Sugar Trading Manual
STM Sugar Trading Manual
Edited by Jonathan Kingsman
Cambridge England
Published by Woodhead Publishing Limited, Abington Hall, Abington Cambridge CB1 6AH, England www.woodhead-publishing.com First published 2000 Second edition 2002 This edition published 2004 © complete work, Woodhead Publishing Limited 2004 © Chapter 4, LMC International 2004; © Chapter 19, Joan Noble Associates 2004 The authors have asserted their moral rights. This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. Reasonable efforts have been made to publish reliable data and information, but the authors and the publisher cannot assume responsibility for the validity of all materials. Neither the authors nor the publisher, nor anyone else associated with this publication, shall be liable for any loss, damage or liability directly or indirectly caused or alleged to be caused by this book. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming and recording, or by any information storage or retrieval system, without permission in writing from the publisher. The consent of Woodhead Publishing Limited does not extend to copying for general distribution, for promotion, for creating new works, or for resale. Specific permission must be obtained in writing from Woodhead Publishing Limited for such copying. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation, without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. ISBN 1 85573 457 5 ISSN 1476-7473 Typeset by SNP Best-set Typesetter Ltd., Hong Kong Printed by Astron On-Line, Cambridgeshire, England
Contents List of contributors Foreword by Dr Peter Baron Introduction Index
Part 1: The history of sugar 1 Early history Tony Hannah International Sugar Organization The spread of sugar westwards The colonial era Sugar and slavery The rise of beet sugar Technical innovation The social history of sugar
2 Sugar from the 1900s to the present day Tony Hannah, Sergey Gudoshnikov and Lindsay Jolly International Sugar Organization 1900–14: Rapid expansion 1914–18: Decline during the First World War 1919–39: Rapid growth and cane makes a comeback 1939–45: Decline in both beet and cane sugar production during the Second World War 1945–55: Rapid recovery, first post-war International Sugar Agreement 1955–65: The Cuban Revolution disrupts trade flows 1965–75: The 1974 price boom unleashes far-reaching structural changes for sugar Contents/page i
Contents 1975–85: The 1980 price boom reinforces the effects of the 1974/5 boom 1985 to the present day
Part 2: The global picture 3 The current world picture Jonathan Kingsman, Société J. Kingsman Tom McNeill, Sugar InSite Pty Ltd Structural change within the sugar market Future prospects – closer examination of three key producers The trading implications of recent changes
4 Costs of production Philip Digges and Dr James Fry LMC International Rationale behind production cost studies Choice of benchmark A comparison of cane and beet sugar production costs A comparison of sugar production costs for a group of selected cane and beet sugar producing countries Technical performance and its impact on costs Conclusion
5 Alternative sweeteners Lindsay Jolly International Sugar Organization Starch sweeteners High intensity sweeteners Conclusion Appendix: Characteristics of high intensity sweeteners and polyhydric alcohols References
6 World fuel ethanols – analysis and outlook Dr Christoph Berg F.O. Licht Contents/page ii
Contents Some basic concepts Success factors Ethanol support schemes – a regional analysis World ethanol trade flows now . . . . . . and in the future Conclusions
Part 3: Physicals 7 Sugar pricing Robin Shaw Samer Darwiche, Cargill International SA, Geneva The futures component Physical premiums or discounts
8 Freight Stephan Baldey O. P. Secretan Liner or tramp Voyage or timecharter Voyage estimate: dry cargo Charter party Trends
9 Statistical analysis Rod Boltjes Cargill Inc, USA The quarterly ‘S & D’ format Sources of information Quality conversions Other conversions How to use the database Relationships Significance of the fundamental range Conclusion Contents/page iii
Contents 10 The Sugar Association of London (SAL) and The Refined Sugar Association (RSA) Derek Moon SAL and RSA Why do trade associations exist? How are the two sugar associations managed? The regulatory organizations for the international trading of physical raw cane and beet sugar and physical refined white sugar How does the arbitration system work? Supervision of raw sugar cargoes delivered to the UK by The Sugar Association of London Other services to the trade
11 Supervision Robert G. Danvers International Commodity Control Services, Hamburg Definition Nomination Role of the supervisor Documentation Claims Arbitration/litigation Conclusion
12
Sugar quality Tom McNeill Sugar InSite Pty Ltd Quality aspects of raw and refined cane sugars The refining process Critical steps in refining sugar Utilization of sugar in food manufacturing Grades of raw sugar
Part 4: Futures 13
Futures and options James Cassidy and Michael McDougall Fimat, USA History and background Market participants
Contents/page iv
Contents Option strategies Conclusion
14
The exchanges Doug Nicolson Sucden UK Ltd The New York Coffee, Sugar and Cocoa Exchange (CSCE) LIFFE The Tokyo Grain Exchange
15
Technical trading Jonathan Kingsman Société J. Kingsman Technical versus fundamental analysis Why does technical analysis work? The investment funds The tools of the technical trade Risk management and moral hazard Conclusion
Part 5: Administration and management 16
Payment and documents John Maton Coimex, Geneva Cash against documents (CAD) Letters of credit (L/C) or documentary credit (credit) Bid bonds (BB) and performance bonds (PB) and guarantees
17
Accounting Simon O’Mahony Sucre Export London Ltd Commercial approach Special features of sugar accounting Accounting principles Contents/page v
Contents Futures margins Positions Contract pricing Vessel accounting Futures accounting Despatch and demurrage Currencies Internal markets Quotas and licences
18
Finance and risk management Roger Bradshaw Rabobank, London Primary production financing Financing sugar factories and mills International sugar trade Managing risk
Part 6: Regional markets 19
The European Union Joan Noble Joan Noble Associates The EU sugar policy 2001–2006 Pressures for change: the EU sugar policy from 2006 The policy beyond 2006 Appendix A: EU sugar support prices Appendix B: Basic sugar, isoglucose and inulin quotas in the EU (tonnes) 2001/02 to 2005/06 Appendix C: Coefficients used to cut Member States’ quotas for sugar, isoglucose and inulin: applicable from 2004/05 Appendix D: EU production quotas for sugar, isoglucose and inulin Appendix E: Preferential sugar quotas for ACP and India
20
The United States Frank Jenkins Jenkins Sugar Group US sugar policy Tariff rate quota
Contents/page vi
Contents Sugar program apparatus Re-export programs The US sugar beet industry The US cane sugar industry Free trade
21
MERCOSUR and the Andean Community Leonela Santana-Boado UNCTAD MERCOSUR and the Andean Community Agreement Sugar in the MERCOSUR Agreement Impact of MERCOSUR on members’ sugar economies Sugar in the Andean Community Impact of Andean Community (CAN) on members’ sugar economies Conclusion Appendix A: Trade agreements in Latin America Appendix B: MERCOSUR and CAN in the world sugar economy Appendix C: Centrifugal sugar (thousand tonnes raw value): MERCOSUR members Appendix D: The sugar trade before and after MERCOSUR Appendix E: Ad valorem tariffs in MERCOSUR members Appendix F: Ad valorem tariffs in Andean group of countries Appendix G: Centrifugal sugar (thousand tonnes raw value) in the Andean Pact Appendix H: The sugar trade before and after the Andean Pact Appendix I: The MERCOSUR Agreement; from LAFTA to MERCOSUR Appendix J: First efforts to integrate the sugar sector
22
Sugar markets of the FSU countries Sergey Gudoshnikov International Sugar Organization Sugar production: trends and developments Sugar consumption: trends and developments Foreign trade in sugar: trends and developments National sugar policies and market structures Conclusion Appendix: Statistical analysis
Contents/page vii
Contents
Part 7: Appendices 1 Sugar No. 11 Rules 2 Sugar No. 5 Rules 3 Standard physical contracts 4 Sugar Charter-Party 1999 5 Sugar No. 14 Rules 6 Organic sugar – Demand potential and supply availability 7 Glossary of terms
Contents/page viii
Contributors Stephan Baldey Stephan Baldey is a chartering broker who has been involved in the international freight market for over thirty years. He is both a member of the LIFFE sugar market freight panel and of the Baltic Exchange. His company, O.P. Secretan, based in the City of London, is experienced in the chartering of ships to carry all dry cargo commodities specializing in the sugar trades.
Christoph Berg Christoph Berg is senior economist and deputy director at commodity analyst F.O. Licht. He graduated in Economics from Heidelberg University in 1989 and afterwards was Research Fellow at Victoria University, Manchester, UK. In 1993 he was awarded a Ph.D. in Economics at the Technical University of Berlin. In 1994 he joined F.O. Licht, where he is responsible for newsletters and reports on sugar, molasses and ethanol.
Rod Boltjes Rod Boltjes was born in 1944 near Platte, S. Dakota. Rod graduated with a B.S. degree from S. Dakota State University in 1967. He was drafted into the US Army while working on his master’s degree in economics at the same institution. After a year’s service in Vietnam, he joined Cargill in 1969. The early years at Cargill were spent on fundamental analysis for the grain, livestock and soybean processing divisions. In 1973 he joined the Cargill Sugar Division and created a fundamental data package to assist in analysing the volatile sugar market. Similar statistical packages were later created for cotton, molasses and coffee. From 1983 to 1987, he was manager of Cargill’s Technical Analysis department, where he developed technical trading systems and held technical seminars for the company’s trading divisions. Rod is currently senior economist at Cargill for the Sugar Business Unit.
Roger Bradshaw Roger Bradshaw started in sugar in 1977 as a floor trader on the Paris futures market. He then moved to London where he worked for Rionda Contributors/page i
Contributors de Pass as a trader until 1980 when he joined J.H. Rayner (Mincing Lane) Ltd. In 1985 he joined E.D. & F. Man Ltd. and was appointed as a director of E.D. & F. Man (Hong Kong) Ltd. He joined Rabobank in Hong Kong in 1991 and in 2000 relocated to Rabobank in London. Since January 2004 he has assumed responsibility for relationship management of UK food and agribusiness clients.
James Cassidy James Cassidy is Senior Vice President – Investments of Fimat USA in New York where he heads the sugar desk. After graduating from Fordham University with a double major in Finance and Economics, Jim has posted an 18-year career in the sugar business with a number of houses, including Thomson McKinnon, Prudential Bache, Paine Webber and Brody White. Jim has extensive experience in trading futures and options with an in-depth knowledge of the sugar industry. He has written numerous articles and journals on the futures side of the business and is an active representative of trade houses, producers and users in sugar derivative markets.
R.G. Danvers R.G. Danvers started his career in 1963 by joining Cargo SuperIntendents (London) Ltd (SGS Group), where he worked for nine years, involved in sampling, checking and weighing cargoes arriving from many different origins. In 1974, he joined Tradax (Cargill Group) in the UK and was responsible for UK Discharge Programme, including the appointment of Stevedores, Ship Agents and Cargo Surveyors as well as undertaking chartering activities. He also represented Tradax at the North American Shippers Association. In 1978, he was appointed Managing Director of Warriner Griffith International and travelled extensively overseas in developing the international trade in supervision/surveying services. Since 1981, Mr Danvers has been a Director of Control Union responsible for sales and marketing worldwide. In 1993, Mr Danvers moved from London to Hamburg and was appointed Managing Director of ICCS – International Commodity Control Services GmbH, a company within the Control Union World Group of Companies, with specific responsibilities for the marketing and execution of sugars and related business worldwide, in addition to developing the group’s expanding supervision interests in Eastern and Central Europe including the Former Soviet Union (FSU) and the Commonwealth of Independent States (CIS). During this period, Mr Danvers served as Chairman for two years on the Agricultural and Vegetable Oils Committee of the International Federation of Inspection Agencies Contributors/page ii
Contributors (IFIA) and currently continues to serve on this committee as a Senior Member. Additionally, Mr Danvers serves as Chairman on behalf of IFIA on the current Sub-Committee formed between the Refined Sugar Association (RSA) and the Sugar Trade Protection Club (STPC). During the course of his career, Mr Danvers has been called upon as a Professional Witness at various arbitrations in matters related to the supervision business.
