Soft as mosaic of markets.

The softs market is a diverse one to say the least. Lacking the connectivity of a market such as energy or livestock, no one broad source for fundamental data covers these products, not even the USDA.

There is no clear definition of the softs market. Cotton, sugar, coffee and cocoa certainly

While some - coffee and cocoa - grow in nearly tropical climates, others - cotton and orange juice - do well in moderately milder regions. At least one, lumber, can grow nearly anywhere, and sugar can begin either as a beet in chilly Ukraine or as cane in sweltering Brazil.

Demand may be easier to nail down due to the consistency of the beast. But aside from two big players - the United States, which has a significant role in all these markets, and China, an unpredictable source of volatility - no clear theme ties these products together.

Hold the Sweet 'n Low

The world's most traded sugar contract is at the New York Coffee, Sugar & Cocoa Exchange (CSCE), where the futures' volume is five-fold that of it's nearest competitor. The 83-year-old futures call for delivery of 112,000 lbs. of raw centrifugal cane sugar from any of 29 countries to a port in the country of origin.

The sugar cane season starts in September and ends the following August. The same grass can grow to produce sugar for several harvests before it must be replanted.

Sugar cane requires a moist, tropical climate to thrive. Thus, it mostly comes from countries such as Australia, Brazil, Cuba, India, Mexico, South Africa and Thailand. India, forecasted to produce 17 million metric tons in the 1996-97 season out of 125 million metric tons of world supply, is the world's largest producer of cane sugar. But the country consumes nearly 15 million tons and lacks the infrastructure to increase exports dramatically, analysts say.

Instead Brazil is the world's largest exporter. The U.S. Department of Agriculture (USDA) estimates the country will export 5.7 million metric tons in 1996-97.

While the CSCE's contract calls for the delivery of sugar cane, nearly 36% of the world's sugar supply comes from beets.

Conveniently, sugar beets grow well in cooler climates, such as Europe and the United States. Europe produces the most beets, by far, and despite sugar cane's dominance on a macro level, the European Union (EU) beet crop is the largest concentration of sugar production in the world.

"If you want to treat the EU as one country, it is the world's largest producer of sugar," says Arthur Stevenson, softs analyst with Prudential Securities in New York. Thus, anything affecting the European beet market - from weather extremes that could hurt crops to EU sugar policies - is a market-moving factor.

The United States produces both sugar cane and sugar beets. For the 1996-97 season, the USDA forecasts the United States will produce 3.1 million short tons of sugar from cane and 4 million tons from beets.

Sugar demand is rising worldwide, with declines elsewhere more than made up for by the developing countries of Asia. Russia will import the most sugar in 1996-97 at 3.3 million metric tons. China will import 2.6 million tons and Korea, 1.3 million tons. The United States should import 2.7 million tons in 1996-97.

One statistic that offers a picture of tightness in the sugar industry is the stocks/consumption ratio - the percentage ending stocks are of that year's domestic consumption. If the ratio is high, its bearish. If the ratio is low, prices tend to rise (see "Sweet market," below).

But you can't pay too much attention to set levels. Figures developed by different statistical sources vary greatly, Stevenson says. Further, you can't look at just one source because a different group may produce the numbers first for any given year.

The USDA, through the National Agricultural Statistics Service, reports on U.S. sugar production and use monthly in the World Agricultural Supply and Demand Estimates (WASDE) report. Other domestic numbers are reported in various other general crop production reports. But the focus of sugar hardly is the United States, especially when production is the topic. The Foreign Agricultural Service (FAS) division of the USDA provides statistics for the international scene monthly. (WASDE reports are at http://www.usda.gov/oce/waob/ wasde/wasde.htm. FAS reports are at http://www.fas.usda. gov/. Historical statistics for most crops are at http://www.mannlib.comell.edu/data-sets/)

Of private statistic providers, the German research finn F.O. Licht is the industry leader by many counts. It's International Sugar and Sweetener Report is well respected and provides some of the earliest quality estimates of European crop size.

Blended market

The CSCE also boasts the world's leading coffee contract with volume more than 1 million from January to April 1997. The contract calls for delivery of 37,500 lbs. of arabica coffee, from various countries at appropriate differentials. Delivery points are in New York as well as New Orleans, San Francisco and Miami at discounts.

Coffee trees constantly produce their crop - a cherry-sized fruit whose seed is the coffee bean - even during harvesting. Thus, a slim taking may follow a bumper crop, as the tree's resources are devoted more to maintaining its mature bounty than developing next year's buds. But small takes don't always follow bumper crops. The cyclical pattern may emerge as a slower rate of growth in a rising, multi-year production trend.

Of course, weather can shock coffee production significantly, especially in higher regions of South America (see "Cut to the quick," above).

"Brazil is unique in that its major coffee producing zone is in a frost-prone area," Stevenson says. "The American summer coincides with the winter in Brazil. In the months of June, July and August, coffee tends to trade on weather."

