sales to its regular free
market customers as well. If its free market sales thus double in 1972,
its sugar earnings at current price levels could rise by some $125 million,
or almost 5% of total exports in 1971. In such an event, earnings from
free market sales would more than match those from expected sales to
the US preferential market. The current boom will have a far greater impact
on the" Dominican Republic, which relies on sugar sales for about half its
total export earnings. If International Sugar Agreement quotas remain
suspended, the Dominican Republic would be able to about double its free
market sales by drawing down on its large surplus stocks. These sales could
exceed $100 million, approximately matching Dominican earnings in the
US preferential market and helping to drive total exports some 50% above
their 1971 level.
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