Samer Darwiche Samer Darwiche entered the commodity industry in 1991 with Cargill International SA and held senior trading positions in Geneva in its Energy and Sugar Divisions until June 1998. In 1999 he co-founded and co-managed a global sugar trading team for Tradigrain SA. Thereafter he worked as a fund manager for Martin Group in Milan until 2001. Mr Darwiche rejoined Cargill in 2002 as Manager of their White Sugar Trading operations.
Philip Digges Philip Digges is Deputy Head of Sugar Reseach at LMC International’s Sugar and Sweeteners Research team, with particular responsibility for international market issues and issues relating to sugar policy, pricing, trade and production. He is also an editor of the monthly Sugar Bulletin and Sweetener Analysis, and of the LMC Sugar and Sweeteners Quarterly Report Service. In addition to his role in contributing to LMC’s work on sugar, Mr Digges has also played a lead role in the company’s leather and leather products team. Prior to joining LMC, he was a senior economist at the Natural Resources Institute where he specialized in crop marketing systems and trading strategies. This involved analysis of smallholder, national, domestic and international marketing systems for tropical crops, and the appraisal of storage and processing technologies.
James Fry James Fry is Managing Director of LMC International, and was one of the company’s founders in 1980, subsequently spending a great deal of time participating in the development of its work in the sugar and sweetener sectors. A particular area of professional interest for him is the preparation of production cost models for sugar and other agricultural commodities. Prior to joining LMC, he was a University EconomContributors/page iii
Contributors ics lecturer at Oxford University, England, and also at the University of Zambia and the Université Officielle du Congo, in Lubumbashi in the Democratic Republic of the Congo.
Sergey Gudoshnikov Sergey Gudoshnikov was educated in Moscow in international trade economics and has dedicated more than two decades of his professional career to the world sugar market. From 1978 to 1988 he worked as a trader and then as deputy director of the Sugar Department of V/O Prodintorg, Moscow. At that time Prodintorg was the sole sugar importer and exporter in the Soviet Union with an annual turnover exceeding six million tonnes of sugar. In 1988 Sergey joined the secretariat of the International Sugar Organization, London, as an economist. He has published many articles on different aspects of the world sugar economy with a particular emphasis on the sugar markets of Eastern Europe.
A.C. Hannah A.C. (‘Tony’) Hannah was educated in New Zealand in agricultural economics and was Trade Policy Research Centre Fellow at Cambridge University from 1970 to 1973. From 1973 to 1976 he was Commodity Specialist at GATT in Geneva, and in 1977 he was appointed Head of the Economics and Statistics Division of the International Sugar Organization. He has published many articles analysing the international sugar market with particular emphasis on the effects of structural changes in the market. In 1996 he co-authored the book The International Sugar Trade, published by Woodhead Publishing Ltd. Mr Hannah died in June 2001.
Frank Jenkins Frank Jenkins is President of Jenkins Sugar Group, Inc., a commodities brokerage located in Wilton, Connecticut. Mr Jenkins has worked in various capacities in the sugar industry since 1983, most recently as a Vice President with Merrill Lynch and previously with E.D. & F. Man in New York. He lives in Wilton, Connecticut, with his wife and three children.
Lindsay Jolly Lindsay Jolly is an economist working with the International Sugar Organization where he is responsible for conducting market research
Contributors/page iv
Contributors and analysis of the world sweeteners, molasses and ethanol markets. Mr Jolly has a wide experience in economic research into primary commodity markets. He has previously been employed at the Australian Bureau of Agricultural and Resource Economics in Canberra, Australia (1982–90 and 1992–95) and the Food and Agriculture Organization of the United Nations in Rome, Italy (1990–92).
Jonathan Kingsman Jonathan Kingsman began his career in sugar in 1978 with Cargill Inc., where he worked as a trader both in Europe and the United States before moving on to the brokerage side of the business with ContiCommodity Services and then Paine Webber. He now lives in France where he started his own physical brokerage and consultancy company in 1990.
John Maton John Maton is an Arbitrator for The Refined Sugar Association of London. He has worked in the sugar trade since 1978, firstly for Anglo Chemical Commodities in London and from 1981 to 2003 for Gill & Duffus in Geneva. He joined Coimex Geneva in November 2003. He is a technician with in-depth knowledge of contract terms.
Michael McDougall Michael McDougall, Senior Vice President of Fimat USA Inc. World Desk, joined Fimat in March 1995 as Managing Director until May when the international team was transferred to New York. The World Desk has been instrumental in developing hedging activities for commodity producers and consumers, with particular emphasis on the Brazilian sugar/alcohol industry. Michael lived in Brazil between 1984 and 1998.
Tom McNeill Tom McNeill is a director of the consulting firm Sugar InSite Pty Ltd in Brisbane, Australia. This chapter was written when he was Senior Analyst for Queensland Sugar Ltd. Prior to that Tom was marketing manager for Queensland Sugar Corporation. He has also worked in sugar mills and in export marketing for CSR Limited, and as a project manager for the Australian Meat and Livestock Corporation.
Contributors/page v
Contributors Derek Moon Derek Moon joined the Sugar Association of London and the Refined Sugar Association in 1963 as a Junior Clerk and was appointed Secretary to both Associations in 1985. He is a member of the Commercial Court Committee, the Chartered Institute of Arbitrators and a council member of the Federation of Commodity Associations.
Doug Nicolson Doug Nicolson is currently manager of the sugar futures desk at Sucden UK. He has had a long and varied career in most aspects of the sugar business, including physical trading, physical brokerage and futures trading both as a client and a broker.
Joan Noble Joan Noble is a highly respected expert on the European Union’s common agricultural policy and its impact on the food industry. Having worked for many years in the City of London for sugar traders S. & W. Berisford and E.D. & F. Man, she established her own consultancy, Joan Noble Associates Ltd*, in 1989. Her business is active in advising on agricultural, food and environmental legislation and related international trade policy. She is a well-known speaker at international conferences, is a member of the EU’s ‘Team Europe’ Speakers’ Panel and has had numerous articles published. *Joan Noble Associates Ltd, 5 Brunswick Gardens, London W8 4AS; Telephone: 020 7727 9345; Facsimile 020 7792 1992; e-mail:
[email protected].
Simon O’Mahony Simon O’Mahony currently works as a trader for Sucre Export London Ltd. Simon qualified as a chartered accountant with Arthur Andersen in London before joining Philipp Brothers in 1979. He started on the sugar trading desk in 1984, specializing in both foreign exchange and EU sugar trading. He joined Sucre Export in 1990.
Leonela Santana-Boado Leonela Santana-Boado joined the United Nations Conference on Trade and Development in 1990. From March 1990 to December 1994, she worked as an economic affairs officer in the Commodities Division, Agriculture Products Branch. Since January 1995 she has been working at the Risk Management and Finance Unit of UNCTAD. She Contributors/page vi
Contributors has published various documents and has been a speaker at international conferences in the area of sugar and risk management and finance. Some of her most recent publications on sugar are: ‘Collateralized commodity financing with special reference to the use of warehouse receipts’, UNCTAD/COM/84, 1996; ‘Sugar and Customs Unions in Latin America: MERCOSUR and Andean Pact, 1997’; ‘Customs Unions and Free Trade: Mercosur and Andean Pact’, F.O. Licht’s World Sugar and Sweeteners Conference, 1998; ‘A survey of the impact of the Everything but Arms initiative in the sugar sector of LDCs’, 2003.
Robin Shaw Robin Shaw has been involved in sugar all his working life. He started with C. Czarnikow in 1966 before moving to Sucres et Denrees Paris in 1971, where, with one interruption, he worked until 1992. He was head of CR Sugar Trading in London from 1992 until its closure in 1999, when he started an Internet brokerage exchange. His travels on sugar business have given him a fairly deep knowledge of the main sugar countries, notably Russia (he speaks Russian) and China.
Contributors/page vii
Foreword The third edition of the Sugar Trading Manual appears only four years after publication of the first edition. This indicates the continued need for such a manual and reflects at the same time the dynamism of the world sugar industry. Dramatic change is taking place in the markets, the trading structures and patterns in the industry as well as in the commercial, policy and regulatory framework. These developments alone justify a regular updating. This third edition, however, is far more than a mere face-lifting operation. The historical part has been tightened up. Other parts like ‘The Global Picture’ and ‘Physicals’ as well as ‘Futures’ have been reworked and streamlined. The parts on ‘Administration and Management’ and ‘Regional Markets’ underwent a major rewriting to embrace the most recent developments and to take into account the rapid changes. The Sugar Trading Manual fulfils high expectations and remains the textbook of excellent standards, written by well-known and respected authors and orchestrated by an experienced editor. This combination makes the third edition of the Sugar Trading Manual an indispensable and absolutely essential tool for the increasing number of players in an expanding and growing world sugar economy. Dr Peter Baron Executive Director International Sugar Organization, London
Foreword/page i
Introduction The sugar trade houses have had such a difficult time over the last few years, it would be tempting to suggest that they needed some sort of manual to teach them how to trade. Even if that were true – and it is not – it is not the purpose of this work to teach anyone how to trade, nor, unfortunately, is it to provide solutions to all the problems that traders encounter. Its raison d’être is as a comprehensive reference and training manual for anyone involved in the international sugar trade. Its ambition is to find a permanent place among the half-empty coffee cups and general debris on the desk of every trader, broker, banker, forwarder and accountant in the sugar business. Where else, for example, would you be able to find, in one work, the world price of sugar in 1900, the correct method for accounting for options, the demurrage clause for the No.11 futures market, who pays what when documents are presented through a bank, or what exactly a doji star is? We believe that this manual fulfils its ambition because of the expertise of its contributors and all the hard work they have put into its preparation. Rather than try to write great chunks of the work ourselves, we preferred to ask for contributions from people who really know what they are talking about – people who have been working in their particular area for years and are happy to have this manual as a forum for passing on that acquired knowledge to young people entering the trade, or those requiring a strategic overview of the workings of the industry and its markets. The response to our initial request for contributions was tremendous and, despite our fears, that early enthusiasm translated into evenings spent in front of the computer screen, rather than in front of the television, and weekends lost to wives, families and golf courses. To all our contributors we pass on an enormous vote of thanks. To spouses, families and nineteenth-hole bartenders, we apologize for the time this manual has taken and we ask for forgiveness. We believe, however, that the end result is worth all the effort put into it. By its very nature as a multi-contributor work, the manual contains some imbalances. Some sections are longer than others and writing styles between contributors vary. We have, however, resisted the temptation to artificially harmonize the contributions, preferring to make a virtue of the variety inherent in the manual’s enormous breadth of coverage. Introduction/page i