As with sugar, two types of coffee dominate world production - arabica and robusta. Arabica coffee is somewhat stronger than robusta coffee and comes mainly from Western tropical regions, such as Brazil and Columbia. FAS forecasts these two countries will produce 39% of the world's coffee in the 1996-97 season.

Indonesia is a large producer of robusta coffee, and should produce 7.5 million 60 kilogram (132 lb.) bags in the 1996-97 season. Taiwan is another major contributor with about 4 million bags. The Ivory Coast, or Cote d'Ivoire, produces 4 million bags, just 14% of Brazil's production, but the African nation exports most of that, or nearly one-quarter of Brazil's exports.

Because major producing countries don't forecast their crops with much regularity or quality, traders must rely on broad estimates from the USDA and professional analysts for supply statistics.

"The statistical record for many producing countries is very unsatisfactory," Stevenson says. "It's a fair generalization to say many third world countries don't consider providing statistics a top priority."

Important supply numbers measure producing nations' export potentials. Potential exports are beginning stocks plus production and imports (if any) minus domestic use. FAS does its best to forecast producing nations' coffee supplies. Numbers are available in its monthly reports. The WASDE also reports on coffee trade.

The United States once consumed 66% of the world's coffee. Now that's down to 33%. Analysts point to America's growing health consciousness, coffee's inconvenience compared to other beverages and its image problem as reasons for falling demand - "it's no longer hip to drink coffee," one analyst says.

Despite the long-term downtrend in U.S. coffee consumption, short-term variations tend to be small. U.S. coffee demand is price inelastic - buyers don't alter their purchases much because of rising or falling prices. Large price swings, though, such as those in 1994 and this year, can shock coffee use downward.

Chocolate gold The CSCE's cocoa futures have some of the most freewheeling grade specifications around - "the growth of any country or clime, including new or yet unknown growth," the exchange says. The contracts are for 10 metric tons of cocoa, deliverable in either the Port of New York, the Delaware River Port or the Port of Hampton Roads district.

While the CSCE traded 1.8 million sugar contracts and more than 1 million coffee contracts from January to April 1997, cocoa volume was just 808,095 contracts.

Cocoa is slightly more tropical than coffee. But, like coffee, cocoa comes from the seeds of the fruit of a tree. The yellow fruit can be harvested around six months after successful pollination of the tree's bloom. The seeds are removed and processed, leaving cocoa butter.

Early season heavy rains are a typical culprit with cocoa as they hamper flowerings.

"During the initial part of the growing season, you need moisture, like most crops," says one cocoa analyst. "But during harvest, if it's too wet, most producers don't have the technology to get the crop [immediately] indoors."

The Ivory Coast crushes other would-be producers, logging 40% of the world's total - a projected 1 million tons for the 1996-97 crop. Ghana is second, contributing 15% to world production. Indonesia and Brazil are other major contributors, with 10% and 7%, respectively (see "Cocoa rebound," page 61).

World demand growth, though, is centered mostly in Asia and Eastern Europe. Large chocolate companies such as Nestle are investing a lot in infrastructure, which should support a 4% to 6% demand growth rate, according to some estimates. Health concerns are checking Western demand, keeping that regional growth between 1% and 3%.

The Netherlands, the United States, Germany and the United Kingdom are large users of cocoa. With grindings the standard barometer of use, the Netherlands is tops, grinding nearly 300,000 metric tons in 1996. The United States ground about 250,000 metric tons. Germany ground just under 200,000, and the United Kingdom came in at just over 140,000.

But grindings as a market gauge may lose significance. Grinding operations are shifting to producing countries for economic reasons. Third world countries such as the Ivory Coast, Indonesia and Malaysia are lacking in quality reporting.

"Those producers often don't know themselves what their volumes are," one analyst says.

Soft as they come

The New York Cotton Exchange (NYCE) traded slightly more than 1 million cotton futures by April 1997 for the year. These 126-year-old contracts, which call for 50,000 lbs. of cotton, are deliverable in Texas, Louisiana, Tennessee and South Carolina.

Cotton typically is planted in April or in May, and the first few weeks of development are crucial, says Sharon Johnson, cotton analyst with Frank Schneider & Co. in Atlanta.

"Cotton does not like cool weather," she says. Johnson points to this year as an enigma for cotton production. April and May temperatures for the South have been some of the coolest on record. There is no recent period the current situation compares to, which may leave the market hanging until harvest.

While China has led the world in cotton production for years, FAS projects the United States will overtake the socialist behemoth in the 1996-97 crop year with its 18 million bales compared to China's 17.5 million. (A bale weighs 480 lbs.) But while the United States will export a world-leading 6.3 million bales, China managed to sell only 21,000 in 1995-96 and is projected to move just 100,000 bales in 1996-97.

Uzbekistan is the world's second leading exporter and should export 4.3 million bales in 1996-97. Large producers, but relatively small on the export side, are India, projected for 12.3 million bales; Pakistan, projected for 6.8 million bales; and Turkey, projected for 3.5 million.

