Read Ebook: About sugar buying for jobbers How you can lessen business risks by trading in refined sugar futures by Dyer B W Benjamin Wheeler

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The measure of protection afforded by the Exchange will appeal to those jobbers who wish to reduce the speculative element in their business.

In the example immediately following, as in all others, we have not taken into consideration the difference between the Exchange quotations and the Seaboard Refiners' quotations, which is explained on page 38. This would simply inject an unnecessary complication, and would be of no particular advantage for purposes of illustration.

You should be able to figure the cost of your sugar at about the market price at the time it is received or sold.

If the price of sugar should go down to 4.00 at about the time when you sell it, your actual sugar, for which you contracted to pay 6.00, would be worth only 4.00; but you would then buy to cover your futures sale, making 2.00 on this transaction, which, subtracted from the price you paid , brings the cost down to the market price of 4.00. In other words, you have accomplished your purpose of being able to figure your sugar cost at the market price at the time when you received it . That is, although every pound of actual sugar was sold at a loss, this loss was balanced by the profit from your hedge.

If the market should remain relatively stable you would buy to cover your hedge at approximately the same price as you sold for, your gain or loss being practically nothing. In other words, you would obtain sugar at the market price, which is the purpose in this kind of a hedge.

All sugar buyers have had the experience of buying actual sugar, only to see it advance or decline before they have disposed of it. How to protect the gain, or minimize the loss, is described in the two hedging positions which we now discuss.

On the other hand, the reverse might be the case. You might find the market going down, and say, "The market is going lower. I want to hedge against that, and limit my loss to a definite amount."

CHART 2

In both of these cases, the operation is relative. If a man has a profit, let us say 2? a pound, and he hedges, he maintains his profit of 2? a pound as compared with the market at the time of delivery, or at the time when he expects to sell this sugar, regardless of whether the market is higher or lower.

In the same way, conversely, if he has a loss on his sugar of 2? a pound, by hedging he can limit that loss to 2? a pound, even though the market goes still lower. In other words, his sugar cost at the time of delivery, or at the time when he expects to sell the sugar, will be about 2? above the market price, whether the market is higher or lower.

Three things may occur--the market may decline, or it may continue to advance, or it may remain steady. You have accomplished your purpose in any case .

On the other hand, when it becomes necessary for you to cover your hedge, if the market has remained steady and is again at 8.00, the two futures transactions cancel themselves without profit or loss. Your original cost of 6.00, therefore, stands as your actual sugar cost at the time of selling . This is 2.00 under the market and you have accomplished your purpose.

This operation is identical in its working with the previous example, except that you have a different end in view.

CHART 3

After your original purchase at 6.00, and market decline to 5.00 , the market might advance again to 6.00, or remain steady at 5.00, but the operation is no different from that previously described, and you in each case attain the same result.

Buying of Sugar Futures

This privilege is particularly valuable to:

No doubt many jobbers will recall occasions when anticipating their requirements seemed obviously advisable, perhaps almost imperative. Such a jobber would be one who believed in the market. His action would be based on his opinion of the market. He might note in January, let us say, that the price of May or July futures is favorable. He would like to get his May or July sugar at about that figure. You yourself probably can recollect many times in the past, when the general market was in such a strong position fundamentally that anticipating your requirements seemed advisable. You decided to buy a considerable quantity only to find that refiners would not sell you to the extent that you wished to purchase. When covering your future requirements on the Exchange, you can buy any quantity desired.

A jobber must anticipate the market in order to take full advantage of it, and in this connection it should be borne in mind that the Sugar Exchange, as in the case of practically all exchanges, usually anticipates either favorable or unfavorable developments in the market for the actual commodity. Consequently, prompt action is necessary when either a higher or lower market is expected, as the Exchange market will usually be the first to reflect changing conditions.

Suppose you feel that the price of sugar is low and probably going higher. You try to anticipate your requirements for some time to come, but find that refiners will not sell for more than thirty days.

You can go on the Exchange and buy futures in the quantity and month desired. Assume then, that you pay 6.00 for your futures. Now, whatever happens in the sugar market, you know you can get the quantity of sugar desired at about 6.00 .

The market will advance, decline or hold steady.

Say the market advances. When it seems advisable to close out your Exchange contract and buy actual sugar, the price may have gone up to 8.00. You will then sell your futures at about 8.00, go into the market and buy actual sugar at the same price, assuming, of course, that the actual market has advanced in relative proportion--which is likely. Although actual sugar has cost you 2.00 more than you had figured, you have made 2.00 on your futures. Profit and loss cancel each other. Your sugar cost is 6.00.

On the other hand, suppose the market declines after you have bought futures at 6.00, and goes down to 4.00, when it seems advisable to close out your Exchange contract. You sell your futures at 4.00, a loss of 2.00. But you will also buy your actual sugar at 4.00, which is 2.00 lower than you had planned. Your actual sugar cost was therefore 6.00, which is the price you had figured was favorable.

If the price still is at 6.00 when you desire to liquidate, you would sell your futures and buy your actual sugar at about the same price. Thus you have neither gained nor lost, but you have been sure of getting sugar at 6.00, which is the price you felt was low.

The time to buy actual sugar is generally when the market becomes strong and an advance in the price of the actual commodity seems imminent; but the time to buy sugar futures is before the strength develops. The future market invariably discounts declines and anticipates advances.