Introduction After much reflection – and many false starts – we have split the manual into seven sections. Part One deals with the history of sugar and discusses the political nature of our commodity and examines how world trade has developed. Part Two explores, in detail, the background to the sugar trade with sections on current trade flows, relative costs of production, ethanol and alternative caloric sweeteners. Part Three looks at the heart of the physical trade. It begins by examining all the components that go into making up the price of sugar and then goes on to deal with the workings of the Sugar Association of London, how to set up a model for statistical analysis and the role of the cargo supervisor. Part Four looks in some detail into the workings of the futures market and the actors involved. Part Five deals with the back office with chapters on payments, banking and accounting. Part Six deals with government intervention and the place in the sugar trade of regional trade groupings. Finally, Part Seven, the Appendices, contains what we hope will be the ‘tool box’ for the sugar trade with examples of standard physical contracts and the rules of the New York and London futures exchanges. Throughout history, traders and merchants have traditionally made their money from the quality and rapidity of their information. The trade houses that exist today were built on the foundations of their communication and information networks. Even as little as 25 years ago, it was still necessary to book a telephone call to Moscow 24 hours in advance. Producers or buyers in far-flung places often had no idea at what price sugar was trading until they received their weekly market report each Monday morning. Communications were best by telex, and fax was in its infancy. Travel, particularly in the former USSR, was difficult. It was almost impossible to find out whether the Russian crop had failed unless someone from Prodintorg told you – and even then you were never sure they were telling the truth. Personal relationships were paramount and trade houses built up vast networks of offices and agents across the globe to maintain personal contacts and relationships with their clients. All this gave the trade-house professionals an important edge over the amateur speculators, an edge that is fast disappearing. Just as there is now a soft drink dispensing machine in every corner store in the world, there is a Reuters screen in every dusty sugar office in Brazil and a computer connected to the World Wide Web in every sugar factory in China. At the click of a button an Indonesian private buyer, for example, can check out not only the futures prices but also the physical premiums and container rates from any port in the world. News service reports have become so thorough that no corner of the trade is left undisturbed. It is not much of an exaggeration to say that there are no secrets any more. As for client relationships, communications have reached such an Introduction/page ii
Introduction advanced stage now that we even complain loudly if the call that we make on a mobile phone on the way to lunch fails to connect (at the first attempt) with a client who is also on a portable phone but in a night club in Thailand. We may think that we have a privileged relationship with a client but we have to accept that there are at least five of our competitors who also have the number of his portable phone – and they are probably less shy about using it than we are. Another related problem for the trade can be blamed, among other things, on Margaret Thatcher. Wherever you are in the world, reforms that she instigated may have lowered your taxes, but probably they have also reduced your profit margins. By catalyzing a wave of privatization that spread across the globe, people everywhere slowly found that they no longer worked for the government but for themselves. As such the money they were risking became their own. Price became the driving force. Perks, relationships and politics went by the board. Also, as the economies of developing countries have grown, the citizens of those countries have been empowered by a corresponding growth in education and knowledge. Twenty-five years ago, your Chinese client across the negotiating table probably left school at 14 years old. Today he may have graduated from Harvard. Twenty-five years ago a producer may have had a hard time grasping the concept of the futures market. Today we would probably have a hard time understanding the option strategy that a producer has just put on in the New York No.11 futures market. Finally, as consumer power and sophistication have grown, a vast financial services industry has grown to service it. Individual speculators have joined a million other like-minded souls in investment funds that now dwarf the traditional trade houses in their own markets. In 1974 a group of Russians wandered around London trying to convince anyone who would listen that, that year, Russia needed to import rather than export sugar. One trade house believed them and started a bull run that took the market to 66 cts/lb. If that happened today (which it would not because it would have been on the newswires the day before), the trade house buying would probably be filled in by a resting order that one of the big funds had forgotten to cancel. Trade houses have become small fishes in a large pond. Over the last 25 years, or so goes the argument, margins have disappeared, principle risk has increased, clients have become better informed and better educated, and traditional trade houses have been dwarfed by enormous and sophisticated investment funds. The end result of all these changes has been a further reduction in margins, leaving the trade houses moving sugar around the globe for little reward. However, that consensus is just too pessimistic. Although privatization has increased principle risk, it has also Introduction/page iii
Introduction widened the client base and given traditional trade houses many more opportunities. Twenty years ago, if a trader wanted to sell sugar to Russia he had no choice but to sell it to one central buying agency. Now he has quite a choice of trading partners although, of course, he will have to be careful who he trusts with his money or his sugar. In any case, he has the freedom to import and distribute the sugar himself, adding value and increasing the opportunities for profit. Similarly, 20 years ago, if a trader wanted to buy sugar from Brazil he had to deal with one central selling agency. Now he can buy directly from the mills, build and run his own terminals, deal in the domestic market and even invest in the production process. Admittedly it is risky – and the risks have to be priced accordingly – but the choice now exists where it did not before. Technology has increased the flow of information, but it was never information that was important anyway. Analysis has always been the key. Being able to work out how a particular news event will affect the market has always given some people an edge over others, and that is unlikely to change. Also, one of the side effects of this information flow is that there is now an information overload. Being able to filter out the noise and concentrate on the essential is more important than ever. Besides, it is not actually true that the flow of all information has increased. Try to get hold of up-to-date figures on Australian export numbers, and you will find that they have been classed as sensitive and are now withheld for a few months before publication. Try to get up-to-date South Brazilian production numbers, and you will be told that ‘they’ve got lost somewhere in UNICA’ and are only found a month or so later – when it is too late anyway. Finally, it has to be said that current information does not always help you to predict future events. One look at the different estimates for the upcoming year’s supply and demand highlights this. Better education as a result of increasing wealth in developing countries has increased the sophistication of both producers and consumers, but the world is a better place for it. To argue that wider education has reduced margins is to suggest that the cake is limited in size and that there is only a certain amount of wealth to go around (economists call this ‘the shortage fallacy’). Better education in itself increases a developing country’s growth and, incidentally, its sugar consumption. On the producing side, better education increases productivity; the use of best available management practices lowers production costs and increases net well-being all round. Also, having a well-educated and sophisticated negotiating partner should enable a trader to work together with him or her to reach solutions that are advantageous for both parties. This is much better than simply imposing what one side thinks is best. Admittedly margins are small, but then the commodities business has Introduction/page iv