"Early on in the crop year, the focus seems to be on [the United States]," Johnson says. "But as we get a handle on the U.S. crop, the market tends to look overseas."

Government reporting for third world producers lacks for cotton as well as other softs, but for some countries, such as India and Pakistan, university extension services provide quality statistics. These generally come by way of the universities or wire services.

While China exports extremely little compared to other exporters, its demand role is huge. China's textile mills should require 19.8 million bales of cotton in the 1996-97 crop year, more than 2 million than the country's production. China's stocks also underline the country's significance. These again are approaching half of world stocks (see "Chinese connection," below).

The United States is a large consumer of cotton as well, projected to use 11 million bales in 1996-97 - 200% of its consumption of just 14 years ago. Use has trended higher due to consumers' favor for cotton clothing, but analysts see less dramatic shifts in the demand curve in coming years.

"Textiles have a thin profit margin," Johnson says. "It's made worse by competition from man-made fibers, such as polyester and rayon, which are far cheaper than cotton."

A concentrated market

The frozen concentrate orange juice futures at the NYCE have the second slimmest volume of the softs, having logged 323,969 contracts between January and April 1997. Delivery points are in exchange-licensed warehouses in Florida, New Jersey, Delaware and California. The 15,000 pounds of orange solids specified by the contracts can come in drums or tanks, at the seller's option.

The United States and Brazil outpace all others in orange juice production. The United States supplied the world with 11.3 million metric tons of oranges in 1995-96, and Brazil contributed 16.3 million. Production and import statistics are available from FAS.

The orange crop is another commodity more susceptible to weather than most. Systems such as hurricanes, freezes and tropical storms can shock the market into the stratosphere if they hit at the right time. It's obvious why. More than 98% of the U.S. crop comes from Florida, a geographic concentration soybean crushers would dread.

Another measure of the orange juice supply is the number and quality of citrus trees, a number published bi-annually by the Florida Agricultural Statistics Service. The report also breaks down trees by type - 1996 orange trees were up 3% to 84.2 million, of which 78.5 million produced fruit, for example.

Traders also should look at the number of trees reaching their most productive years, says Bernie Savaiko, senior softs analyst with PaineWebber in New York. A tree can take as long as 15 years to reach maturity.

Supply statistics certainly are important, as they move the market more than demand, Savaiko says. Supply's strong role also could influence the strong trend factor evident in orange juice (see "O.J. on the move," above).

"Once a supply pattern becomes established, unless there's a weather surprise, we're likely to see it continue at the same rate," Savaiko says.

While the United States produces a great deal of oranges, it's not always enough to feed American's thirst for frozen concentrate orange juice, which the country is importing at near-record levels. While U.S. dependence on the primary contributor Brazil has increased recently, analysts predict imports are leveling off.

Orange statistics are available from various sources, including FAS, the Agricultural Statistics Board of the USDA, the Economic Research Service of the USDA, the Florida Department of Citrus and Citrus Economic and Market Research (http: //www.fred.ifas.ufi.edu/citrus/index.html).

RELATED ARTICLE: Canada lumber's saving grace?

While volume has fallen for Chicago Mercantile Exchange (CME) lumber as of late - 1985 volume was 581,548; 1995 volume was 182,686 - it rebounded to 304,214 in 1996. Cutting the contract size in half part way through the year certainly had something to do with that, but another reason has been the five-year agreement between the United States and Canada that limits the amount of lumber Canada can export free of fees.

While the fee quota - graduated fees start after the first 14.7 billion board feet of lumber imported from Canada per year - hasn't restricted the supply of lumber from Canada yet, concerns over possible supply squeezes have produced more volatility in lumber, says Burrle Elmore, editor of Random Lengths, the Eugene, Ore.-based lumber newsletter.

Neal Schmaedick, Smith Barney lumber analyst, agrees, but adds as the market becomes more accustomed to the trade pact, the agreement's effect will be more predictable.

"[The trade pact] will have a huge impact in strong [consumption] years," Schmaedick says. "It will have a minimal effect in weaker years because you need to get consumption up to a point where excess supplies of Canadian lumber are required here in the U.S."

Elmore says the best lumber production statistics come from the Western Wood Product Association and the Southern Forestry Product Association in the United States and the government-run Statistics Canada up north.

For consumption, housing starts, repair and remodeling numbers, interest rates, new housing and existing home sales all are important. Building permits is a more forward-looking statistic, Schmaedick says. But, again, the slew of sources for statistics, from Realtor associations to the U.S. Commerce Department, makes analysis daunting.

Elmore says while they must get the numbers from the associations before they redistribute them, Western Wood Products and Resource Information System Inc. offer comprehensive price, consumption and production numbers, simplifying the process.

Another comprehensive source is Random Lengths' monthly publication Random Lengths Yardstick.

Despite the slight lag time, the sources, particularly the newsletter, are timely enough for traders. "Those are good numbers," Schmaedick says. "That's what the market watches."