While it may not be an established custom, we know numerous instances where jobbers have sold sugars in small quantities for future delivery. The examples to which we refer are small manufacturers buying sugar locally, who, when the market appears in a strong condition desire to be assured of their regular supply of sugar at a specified price. Under such conditions we have known jobbers to sell them sugar for delivery over several months. If at any time you are placed in a similar position, and desire to take care of your customers in this manner, without incurring too great a risk, the Exchange offers exceptional opportunities for protection, as, of course, you would be able to buy sugar for delivery in any month you desire, even as far in advance as one year.

It is clear that if you sell at a specified price for delivery at a certain time, your only protection is your belief that you'll be able to buy sugar cheaply enough to make a profit.

CHART 4

It is equally clear that if a manufacturer names a price and takes advance orders without pre-determining his sugar cost, his profit is a matter of guesswork. He is not going to know the cost of his manufactured product until he buys his sugar.

Assume that you have contracted to deliver sugar to a manufacturer or to any customer at a definite date and a specified price, without buying sugar to cover your requirements. If the price of sugar is favorable when you deliver it, you are fortunate and net a profit. But sugar may have advanced to a point where you are forced to pay such a price that your profit is lower than it should be. In fact there may not be any profit at all.

Suppose that in March or April, for example, the market appears strong and you find that some of your manufacturing customers are anxious to be assured of an adequate supply of sugar at a definite price. In such a case, if these advance orders called for a sufficient volume, and provided Exchange prices were favorable, you could take care of your trade's future requirements at a fixed price, without yourself taking a speculative position. We also believe that buyers making these arrangements with any of their trade would be justified in requesting the same proportionate marginal protection which it is necessary for jobbers themselves to give the seller on the Exchange. There will no doubt be many occasions when it would be worth while to solicit orders on this basis.

With your own sugar cost fixed by the use of the Exchange, you could take proper care of these buyers without worrying about subsequent fluctuations of the market, as you would know that your sugar cost would be about the price paid for your futures which, let us say, is 6.00.

The market may advance so that by September, sugar is selling at 8.00. . So you sell your futures at 8.00, go into the market and buy actual sugar for about the same figure, assuming, of course, that actual sugar has also advanced in relative proportion, which is likely. You pay 2.00 more for your actual sugar than you had figured but you have profited to the extent of 2.00 on the sale of futures. Profit and loss cancel each other and you have your sugar at 6.00. In other words, although the market is now 8.00 you are delivering 6.00 sugar to your customers, with a profit to yourself.

If the market declines after your original purchase at 6.00 so that in September sugar is selling at 4.00, you will sell your futures at 4.00, taking a loss of 2.00. But you will buy your actual sugar at about 4.00, also, which is 2.00 lower than you planned for. This gain of 2.00, while not to be termed an actual profit, may certainly be considered as canceling the loss on the sale of your futures, so that the cost of your sugar is really 6.00, your original price.

Another way of looking at this is to add the loss of 2.00 on the sale of your futures to 4.00, the cost of your actual sugar, making 6.00, the price upon which you had based your plans. If you had waited, you would have been able to get your sugar for 4.00, but by buying it ahead you have had the benefits of protection and the elimination of speculation and risk.

If the market remains steady after your June purchase, or after various fluctuations, returns to 6.00 by September, you sell your futures at 6.00 and buy spot sugar for about the same amount. Thus you have neither gained nor lost, but you have been protected in your sugar cost.

This is essentially a "playing-safe" operation. It results in profit insurance for the jobber who is willing to sacrifice the possibility of a speculative gain on advance sales to customers. It is thoroughly sound business policy and is neither expensive nor difficult to carry out.

Point of Delivery

Although Chicago is the delivery point in all Exchange contracts for refined sugar, it should be plainly understood that the Exchange is for anyone, anywhere. Whether located in Chicago, or in Rochester, Baltimore, New York or even San Francisco, a jobber can advantageously use the Exchange.

The usual procedure followed in sugar exchange operations is for the buyer to close out his exchange transaction prior to the period calling for delivery and purchasing actual sugar from the refiners, executing both transactions practically simultaneously.

Possibly the most important problem in connection with the organization of any commodity exchange is to reduce the possibility of corners, however remote, to the smallest possible degree.

In the case under discussion, the Chicago delivery point, by virtue of its accessibility for producers and consumers from all parts of the country, operates to that end.

Practically every refiner of cane sugars in the East and West, as well as the Southern refiners, carries large stocks in Chicago, and its favorable location in connection with the beet sugar industry also makes it highly desirable. Its situation in regard to the offerings of the Louisiana producers is also an additional protection and advantage of considerable importance.

The Exchange-licensed warehouses in Chicago are under the direct and constant supervision of Exchange representatives. Facilities are provided for testing and grading sugar so as to maintain Exchange quality standards.

When are Refiners' Prices and Exchange Quotations in line?

Since exchange quotations for refined sugar futures are net cash ex-exchange-licensed warehouse, Chicago, while refiners' quotations are f.o.b. refinery, less 2% for cash, it is obvious that there must be a difference between refiners' prices and exchange quotations.

It is equally obvious that the differential should approximate the freight rate between Chicago and the Seaboard, where the refiners are located, with allowance also for the cash discount. When the markets are in line such is the case. Conversely, when the differential is higher or lower, the markets are out of line.

Therefore, in order to tell whether the markets are out of line, or to what extent, it is necessary to determine on a differential to represent the normal difference between the two markets. There is no one figure, however, that will satisfy all conditions at all times, for the reason that there are various freight rates between the Seaboard and Chicago. It is inaccurate, for instance, to use 63? as the basis for the normal differential. The 63? rate is one rate--the all-rail freight rate from New York to Chicago.

Other important routes and rates are as follows:

Routing: Freight Rate:

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