Introduction always been a high-volume, low-margin business where rates of return have never been particularly sexy. However, although it may only be an impression, it seems that each time the trade houses have a bad year, they always go back to the basics of moving sugar from producer to consumer with no add-ons and no frills. If the market is bubbling, no one pays much attention, say, to Tunisia’s tender for a cargo of whites. However, if the market is flat and the Tunisian tender is the only thing happening at the time, then the offers will be more competitive and the margins smaller. (In a quiet market, lower margins can also reflect the lower risk of getting your hedges off at the right level.) However, there obviously comes a point where it is simply not worth doing the business. If enough trade houses took the conscious decision not to compete in a particular business then margins would inevitably rise. It is true that investment funds have swamped the trade houses in size but they have also opened up a whole new area of profitability. Devoting brain power to trying to work out the funds’ future behaviour has turned out in recent years to be probably the best time investment a sugar trader can make. And, as nearly all of these funds are trend followers, predicting their behaviour is not as impossible as some might think. Admittedly the days are gone when trade houses had a free hand to manipulate the futures, but then those times never really existed in the first place. There was usually another trade house of equal size willing to call the other one’s bluff. Besides, markets are efficient enough to ensure that manipulations are short-term affairs. Trade house access to finance has recently been reduced, but that could best be put down to the inability of the trade houses to price risk correctly. The fact that the banks are no longer willing to subcontract their role to the trade houses suggests that the trade houses have not filled that role successfully. In hindsight, traders have been too optimistic and too keen ‘to get the business done’, underestimating the risks involved and charging too small an interest rate differential. Bankers are a fickle lot and different areas of lending move quickly in and out of fashion. The commodity trade is now out of fashion, but that will not last forever. A scarcity in the supply of finance will eventually push differential rates higher to a level where risk is correctly priced. At that time, banks will be back knocking at the door. Having said all this, however, it is possible to argue that not only has there been a trend by trade houses to move up and downstream, but there has also been a move by producers and consumers to take over the role of the traditional trade houses. Middle East refiners have negotiated purchase contracts directly from Brazilian producers. Russian importers now buy fobs (free on board) and ship the sugar themselves. Brazilian producer groups have delivered their sugar to the New York futures exchange. As one observer put it recently, everyone now is in the DIY (do it yourself) trading business. All in all, the number Introduction/page v
Introduction of companies and individuals involved in the international sugar trade is growing, not shrinking. Traditional trade houses may be losing ground, but they are being replaced just as quickly by producers and consumers moving in towards the centre of the spectrum. The sugar trade will continue to evolve, and the speed at which it does so will probably accelerate. Technical change will alter the way sugar is grown, harvested, transported to the ports, freighted and discharged. White sugar is often moving in bulk – or at least in big bags – to the ports, and this trend is sure to continue. Vessel sizes for bulk sugar are increasing dramatically while there has been a marked shift towards shipping white sugar in containers. The quality of raw sugar – spurred on by restructuring in Brazil’s Proalcool programme – will continue to improve and refinery processes will adapt in consequence. However, it is the growth of computer technology and, in particular, the transmission of information that will have the biggest effect on the way the sugar trade is conducted. It is now possible to access most newspapers and journals from the World Wide Web – no matter where they are published. At the click of a button, sophisticated search engines can turn out articles on sugar from Thailand to Sao Paulo and the news – all the news – is accessible from the trader’s desk. As such, this reduces the need for trade houses to keep expensive local office networks that were built up over the years to source market information. The trouble is, of course, that there is now too much information and this creates the need for intermediaries – people or companies who can analyse and interpret the news, filter it and deliver it in a timely fashion to traders and producers around the world. This, of course, brings us back to this manual. Information and knowledge have to be gathered from many sources, structured into a readable form and then presented in a way that adds value to the lives of the people for whom it is intended. With the changes in the sugar trade over the last 25 years there are more new players in the market than ever before. There is, therefore, more need for a manual now than ever before. The traditional trade houses realize that and, as a result, have contributed so willingly to its production. We thank them for that. Jonathan Kingsman Société J. Kingsman
Introduction/page vi
Index AA (against actuals) trades, 7/3–4, 17/7 accounting, 17/1–33 accrual principle, 17/3 balance sheets, 17/3–4 contract pricing, 17/7–9 controls, 17/3 currencies, 17/13–14 demurrage and despatch, 17/11–13 forward trading of physicals, 17/1–2 futures accounting, 17/2, 17/4–5, 17/10–11 internal markets, 14/14–15 licences, 17/15–16 margin payments, 17/4–5, 17/11 matching principle, 17/2–3 narrow margins, 17/1 position sheets, 17/2, 17/5–7 presentation, 17/3–4 profit and loss accounts, 17/3, 17/17 prudence principle, 17/3 quotas, 17/15, 17/16 vessel accounting, 17/9–10 accrual principle, 17/3 acesulfame-K, 5/31, 5/33, 5/39, 5/45 ACP (African Caribbean and Pacific) countries, 19/9, 19/30 activated carbon, 12/9 affination, 12/2, 12/5–6 against actuals (AA) trades, 7/3–4, 17/7 agents, 8/7, Appendix 4/4 agricultural alcohol, 6/1 alcohol production agricultural alcohol, 6/1 anhydrous alcohol, 6/2, 6/7, 6/9–10 beverage alcohol market, 6/2 Brazil, 2/11, 3/11–12 hydrous alcohol, 6/2 synthetic alcohol, 6/1 see also ethanol production alitame, 5/31, 5/45–6 Andean Community (CAN), 21/2–4, 21/7–9, 21/11, 21/15–17 anhydrous alcohol, 6/2, 6/7, 6/9–10 annexed refineries, 12/1 appointing supervisors, 11/1–2 Arab Black List, Appendix 4/15 arbitration, 8/11, 10/2–4, 11/4, 11/5–6, 14/7 Brazilian standard terms, Appendix 3/6, Appendix 3/7–8 charter party terms, Appendix 4/14–15
European standard terms, Appendix 3/14 No. 5 rules, Appendix 2/21–2 No. 11 rules, Appendix 1/16–19, Appendix 1/20 Thai standard terms, Appendix 3/18–19, Appendix 3/25 Argentina, 5/15 Armenia, 22/4, 22/10, 22/18, 22/24 aspartame, 5/30–1, 5/32–3, 5/35, 5/39, 5/46 Australia delivery policy, 3/25 ethanol production, 6/18 futures and options trading, 13/13–14 production costs, 4/8, 4/9, 4/13 reporting conversions, 9/5 subsidies, 3/10 average pricing, 17/8–9 Azerbaijan, 22/4, 22/10, 22/18, 22/25 back-to-back letters of credit, 18/19–20 bagged cargoes, 3/28, 8/14, 11/2–3 bakery products, 5/7–8 balance sheets, 17/3–4 banks, 13/10–11 see also finance; payments Banque Indosuez, 18/19 Barbados, 1/4 Barbosa, Duarte, 1/1 Basel II, 18/22–4 basis trading, 7/6–12 beet sugar, 1/6–11, 2/1, 4/4–8 decline in production, 3/3, 3/4 quality conversions, 9/4 in the US, 20/1, 20/12–17, 20/23–4 Belarus, 22/3–4, 22/8–9, 22/17–18, 22/26–7 beverages market, 5/5–7, 5/10, 5/12–14, 5/23–4, 5/32–3, 5/41 alcohol, 6/2 bid bonds, 16/42–9, 18/21 bills of lading, 8/8, 8/9, 16/3–4, 18/19, Appendix 4/7–8 blending high intensity sweeteners, 5/39–42 BMF contract, 13/2–3 Bolivia, 21/4 bone char, 12/9 bounty system, 1/8, 1/10–11 box plots, 2/28–9
Index/page i
Index Brazil alcohol programmes, 2/11, 3/11–12, 6/2, 6/7 contract terms, 13/2–3, Appendix 3/1–2, Appendix 3/4–8 CPR finance system, 18/5–6 currency flotation, 3/30 ethanol production, 3/30, 6/2, 6/4, 6/7–11 expansion plans, 3/11–14 and FTAA, 20/29 futures and options trading, 13/11, 13/12–13 history, 1/4 land supply, 3/3 organic sugar market, Appendix 6/5 Proalcool programme, 6/2, 6/7 production, 2/11, 2/19–23, 3/11–14, 13/11 production costs, 3/12, 4/6–7 share of world exports, 3/6, 3/10 British Sugar Bureau, 10/6–7 Brussels Convention, 1/10, 2/4 bulk in bagged out (bibo), 8/14 bulking agents, 5/36–8 CAN (Andean Community), 21/2–4, 21/7–9, 21/11, 21/15–17 Canada, 5/33, 6/13 candle charts, 15/15–16 cane sugar, 1/1–6, 2/1–3, 4/4–8 in the US, 20/17–25 cane zoning, 18/4 CAP (Common Agricultural Policy), 19/1, 19/13 capacity utilization, 4/11–12 capital adequacy requirements, 18/22–4 carbon, 12/9 carbonatation, 12/6–7 carrying charges, 3/22, 3/23 cash against documents (CAD), 16/1–8 cash premium analysis, 9/7 centrifuging, 1/12, 12/4, 12/10 certificates, 8/12 certificates of quota exemption (CQEs), 17/16 CFTC (Commodity Futures Trading Commission), 13/3–4, 15/11 Chadbourne Agreement, 2/5 channels, 15/6–7 char filters, 12/9 charter party agreements, 8/5–13, Appendix 4/1–16 agents, 8/7, Appendix 4/4 arbitration, 8/11 bills of lading, 8/8, 8/9, 16/3–4, 18/19, Appendix 4/7–8 certificates, 8/12 commission payments, 8/12–13 demurrage and despatch, 8/9, 14/4–5, 17/11–13, Appendix 4/13
Index/page ii
deviations, 8/9 discharging, 8/7, 8/9, 10/5–6, Appendix 4/3, Appendix 4/8–9, Appendix 4/12–13 general average, 8/10–11 hold condition, 8/9 insurance, 8/10 International Safety Management (ISM) code, 8/13 laytime, 8/9, Appendix 4/11, Appendix 4/12–13 loading, 8/7, 8/9, Appendix 3/13, Appendix 4/3, Appendix 4/8–9, Appendix 4/11 mate’s receipts, 8/9, Appendix 4/7–8 notices and cancelling date, 8/8, Appendix 4/6–7 payment terms, 8/8, Appendix 4/5–6 riders, 8/12 satellite tracking, 8/11–12, Appendix 4/15–16 stevedores, 8/8–9, Appendix 4/7 sub letting, 8/11, Appendix 4/15 taxation, Appendix 4/4–5 taxes, 8/8 time bars, 8/11, Appendix 4/14 vessel condition, 8/9, 8/12 vessel description, 8/7, Appendix 4/1–2 vessel position, 8/7, Appendix 4/2–3 vessel readiness, Appendix 1/6 waiting times, 8/10, Appendix 4/13 see also payments; supervision charting see technical trading Chicago Board of Trade, 13/1–2 Chile, 21/2, 21/3 China ethanol production, 6/17 HFCS (high fructose corn syrup), 5/18–19 HIS (high intensity sweeteners), 5/34, 5/35–6, 5/45 history, 1/1 production costs, 4/8, 4/11, 4/13 claims settlements, 11/5 clarification, 12/2–4, 12/6–7 Clean Air Act, 6/12 Coffee, Sugar and Cocoa Exchange (CSCE), 14/1–11, Appendix 1/1–23 Colombia ethanol production, 6/19–20 external tariffs, 21/4 futures and options trading, 13/14–15 colonial era, 1/2–5 colour of bags, 3/28 colour measurement, 12/7–9 Columbus, Christopher, 1/3 commercial traders, 13/7–11 commission payments, 8/12–13
Index commitment of trades (COT) report, 13/3–4, 15/11–12 Commodity Futures Trading Commission (CFTC), 13/3–4, 15/11 commodity trading advisors (CTAs), 13/4–5 Common Agricultural Policy (CAP), 19/1, 19/13 Commonwealth Sugar Agreement (1951), 2/7, 19/9 concentration of exports, 3/4–6, 3/10 confectionery products, 5/7–8 consumer choice, 3/9 consumption ending stocks/consumption relationship, 9/6–7 in the Former Soviet Union, 22/7, 22/20–1 growth, 2/1, 2/14–18, 3/1–3, 13/16 of high fructose corn syrup, 5/2–3, 5/10–11 of high intensity sweeteners, 5/28–9 history of, 1/12–14 in India, 3/20–1 production/consumption relationship, 9/5–6 in the US, 20/1 container shipments, 8/2, 8/14 contract pricing, 3/29–31, 7/1–12, 17/7–9 contract terms, 3/25–9, 10/2 Brazil, 13/2–3, Appendix 3/1–2, Appendix 3/4–8 contract size, Appendix 1/4 Cuba, Appendix 3/2–3, Appendix 3/9–12 domestic contract (No. 14), 13/2, Appendix 5/1–16 Europe, Appendix 3/12–14 France, 13/2 Japan, 13/3, 14/21–3 London refined white (No. 5), 13/2, 14/10–21, Appendix 2/1–24 non-registered contracts, Appendix 2/23 premiums/discounts, 7/6–12 Thailand, Appendix 3/3–4, Appendix 3/14–25 verbal contracts, Appendix 1/3 world contract (No. 11), 13/1–2, 14/1–11, Appendix 1/1–23 controls, 17/3 conversion standards, 9/4–5 corn syrup see HFCS (high fructose corn syrup) costs of production see production costs counter-trade, 18/20–1 CPR finance system, 18/5–6 credit insurance, 18/18–19 crop cycles, 9/1–2 crop financing, 18/1–2
crushing, 1/11–12 crystallization, 12/4, 12/9–10 CSCE (Coffee, Sugar and Cocoa Exchange), 14/1–11, Appendix 1/1–23 Cuba, 1/3–4, 2/2, 2/4, 2/21, 3/29 contract terms, Appendix 3/2–3, Appendix 3/9–12 revolution, 2/8–9 currencies, 17/13–14 EU conversion policy, 19/4–6 matching, 18/9 cyclamates, 5/31, 5/33, 5/34, 5/38, 5/46 daily sentiment indicator (DSI), 15/14–15 damaged cargoes, 11/3–4 decolourization, 12/4, 12/7–9 default rules, Appendix 2/15–18 deficiencies and excesses, Appendix 1/20–1 deliverers’ obligations, Appendix 1/10–16 delivery grades, 14/3–4, Appendix 1/1–2, Appendix 2/2–3 delivery mechanisms, 3/25–9, 7/7–10, 14/4–6, 14/8–10 No. 14 rules, Appendix 5/5–6 No. 5 rules, Appendix 2/9–14 Thai standard contract, Appendix 3/14, Appendix 3/15–17, Appendix 3/20–2 delivery months, Appendix 1/4 demand, 2/14–18 for organic sugar, Appendix 6/3–4 supply and demand database, 9/1–8 demurrage and despatch, 8/9, 14/4–5, 17/11–13 accounting for, 17/11–13 Brazilian standard contract, Appendix 3/5 charter party agreement, Appendix 4/13 deviations, 8/9 dextran, 12/10 dextrose, 5/4 directional movement index (ADX), 15/14 discharging, 8/7, 8/9, 10/5–6 charter party agreement, Appendix 4/3, Appendix 4/8–9, Appendix 4/12–13 No. 14 rules, Appendix 5/9–10 discounts/premiums, 7/6–12 dispute resolution see arbitration; claims settlement documentary credits, 16/8–42 documentation, 11/4–5, 17/2 fraudulent amendment, 18/17 No. 5 rules, Appendix 2/14 No. 14 rules, Appendix 5/6–8 Thai standard contract, Appendix 3/17–18, Appendix 3/23–4
Index/page iii
Index Doha Development Agenda, 19/20, 19/21 doji star, 15/15 domestic contract (No. 14), 13/2, Appendix 5/1–16 draught surveys, 11/3 drying, 12/5 duties see tariffs and duties economic liberalization see free trade Ecuador, 21/4 ending stocks/consumption relationship, 9/6–7 energy qualities, 1/12 engulfing patterns, 15/15 environmental protection, 19/18 ethanol production, 6/1–24 in Australia, 6/18 in Brazil, 3/30, 6/2, 6/4, 6/7–11 in Canada, 6/13 in China, 6/17 in Colombia, 6/19–20 definition of ethanol, 6/1 in the European Union, 6/13–14, 6/21 feedstocks, 4/4–6, 6/1 futures market, 6/23–4 in India, 6/15–16 in Latin America, 6/19–20 in Peru, 6/19 political support, 6/6–7 and solvents, 6/2 subsidies, 6/7, 6/24 in Thailand, 6/16–17 trade flows, 6/20–2, 6/23 in the United States, 6/11–13 European Union, 19/1–30 Common Agricultural Policy (CAP), 19/1, 19/13 contract terms, Appendix 3/12–14 currency conversion policy, 19/4–6 domestic supply, 19/12–13 enlargement, 5/21–2 environmental protection, 19/18 ethanol production, 6/13–14, 6/21 export policy, 19/15–16 finance, 19/17–18 futures and options trading, 13/15–16 HFCS (high fructose corn syrup), 5/19–22 HIS (high intensity sweeteners), 5/36, 5/42 import policy, 19/8–12, 19/13–15 intervention prices, 19/16 isoglucose production, 5/21–2, 19/6–7, 19/24–9 licences, 17/15–16 MERCOSUR negotiations, 21/1, 21/3 organic sugar production, Appendix 6/5–6 production levies, 19/17–18
Index/page iv
production quotas, 5/21–2, 19/6–8, 19/24–30 carryover, 19/17 set-aside land, 19/17 sugar policy (2001–6), 19/1–18 sugar policy (2006–onwards), 19/19–22 Sugar Protocol, 19/9, 19/10, 19/20 support prices, 19/2–6, 19/23 evening star, 15/16 excesses and deficiencies, Appendix 1/20–1 exchange delivery settlement prices (EDSP), Appendix 2/4–6 exchange for physicals, 7/3–4, 17/7 executable orders (SEOs), 7/2–3, 17/7–8 exit positions, 15/4 exponential moving averages, 15/7 export credit agencies, 18/18–19 exports, 2/19–23, 3/23 concentration, 3/4–6, 3/10 European Union policy, 19/15–16 Former Soviet Union (FSU), 22/20–39 and production costs, 4/2 factories see refineries FAIR Act, 20/7–10 fair basis, 7/10, 7/11 farms crop cycles, 9/1–2 field performance, 4/9–11 financing, 18/1–6 feedstocks, 4/4–6, 6/1 field performance, 4/9–11 filtration, 12/4, 12/7 finance, 18/1–27 bid bonds, 16/42–9, 18/21 capital adequacy requirements, 18/22–4 counter-trade, 18/20–1 currency matching, 18/9 in the European Union, 19/17–18 factories and mills, 18/7–13 farms, 18/1–6 long-term finance, 18/12–13 performance bonds, 16/42–9, 18/21 plantations, 18/6–7 risk management, 15/16–17, 18/24–7 short-term finance, 18/9–11 tolling, 18/20 of trade houses, 18/14–15 see also payments Finland, 19/9 First World War, 2/1 flat prices, 3/29–31, 9/5–7 Florida, 20/17–18 food manufacturing, 12/10–11 force majeure, 14/7–8 Brazilian standard contract, Appendix 3/6, Appendix 3/8
Index charter party agreement, Appendix 4/14 European standard contract, Appendix 3/14 No. 11 rules, Appendix 1/19–20 No. 5 rules, Appendix 2/18–21 Thai standard contract, Appendix 3/25 forecasting, 9/2–3 Former Soviet Union (FSU), 2/14–18, 22/1–39 Armenia, 22/4, 22/10, 22/18, 22/24 Azerbaijan, 22/4, 22/10, 22/18, 22/25 Belarus, 22/3–4, 22/8–9, 22/17–18, 22/26–7 consumption, 22/7, 22/20–1 Georgia, 22/4, 22/10, 22/18–19, 22/27–8 HFCS (high fructose corn syrup), 5/22 Kazakhstan, 22/4, 22/10–11, 22/19, 22/28–9 Kyrgyz Republic, 22/4–5, 22/10–11, 22/19, 22/29–30 market structures, 22/12–19 Moldova, 22/3, 22/10, 22/30–1 production trends, 22/1–6 Russia, 2/18, 22/1–2, 22/8, 22/12–16, 22/32–4 sugar policies, 22/12–19 Tajikistan, 22/5, 22/11, 22/34–5 trade flows, 22/8–12 Turkmenistan, 22/5, 22/11, 22/35–6 Ukraine, 4/8, 4/11, 4/13, 22/2–3, 22/9, 22/16–17, 22/36–8 Uzbekistan, 22/5, 22/11, 22/38–9 forward trading of physicals, 17/1–2 France, 1/7, 13/2 fraud, 18/17, 18/21–2 free trade, 3/3–10 Andean Community, 21/2–4, 21/7–9, 21/11, 21/15–17 FTAA, 20/29, 21/1 Latin American, 21/1, 21/10 MERCOSUR, 21/1–7, 21/11–14, 21/18 NAFTA, 20/26–9 freight market, 8/1–14 bulk in bagged out (bibo), 8/14 container shipments, 8/2, 8/14 differentials, Appendix 2/7–8 liberty tweendecker ships, 8/13 liner services, 8/1–2 quantities shipped, 8/14 rates, 3/16 spreads, 7/10 timecharters, 8/4–5 tramping, 8/3–4 trends in, 8/13–14 vessel accounting, 17/9–10 voyage charters, 8/4 voyage estimates, 8/5, 8/6 see also charter party agreements
fructose see HFCS (high fructose corn syrup) FSU see Former Soviet Union (FSU) FTAA (Free Trade Agreement of the Americas), 20/29, 21/1 fuel ethanols see ethanol production fundamental analysis, 15/1–2, 15/17 supply and demand database, 9/1–8 funds, 13/4–6, 15/1, 15/4–6 futures trading, 3/22–31, 7/1–12, 13/1–19 accounting, 17/2, 17/10–11 against actuals (AA) trades, 7/3–4, 17/7 banks, 13/10–11 basis, 7/6–12 by Brazilian companies, 13/11 carrying-charges, 3/22, 3/23 commercial traders, 13/7–11 contract pricing, 3/29–31, 7/1–12, 17/7–9 delivery grades, 14/3–4, Appendix 1/1–2, Appendix 2/2–3 in ethanol, 6/23–4 executable orders (SEOs), 7/2–3, 17/7–8 fair basis, 7/10, 7/11 flat prices, 3/29–31, 9/5–7 freight spreads, 7/10 funds, 13/4–6, 15/1, 15/4–6 history, 13/1–3 by Indian companies, 13/11 inverted market structure, 3/22–4, 3/29 liquidity, 13/7 locals, 13/6–7 margin payments, 17/4–5, 17/11 non-commercial traders, 13/4–7 options on futures, 7/4–6 position information, 13/3–4, 15/11–12 by producing countries, 13/11–17 spreads, 3/22 strategies, 3/27–8, 7/11–12 trade houses, 13/8–10, 13/11, 13/17, 18/14–15 volumes, 13/7, 13/19 see also contract terms; delivery mechanisms; technical trading Gama, Vasco da, 1/1 general average, 8/10–11 Georgia, 22/4, 22/10, 22/18–19, 22/27–8 glucose, 5/1, 5/4 glycyrrhizin, 5/32, 5/46 grading, 12/5 Great Lakes, 20/14–15 Great Plains, 20/15–16 Greeks, 1/1 guarantees, 16/42–9, 18/16 Guatemala, 13/14–15 hammer patterns, 15/15 hanging man patterns, 15/15
Index/page v
Index Hawaii, 20/20–1 Hawley–Smoot Tariff Act, 2/5 HFCS (high fructose corn syrup), 5/1–28, 5/42–4 in Argentina, 5/15 in Asia, 5/15–19 in China, 5/18–19 consumption, 5/2–3, 5/10–11 in the European Union, 5/19–22 in the Former Soviet Union (FSU), 5/22 in Japan, 5/16–18 in Mexico, 5/12–14 outlook for, 5/22–8 prices, 5/9–10, 5/11, 5/24–8 production costs, 5/25 in South Korea, 5/16, 5/18 in Taiwan, 5/16, 5/18 in Thailand, 5/19 in the United States, 5/3–11, 5/22–5, 5/43–4 HIS (high intensity sweeteners), 5/1, 5/28–42, 5/44–5 acesulfame-K, 5/31, 5/33, 5/39, 5/45 alitame, 5/31, 5/45–6 in Asia, 5/30, 5/33–5 aspartame, 5/30–1, 5/32–3, 5/35, 5/39, 5/46 blending, 5/39–42 in China, 5/34, 5/35–6, 5/45 consumption, 5/28–9 cost savings, 5/40–1 cyclamates, 5/31, 5/33, 5/34, 5/38, 5/46 in the European Union, 5/36, 5/42 glycyrrhizin, 5/32, 5/46 isomalt, 5/46 lactitol, 5/46 malitol, 5/47 mannitol, 5/47 neohesperidine dihydrochalcon (NHDC), 5/47 neotame, 5/32, 5/45, 5/47 poly-ols, 5/1, 5/36–8 prices, 5/38–9 prospects for, 5/38–42 saccharin, 5/29–30, 5/34, 5/35–6, 5/38, 5/47 sorbitol, 5/37, 5/47–8 stevioside, 5/32, 5/39, 5/48 sucralose, 5/31–2, 5/39, 5/48 thaumatine, 5/48 in the United Kingdom, 5/41 in the United States, 5/32–3 xylitol, 5/48 history of futures trading, 13/1–3 history of sugar, 1/1–14 1900–39, 2/1–6 1939–85, 2/7–13 1985–present day, 2/13–33 beet sugar, 1/6–11, 2/1 bounty system, 1/8, 1/10–11
Index/page vi
cane sugar, 1/1–6, 2/1–3 colonial era, 1/2–5 First World War, 2/1 slavery, 1/5–6 social history, 1/12 technical innovations, 1/11–12 hold condition, 8/9 Holland, 1/4 Howard, Edward, 1/12 Hungary, 5/21 hydrous alcohol, 6/2 imports, 2/14–18 diversification, 3/4–6 European Union policy, 19/8–15 Former Soviet Union (FSU), 22/20–39 and production costs, 4/2 US policy, 20/1 see also tariffs and duties income growth, 3/2 India, 2/2, 2/20–1, 3/19–22 consumption/production mismatch, 3/20–1 ethanol production, 6/15–16 EU preferential quotas, 19/30 futures trading, 13/11 history, 1/1, 1/2 pricing system, 3/21–2 Indonesia, 3/10 information sources, 9/3 insurance, 8/10, 18/18–19 Brazilian standard terms, Appendix 3/6 charter party agreement, Appendix 4/14 No. 14 rules, Appendix 5/8–9 Thai standard terms, Appendix 3/17, Appendix 3/23 intensive sweeteners see HIS (high intensity sweeteners) internal markets, 14/14–15 International Safety Management (ISM) code, 8/13 International Sugar Agreements 1937, 2/6 1953, 2/7–8 1958, 2/9 1968, 2/10–11 1977, 2/12–13 1992, 2/31–3 International Transport Workers Federation (ITF), 8/4 intervention prices, 19/16 inulin, 19/6–7, 19/24–9 inverted market structure, 3/22–4, 3/29 investment funds, 13/4–6, 15/1, 15/4–6 ion exchange resins, 12/9 isoglucose production, 5/21–2, 19/6–7, 19/24–9 isomalt, 5/46
Index Jamaica, 1/4, 4/8, 4/10 Japan contract terms, 13/3, 14/17, 23–4 HFCS (high fructose corn syrup), 5/16–18 Java, 2/2 J. H. Rayner, 18/19 Jones-Costigan Act, 2/6, 20/3 Kazakhstan, 22/4, 22/10–11, 22/19, 22/28–9 Kyrgyz Republic, 22/4–5, 22/10–11, 22/19, 22/29–30 lactitol, 5/46 land supply, 3/3 last trading days, Appendix 1/6–7, Appendix 2/23, Appendix 5/4–5 Latin America ethanol production, 6/19–20 free trade agreements, 21/1, 21/10 laytime, 8/9, Appendix 4/11, Appendix 4/12–13 letters of credit, 16/3–4, 16/8–42, 18/15–16 back-to-back, 18/19–20 sight, 18/17 usance, 18/19 liberty tweendecker ships, 8/13 licences, 17/15–16 liner services, 8/1–2 liquidity, 13/7 litigation, 11/5–6 loading, 8/7, 8/9, Appendix 3/13, Appendix 4/3, Appendix 4/8–9, Appendix 4/11 loan programs, 20/1, 20/7–8 local traders, 13/6–7 Lomé Convention, 19/9 London International Financial Futures Exchange (LIFFE), 13/2, 13/15–16, 14/11–17 London refined white (No. 5) contract, 13/2, 14/10–21, Appendix 2/1–24 long-term finance, 18/12–13 Louisiana, 20/19–20 low calorie bulking agents, 5/36–8 Madeira, 1/3 malitol, 5/47 managed money, 13/4–6, 15/1 mannitol, 5/47 margin payments, 17/4–5, 17/11 market participants, 13/3–17 marking of bags, 3/28 matching principle, 17/2–3 mate’s receipts, 8/9, Appendix 4/7–8 MATIF contract, 13/2 melting, 12/2 Memo of Delivery, Appendix 1/21
MERCOSUR, 21/1–7, 21/11–14, 21/18 metric tonnes, 9/4 Mexico futures and options trading, 13/14–15 HFCS (high fructose corn syrup), 5/12–14 and NAFTA, 20/26–9 production costs, 4/8 subsidies, 3/10 US–Mexico trade dispute, 5/11–15 Middle Eastern refineries, 13/16–17 mills see refineries Moldova, 22/3, 22/10, 22/30–1 money flow index (MFI), 15/12–13 moral hazard, 15/16–17 morning star, 15/16 moving averages, 15/7–8 convergence divergence (MACD), 15/8 multinational producers, 3/8–9 NAFTA, 20/26–9 Napoleon Bonaparte, 1/7 narrow margins, 17/1 neohesperidine dihydrochalcon (NHDC), 5/47 neotame, 5/32, 5/45, 5/47 net trades, 9/7 New York Board of Trade, 13/1–2, 14/1 New York Coffee, Sugar and Cocoa Exchange (CSCE), 14/1–10, Appendix 1/1–23 non-commercial traders, 13/4–7 non-registered contracts, Appendix 2/23 notices and cancelling date, 8/8, Appendix 4/6–7 obligations of receivers and deliverers, Appendix 1/10–16 open interest, 15/10–11 open position reporting, Appendix 1/21–2, Appendix 5/15–16 operating currencies, 17/13–14 option trading, 13/7, 13/17–19 options on futures, 7/4–6 organic sugar, Appendix 6/1–8 demand, Appendix 6/3–4 supply, Appendix 6/4–7 original margins, 17/4–5 oscillators, 15/8, 15/13 overtime payments, Appendix 4/14 parabolic SAR system, 15/13–14 payments, 8/8, 16/1–49, 18/15–20, Appendix 4/5–6 bid bonds, 16/42–9, 18/21 Brazilian standard contract, Appendix 3/5, Appendix 3/7 cash against documents (CAD), 16/1–8 credit insurance, 18/18–19
Index/page vii
Index documentary credits, 16/8–42 freight differential, Appendix 2/7–8 guarantees, 16/42–9, 18/16 letters of credit, 16/3–4, 16/8–42, 18/15–16, 18/17, 18/19–20 No. 5 rules, Appendix 2/6–7 performance bonds, 16/42–9, 18/21 promissory notes, 18/16 Thai standard contract, Appendix 3/17 performance bonds, 16/42–9, 18/21 Persia, 1/2 Peru, 6/19 Philippines, 2/2–3 phosphatation, 12/7 plantations, 18/6–7 Poland, 5/21 polarization, 4/5, 9/4, 10/6, 12/6, Appendix 5/11 political environment, 2/23–5 Polo, Marco, 1/1 poly-ols, 5/1, 5/36–8 population growth, 3/1 Portugal, 1/3, 1/4, 19/9 position information, 13/3–4, 15/11–12 position limits, 14/3 position sheets, 17/2, 17/5–7 premiums/discounts, 7/6–12 presentation of accounts, 17/3–4 prices 1900–39, 2/3–6 1939–89, 2/7–13, 2/30 1990–present day, 2/18–19, 2/30–1, 3/10–11 contract pricing, 3/29–31, 7/1–12, 17/7–9 exchange delivery settlement prices, Appendix 2/4–6 forecasting see supply and demand database and free trade, 3/9 of HFCS, 5/9–10, 5/11, 5/24–8 of HIS, 5/38–9 long-run trend, 2/26–7 price dynamics, 2/18–19 and production costs, 4/2–4 support prices, 19/2–6, 19/23, 20/2, 20/7 volatility, 2/19–20, 2/25–31, 3/7–8, 3/31, 17/2 Proalcool programme, 6/2, 6/7 processing see refining process production costs, 4/1–14 beet sugar, 4/4–8 benchmarks, 4/2 cane sugar, 4/4–8 comparisons between producers, 4/4 country comparisons, 4/8 and exports, 4/2 and factory performance, 4/11–13
Index/page viii
and field performance, 4/9–11 of HFCS (high fructose corn syrup), 5/25 and imports, 4/2 and prices, 4/2–4 processing costs, 4/5 production finance, 18/1–7 production levies, 19/17–18 production quotas see quotas production statistics, 1/9–10 1900–39, 2/1–6 1939–85, 2/7–13 1985–present day, 2/13–33 First World War, 2/1 productivity, 3/3 profit and loss accounts, 17/3 promissory notes, 18/16 prudence principle, 17/3 Puerto Rico, 1/3, 20/21–2 quality, 3/9, 10/6, 12/1–11 Brazilian standard contract, Appendix 3/4 conversions, 9/4 delivery grades, 14/3–4, Appendix 1/1–2, Appendix 2/2–3 No. 14 rules, Appendix 5/11–12 quantities shipped, 8/14 quintals, 9/4 quotas, 5/21–2, 17/15, 17/16 carryover, 19/17 European Union, 19/6–8, 19/24–30 United States, 20/1–2, 20/3–6 raw sugar, 9/4, 12/11 re-export programmes, 20/10–12 receivers’ obligations, Appendix 1/10–16 Red River Valley, 20/16–17 Refined Sugar Association, 10/1–7, 11/1 refineries annexed, 12/1 capacity utilization, 4/11–12 financing, 18/7–13 Middle Eastern, 13/16–17 performance, 4/11–13 size, 4/11 stand-alone, 12/1 and trade liberalization, 3/4 United States, 20/22–5 refining process, 12/1–11 affination, 12/2, 12/5–6 carbonatation, 12/6–7 centrifuging, 1/12, 12/4, 12/10 clarification, 12/2–4, 12/6–7 costs, 4/5 crystallization, 12/4, 12/9–10 decolourization, 12/4, 12/7–9 drying, 12/5 filtration, 12/4, 12/7 grading, 12/5
Index melting, 12/2 phosphatation, 12/7 recovery boilings, 12/5 relative strength index (RSI), 15/12 Renewable Fuels Standard (RFS), 6/12 reported sales, Appendix 1/22 resistance levels, 15/8 riders, 8/12 risk management, 15/16–17, 18/24–7 role of supervisors, 11/2–4 Romans, 1/1 rural credit schemes, 18/2–3 Russia, 2/18, 22/1–2, 22/8, 22/12–16, 22/32–4 saccharin, 5/29–30, 5/34, 5/35–6, 5/38, 5/47 sampling procedures, 11/3–4 satellite tracking, 8/11–12, Appendix 4/15–16 sellers’ executable orders (SEOs), 7/2–3, 17/7–8 set-aside land, 19/17 shipping see freight market shooting star, 15/16 short tons, 9/4 short-term finance, 18/9–11 sight letters of credit, 18/17 size of refineries, 4/11 slavery, 1/5–6 Slovakia, 5/21 smuggling, 3/7 social history, 1/12 soft drinks market, 5/5–7, 5/10, 5/12–14, 5/23–4, 5/32–3, 5/41 solvents, 6/2 sorbitol, 5/37, 5/47–8 South Africa, 3/25, 3/29 production costs, 4/8, 4/13 South Korea, 3/17 HFCS (high fructose corn syrup), 5/16, 5/18 Spain, 1/3–4, 1/5 speculation, 13/4–6 spreads, 3/22 squeeze plays, 3/27–8 stand-alone refineries, 12/1 standard physical contracts see contract terms starch sweeteners see HFCS (high fructose corn syrup) stevedores, 8/8–9, Appendix 4/7 stevioside, 5/32, 5/39, 5/48 stochastic indicators, 15/13 strategies for futures trading, 3/27–8, 7/11–12 strikes, Appendix 4/14, Appendix 5/13 sub letting, 8/11, Appendix 4/15 subsidies, 3/10, 6/7, 6/24 sucralose, 5/31–2, 5/39, 5/48
sucrose yields, 4/9–11 Sugar Association of London, 10/1–7, 11/1 Sugar Bureau, 10/7 Sugar Industry (Reorganization) Act, 2/6 Sugar Protocol, 19/9, 19/10, 19/20 supervision, 10/4–6, 11/1–6 appointing supervisors, 11/1–2 claims settlements, 11/5 damaged cargoes, 11/3–4 dispute procedures, 11/4, 11/5–6 documentation, 11/4–5 draught surveys, 11/3 role of supervisors, 11/2–4 sampling procedures, 11/3–4 third party supervisors, 11/4 warehouse supervision, 11/4–5 supply, 2/19–23, 3/23 European Union domestic supply, 19/12–13 of organic sugar, Appendix 6/4–7 supply and demand database, 9/1–8 cash premium analysis, 9/7 crop cycles, 9/1–2 ending stocks/consumption relationship, 9/6–7 forecasting, 9/2–3 historical data, 9/1–2 information sources, 9/3 net trades, 9/7 production/consumption relationship, 9/5–6 quality conversions, 9/4 weight conversions, 9/4–5 whites premium, 9/7 support levels, 15/8 support prices, 19/2–6, 19/23, 20/2, 20/7 sweetener market, 3/2 see also HFCS (high fructose corn syrup); HIS (high intensity sweeteners) sweetness qualities, 1/12 synthetic alcohol, 6/1 Taiwan, 5/16, 5/18 Tajikistan, 22/5, 22/11, 22/34–5 tallymen, 8/8–9, Appendix 4/7 Tarafa Action, 2/4 tariffs and duties, 2/24–5, 3/9–10, 19/13–15 Andean Community, 21/15 Former Soviet Union countries, 22/12–19 MERCOSUR members, 21/14 US tariff rate quota (TRQ), 20/3–6 Tate & Lyle, 10/4, 10/5, 20/23 taxation, 8/8, Appendix 3/18, Appendix 3/24–5, Appendix 4/4–5, Appendix 5/13 technical innovations, 1/11–12
Index/page ix
Index technical trading, 15/1–17 candle charts, 15/15–16 channels, 15/6–7 commitment of trades report, 13/3–4, 15/11–12 daily sentiment indicator, 15/14–15 directional movement index, 15/14 money flow index, 15/12–13 moving averages, 15/7–8 convergence divergence, 15/8 open interest, 15/10–11 oscillators, 15/8, 15/13 parabolic SAR system, 15/13–14 relative strength index, 15/12 resistance levels, 15/8 and risk management, 15/16–17 stochastic indicators, 15/13 support levels, 15/8 trend lines, 15/6–7 volume, 15/9–10 tender days, Appendix 2/8–9, Appendix 2/23–4 testing see weighing and testing Texas, 20/21 Thailand, 3/14–19 contract terms, Appendix 3/3–4, Appendix 3/14–25 delivery mechanisms, 3/26 ethanol production, 6/16–17 farm finance risks, 18/4 freight rates, 3/16 futures and options trading, 13/14 HFCS (high fructose corn syrup), 5/19 industry outlook, 3/18–19 pricing system, 3/15–16 quality issues, 3/17 volatility in raw premiums, 3/17–18 thaumatine, 5/48 third party supervisors, 11/4 time bars, 8/11, Appendix 4/14 timecharters, 8/4–5 Tokyo Grain Exchange, 14/21–3 tolling, 18/20 trade associations, 10/1–7, 11/1 council members, 10/1 sugar-testing programme, 10/7 trade flows, 3/6–7 ethanol production, 6/20–2, 6/23 forecasting, 9/3 in the Former Soviet Union (FSU), 22/8–12 see also exports; imports trade houses, 13/8–10, 13/11, 13/17, 18/14–15 trade liberalization see free trade tramping, 8/3–4 transportation see freight market trend lines, 15/6–7 Turkey, 5/21–2 Turkmenistan, 22/5, 22/11, 22/35–6
Index/page x
Ukraine, 22/2–3, 22/9, 22/16–17, 22/36–8 production costs, 4/8, 4/11, 4/13 United Kingdom, 5/41 United States, 20/1–29 beet sugar industry, 20/1, 20/12–17, 20/23–4 cane sugar industry, 20/17–25 Clean Air Act, 6/12 consumption, 20/1 ethanol production, 6/11–13 FAIR Act, 20/7–10 Far West region, 20/13–14 Florida, 20/17–18 and FTAA, 20/29 futures exchanges, 13/1–2, 14/1–10 Great Lakes, 20/14–15 Great Plains, 20/15–16 Hawaii, 20/20–1 Hawley–Smoot Tariff Act, 2/5 HFCS (high fructose corn syrup), 5/3–11, 5/22–5, 5/43–4 HIS (high intensity sweeteners), 5/32–3 import policy, 20/1 industry structure, 20/22–5 Jones–Costigan Act, 2/6, 20/3 loan program, 20/1, 20/7–8 Louisiana, 20/19–20 and NAFTA, 20/26–9 organic sugar production, Appendix 6/5 production, 20/1 production costs, 4/8, 4/11, 4/13 Puerto Rico, 20/21–2 quotas, 20/1–2, 20/3–6 re-export programmes, 20/10–12 Red River Valley, 20/16–17 refineries, 20/22–5 Renewable Fuels Standard (RFS), 6/12 support programmes, 20/2, 20/7 Texas, 20/21 US–Mexico trade dispute, 5/11–15 unloading see discharging unmatched trades, Appendix 1/5 Uruguay Round, 2/23–5, 19/9–10 usance letters of credit, 18/19 USSR, 2/7, 2/9–13 see also Former Soviet Union (FSU) Uzbekistan, 22/5, 22/11, 22/38–9 vacuum pan, 1/12 variation margin, 17/5 Varthema, Ludivico di, 1/1 verbal contracts, Appendix 1/3 vessel accounting, 17/9–10 vessel condition, 8/9, 8/12 vessel description, 8/7, Appendix 4/1–2 vessel position, 8/7, Appendix 4/2–3 vessel readiness, Appendix 1/6
Index volatility of prices, 2/19–20, 2/25–31, 3/7–8, 3/31, 17/2 volume of trades, 13/7, 13/19, 15/9–10 voyage charters, 8/4 voyage estimates, 8/5, 8/6 waiting times, 8/10, Appendix 4/13 warehouse supervision, 11/4–5 weighing and testing, 10/5–6, 10/7, 11/2 conversions, 9/4–5 deficiencies and excesses, Appendix 1/20–1 No. 11 rules, Appendix 1/8–10
No. 14 rules, Appendix 5/10, Appendix 5/10–11 weighted moving averages, 15/7 West Indies, 1/4 whites market, 9/4, 9/7 No. 5 contract terms, 13/2, 14/10–21, Appendix 2/1–24 world contract (No. 11), 13/1–2, 14/1–10, Appendix 1/1–23 xylitol, 5/48 zoning, 18/4
Index/page xi
Part 1 The history of sugar
1 Early history Tony Hannah International Sugar Organization
The spread of sugar westwards The colonial era Sugar and slavery The rise of beet sugar Technical innovation The social history of sugar
Sugar cane, from which most modern sugar producing varieties are derived (Saccharum officinarum), is thought to have originated in New Guinea. It has been domesticated and cultivated there, for its sweet taste, for an estimated 9000 years. Botanists believe that there were three main introductions worldwide from New Guinea through migration; the first, to the Philippines and India, came 2000 years after its initial usage in New Guinea. Later, sugar cane was introduced further east to China and throughout the Polynesian tropical settlements. The first datable reference to sugar cane comes from Nearchus, a general of Alexander the Great, who wrote, in 327 BC, of ‘a reed in India that brings forth honey without the help of bees, from which an intoxicating drink is made, though the plant uses neither beans nor fruit’. Evidence of sugar making comes much later, around the beginning of the Christian era. There are some disputed references by Greek and Roman writers concerning that period. For example Dioscorides wrote: ‘There is a kind of concentrated honey, called saccharon, found in reeds in India and Arabia, with a consistency like that of salt, and brittle to be broken between the teeth, as salt is.’ The food historian R.J. Forbes wrote: ‘Sugar was therefore produced, at least in small quantities, in India and was just becoming known to the Roman world in Pliny’s day’ (the first century AD). Indeed, the first references to sugar in Indian writings date from approximately the same period. Sugar is mentioned in the medical work, the Chanaka, thought to have been written around AD 78 and the Susruta-Samtitas of about a century later. The first writings describing sugar in China date from the Liang Dynasty (AD 502–560). Between the first century AD and the arrival of the first Western European explorers, the sugar industries of India and China developed considerably. Sugar progressed from being a medicine to become a desired food condiment. Marco Polo (1254–1325) noted the extent of the industry in south east China and referred to the vast reserves in the region surrounding the mouth of the Yangtse River and of the region ‘opposite Taiwan’. In 1498, when Vasco da Gama landed at Calcutta in India, he noted large quantities of sugar. Ludivico di Varthema, who travelled to India in the years 1503–8, records that south of Goa, ‘there is a great abundance of sugar, especially sugar candied according to our way’. Indeed, Duarte Barbosa, visiting India in 1513, wrote: ‘In Bengal white and good sugar is manufactured, but they do not understand how to make it into the form of white sugar, but only as meal. It is packed in cotton sacks, enclosed in rawhide outer covers, carefully sown and shipped to many foreign lands’ (Sri Lanka and Arabia are mentioned). Chapter 1/page 1
Sugar Trading Manual During this period of development of sugar production in India and China, the method of production remained essentially the same, similar to the production of gur in present day India. The juice was extracted by pestle and mortar, or vertical or horizontal rollers, powered by humans or oxen. The juice was then boiled in open pans until it solidified.
The spread of sugar westwards The introduction of sugar cane into Persia from India is dated at the sixth century AD. The first mention of sugar as a product dates from AD 627 when the Roman Emperor Heraclius conquered a palace near Baghdad and sugar was listed in the inventory of valuables captured. It is probable that the Arabs acquired sugar cane and sugar making skills from Persia, through trade and conquest. What is true is that they brought sugar cane and sugar technology to the lands they conquered and left it as a legacy when they finally withdrew. The Arab expansion began in AD 636 with the defeat of Heraclius followed by the occupation of Persia and Syria. Egypt was conquered in AD 640, following which the Arabs spread along North Africa, reaching Morocco in AD 682. In AD 710 they crossed to Spain, where the Arab state they established did not fall until 1492. Of the islands of the Mediterranean, Cyprus was first occupied in AD 644, Sicily in AD 655, Crete in AD 823 and Malta in AD 870. The development of sugar industries in those lands followed rapidly. For example, the first mention of sugar being produced in Egypt dates from AD 700, only 60 years after conquest. In all, sugar industries were established by the Arabs in Cyprus, Sicily, Syria, Egypt, Morocco and Spain. (It is interesting to note that cane sugar production still survives in southern Spain today.) The Arab expansion into the Mediterranean was an immensely important development in the history of sugar. The establishment of thriving sugar industries in Sicily and southern Spain provided the basis for the subsequent massive expansion of sugar production during the colonial era. Just as important, the Arab occupation spread the taste for sweetness which began to penetrate Southern Europe and was also introduced into Northern Europe after the experiences of the medieval crusaders trying to reconquer Arab lands.
The colonial era At the beginning of the colonial era in the fifteenth century, the emerging powers had inherited a thriving sugar industry, plus technology and skills from the Arabs. Furthermore, the taste for sweetness, at least among aristocrats and merchants, had been firmly established. It was Chapter 1/page 2
Early history only natural then that, in extending their territory westwards, firstly to the islands off Africa and then to the New World, they should take sugar cane and sugar production with them. The expansion of sugar production under colonization begins with Portugal colonizing Madeira in the 1420s. Colonization was undertaken by Prince Henry the Navigator and, in 1425, he had the first cane sent to the island from Sicily. Production in Madeira grew rapidly and eventually began to undermine the sugar industries of Spain and Sicily. Questions were raised in the Spanish Cortes in 1472 and again in 1491 about the level of imports from Madeira and the level of the duty applicable. Portuguese colonization of Sao Tomé began in earnest in 1493 and, by 1520, there were 60 sugar factories operating in the territory. After the conquest of the Canary Islands in the 1490s, Spain introduced sugar cane to Palma in 1491. Development was rapid and by 1526 there were 29 factories in the islands. The spread of sugar manufacture to the islands off Africa was an important transitional step between the established Mediterranean industry, which went into decline, and the discovery and colonization of the New World. Sugar cane made its entry to the New World early. Columbus himself introduced sugar cane to Hispaniola on his second voyage in 1493. Although the canes brought by Columbus grew well, the first factory was thought not to have been established until 1506. Although the first record of sugar being shipped to Spain from Hispaniola dates from 1516/17, they were small quantities sent as gifts to the Emperor. The first record of a substantial quantity was of three ships arriving in Seville loaded with sugar in 1525. In 1530, 12 ships arrived in Spain unloading 1500 tonnes of Hispaniola sugar. In 1546 there were a total of 24 sugar mills on the island. The first sugar factory was built in Puerto Rico in 1523. Although sugar cane was taken to Cuba by Velasquez in 1511, development of the industry was slow. Although in the following years various schemes were floated for producing sugar, the first record of sugar production appears in 1576, when three mills near Havana were making concentrated juice cast in the form of flat cakes. However, it was in eastern Cuba that the sugar industry of Cuba made its first substantial growth. A mill was established at Guiacanamao in 1598. By 1617 there were 37 mills in the region producing annually 300 tonnes of sugar. Until the end of the eighteenth century there was little further development of the Cuban industry but, from 1820 onwards, production began to increase rapidly and this development persisted almost continuously until the break up of the Soviet Union in 1991. In 1770 Cuba produced 10 000 tonnes of sugar; in 1870, 726 000 tonnes; and in 1970 production was 7 559 000 tonnes. The rapid expansion of the Cuban industry Chapter 1/page 3
Sugar Trading Manual in the nineteenth and twentieth centuries was encouraged by the rapid growth of the US as a natural market for Cuba. Sugar cane was carried to the American mainland by the conquistadors. Cortes himself established a mill near Veracruz, Mexico, in 1529. Subsequently, sugar industries were established by the Spanish conquerors in Peru and Argentina. During the sixteenth century, while Spain was expanding its sugar industry in the Caribbean and the American mainland, Portugal was developing a major industry in Brazil. At this time, Portugal was the world’s largest sugar producer, through its possession of Madeira and Sao Tomé. The date of the first introduction of sugar cane to Brazil is not known. However there is a record of Brazilian sugar paying duty in Lisbon in 1526. It is thought that factories were first constructed in Pernambuco around 1520. A factory was established near Santos, Sao Paulo, in 1533. Development was rapid and, by 1610, 400 factories were producing 57 000 tonnes of sugar. England was a late entrant in the sugar colonization of the New World, but it is important because the West Indies, particularly Jamaica, became (in the nineteenth and twentieth centuries) one of the main sugar exporting regions. Cultivation of sugar began in Barbados around 1640. Development was rapid and, by 1655, Barbados was exporting to England almost 7000 tonnes of sugar, mainly muscavado. Although the Spanish produced sugar during their occupation of Jamaica in the sixteenth century, major development of the sugar industry did not take place until British colonization, which began systematically in 1664. By 1673 there were 57 mills producing 670 tonnes of sugar. In 1684 production had risen to 3500 tonnes and, by 1739, exports to England were almost 20 000 tonnes. Until around 1750 production stayed at around 20–30 000 tonnes, rising to 70 000 tonnes by 1800. Although they set up sugar industries in their Caribbean and South American colonies, and developed the sugar industry of Brazil during their occupation, the Dutch had relatively little permanent impact in the region. However they left a colonial sugar legacy of great importance in their development of the sugar industry of Java. Java became an important player in the world sugar economy in the late nineteenth century and the first half of the twentieth. When the Dutch arrived in Java in 1596 there was an existing sugar industry in the hands of Chinese immigrants. The Dutch began to develop the sugar industry themselves from 1619, finding markets in Persia and Japan. Development was slow during the seventeenth and eighteenth centuries, due to the difficulty of finding economic markets since Javan sugar could not compete with Brazilian and Caribbean sugar in Europe because of the shipping cost. In the second half of the nineteenth century, however, there was rapid expansion, and producChapter 1/page 4
Early history tion reached 534 000 tonnes in 1896, making Java second only to Cuba as a world cane sugar producer. The colonial era, from the fifteenth century to the nineteenth century, proved to be a spectacular period for the expansion of sugar production and the geographical dissemination of sugar cane. However, the rapid increase in supply had, of course, to be matched by demand in the colonial powers. Not only did the taste for sweetness spread from Southern to Northern Europe during this period, but also sugar progressed from being a medicine to a condiment and, finally, to a staple. At the same time, the industrial revolution led to sugar consumption moving through the strata of society – it went from being an aristocrat’s luxury item to the food of the working class, providing energy as well as taste.
Sugar and slavery The history of sugar would be incomplete without reference to slavery as the two are inextricably linked. Slavery was an immensely important demographic movement, even if involuntary, which still has major political and social ramifications today. The great expansion in sugar production in the New World required a heavy input of labour – sugar was a labour intensive crop in cultivation, harvesting and manufacture – and local populations were not deemed ‘suitable’. Although other plantation crops required slave labour, sugar was the principal user. Sugar and slavery became linked by the Arab expansion through the Mediterranean. There is no doubt that the Arabs used slaves for their North African sugar industries, particularly in Egypt and Morocco. The Portuguese imported African slaves to their plantations and factories in Madeira and Sao Tomé in the late fifteenth century. Alarmed at the depletion of the indigenous population, King Ferdinand of Spain authorized the importation of slaves to Hispaniola in 1509. At first Indians from the region were sought but, in 1510, the first importation of African slaves to Hispaniola occurred. In 1516 the first cargo of slaves to Cuba took place. The first importation of slaves to the English West Indies – to Barbados – took place in 1627. With the growth of the sugar production in the seventeenth and eighteenth centuries, the slave trade also increased. The ‘triangular trade’ became famous – textiles from London, Bristol or Liverpool to West Africa in return for slaves, slaves to the West Indies in return for sugar, and sugar back to London, Bristol and Liverpool. The fact that sugar was the prime product in slavery is supported by figures quoted by Deerr for Brazil, which had the largest individual slave trade. From 1600 to 1699 a total of 350 000 slaves were imported, employed almost exclusively in the sugar industry. From 1700 to 1852 a total Chapter 1/page 5
Sugar Trading Manual of 2 950 000 slaves were imported, of which 1 000 000 were for the sugar industry, 600 000 for the mineral industry, 250 000 for coffee and 1 100 000 for other various industries. In the second half of the eighteenth century, opposition to the slave trade grew in the European colonial powers. This anti-slavery movement gathered force in the nineteenth century. In 1807 the US abolished the slave trade. In 1814 it was abolished in Holland, in 1820 in Spain, in 1830 in France, and in 1834 in Britain.
The rise of beet sugar The parent beet plant from which all modern commercial varieties are derived occurs naturally in Sicily and both sides of the Mediterranean. It is known by various names, e.g. Beta cicla, Beta maritima and Beta vulgaris. Although it was recognized as a source of sweetness for many centuries, the sugar yielding form, the white Silesian beet (the source of all today’s commercial varieties) was only developed by Achard and Von Koppy in the early years of the nineteenth century. The pioneer of the production of sugar from beet was Marggraf (1709–82), working in Berlin, who, in 1747, published a thesis on deriving sugar from various plants, including beet. Marggraf’s research was not followed up and it was left to his pupil, Achard, to develop the work. Achard obtained an interview with the King of Prussia in 1799 and convinced him to support the establishment of a beet industry. With grants from the King, Achard built the world’s first beet sugar factory at Cunern in Silesia, which opened in 1802. Achard’s factory was bankrupt after only one year of operation, but further development took place and factories were built elsewhere in Silesia and around Magdeburg. By 1836, Germany was producing 1400 tonnes of sugar. The impetus to develop the European beet industry further came from France, as a consequence of the Napoleonic wars. In 1811 a chief army officer paid a visit to Germany to investigate the beet industries of Krayn and Von Koppy. An article describing the visit was published in Le Moniteur on 2 March 1811. The article contained a justification for the production of sugar from beet by Von Koppy, in spite of a higher cost than cane sugar, that is worth repeating: ‘That the culture of beetroots, far from diminishing that of wheat, contributed to procure for him more abundant crops than he obtained before, first, because in employing for beets only the lands left previously to fallow, his wheat occupied the same area as it did before he thought of making sugar; and second because beets furnish, besides sugar, a large mass of food for cattle and sheep.’ He was able, without enlarging his domain, to double the number of his cattle, to obtain more manure and, with the aid of this manure, to obtain larger quantities of wheat. He admitted that: ‘he owed to the war Chapter 1/page 6
Early history a large portion of the profits given him by sugar that the people were obliged to use in place of cane’. However, he asserted that: ‘should he, in times of peace, obtain from his factory only the cost of cultivation of the beet crop, then he would guard himself from abandoning it, so as not to renounce the prosperity it had given him, and which it would always preserve on this domain’. Clearly the arguments and justifications between beet and cane sugar production, still heard today, started early in the history of beet sugar. On 10 March 1811, Montalivet, the minister of the interior, reported to Napoleon that sugar was being produced in France in the departments of the Roer and Rhine, and Moselle. Napoleon was concerned at the cost of sugar imports, owing to the war and in particular the English blockade. He acted swiftly. On 11 March 1811, Napoleon himself issued his first decree dealing with sugar. Relevant paragraphs were: 1 Plantations of beetroot, proper for the manufacture of sugar, shall be formed in our Empire to the extent of 32 000 hectares. 7 The Commission shall before the 4 May fix upon the most convenient place for the establishment of four experimental schools for giving instruction in the manufacture of beet sugar, conformably to the process of chemists. 10 Messrs Barruel and Ismard, who have brought to perfection the process for the extraction of sugar from the beetroot, shall be especially charged with the direction of two of the schools. 12 From 1 January 1813, and upon a report to be made to our minister of the interior, the sugar and indigo of the two Indies shall be prohibited and considered as merchandise of English manufacture, or proceeding from English commerce. Progress was swift following the decree. By 1813 France was producing 3500 tonnes of sugar from 334 factories. The French industry went into decline immediately after the Napoleonic wars ended with the opening up of French ports to colonial imports, but soon revived again. By 1826, 100 factories were producing 24 000 tonnes of sugar. During the first half of the nineteenth century, major beet sugar industries were also set up in Austria/Hungary, Russia and Belgium. Beet industries flourished in continental Europe for a variety of reasons. In spite of a higher cost of production than cane sugar, beet sugar was attractive to land-locked countries, countries without sugar producing colonies, or countries at war. Consequently, the second half of the Chapter 1/page 7
Sugar Trading Manual Table 1.1 Production of beet sugar in major European producers (tonnes)
Germany Austria/Hungary Russia France Belgium
1850
1900
53 349 16 805 13 100 76 151 11 604
1 984 287 1 083 328 893 500 1 040 294 325 000
Source: Deerr.
nineteenth century saw an exponential growth in beet sugar production in Europe, as Table 1.1 shows. Such was the growth of the beet industry that, by 1880, it had overtaken cane as the main source of sugar. By 1899, world beet sugar production had reached 5.4 million tons, compared to 2.9 million tons from cane (see Table 1.2). The rise of the sugar beet industry during the second half of the nineteenth century was not simply confined to production. Much of the production from Europe was exported and beet sugar came to dominate trade, as well as production. The reason for this was the bounty system applied to exports of beet sugar. The bounty dates from 1684 when France instituted primes d’exportation whereby refined sugar exported from France received a drawback of the duty paid on importation. The basis of the calculation of the drawback was a raw yield of 44.44% of refined sugar. If a refiner obtained a yield of more than 44.4% he received, as a bonus, the difference in duty. A similar system operated in England in the nineteenth century. Beet producers adopted similar systems. For example, in Germany, from 1885, roots paid a fixed tax, and a drawback or refund of tax was allowed on exported sugar, based on a yield from the beet of 8.51%. Any yield over 8.51% gave an unearned profit to the producer in excess of the drawback and allowed the export of sugar at less than the cost of production. Bounty systems were operated by all the major European beet sugar producers, such as Austria/Hungary, Russia, Belgium, France and Holland. As a result of the bounty system, cane sugar from the colonies found it difficult to compete, and the industry and exports went into a decline as the nineteenth century progressed. At the same time, opposition to bounties began to grow, especially in countries with colonial possessions producing sugar. France was the first country to act, calling for an international conference on the problem. In 1863 France, Belgium, Holland and Great Britain met at the invitation of France, and this was Chapter 1/page 8
Early history Table 1.2 World sugar production (tons), 1840–99 Year
Cane
Beet
Total
Share of cane
1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888
788 000 829 000 840 000 909 000 961 000 1 003 000 1 017 000 1 067 000 1 008 000 1 070 000 1 043 000 1 186 000 1 167 000 1 284 000 1 301 000 1 243 000 1 195 000 1 220 000 1 358 000 1 438 000 1 376 000 1 466 000 1 363 000 1 334 000 1 333 000 1 506 000 1 544 000 1 499 000 1 759 000 1 728 000 1 662 000 1 697 000 1 805 000 1 848 000 1 883 000 1 816 000 1 792 000 1 770 000 1 873 000 1 908 000 1 883 000 1 806 000 2 079 000 2 210 000 2 225 000 2 300 000 2 400 000 2 541 000 2 359 000
48 198 50 919 41 240 46 911 53 458 60 857 80 004 96 346 79 885 110 737 159 435 163 757 202 810 194 893 176 210 246 856 276 702 370 004 409 614 387 539 351 602 413 671 474 719 457 146 474 719 680 685 671 810 687 281 760 025 821 141 939 096 976 915 1 128 918 1 198 463 1 284 586 1 377 336 1 085 204 1 385 828 1 615 934 1 459 385 1 857 210 1 831 847 2 173 409 2 322 736 2 549 672 2 172 200 2 686 700 2 367 200 3 555 900
830 198 879 919 881 240 955 911 1 014 458 1 063 857 1 097 004 1 163 346 1 087 885 1 180 737 1 202 435 1 349 757 1 369 810 1 478 893 1 477 210 1 489 856 1 471 702 1 590 004 1 767 614 1 825 539 1 727 602 1 879 671 1 857 719 1 791 146 1 837 719 2 195 685 2 215 810 2 186 281 2 519 025 2 549 141 2 601 096 2 673 915 2 933 918 3 046 463 3 167 586 3 193 336 2 877 204 3 128 828 3 488 934 3 367 385 3 740 210 3 637 847 4 252 409 4 532 736 4 774 672 4 472 200 5 086 700 4 908 200 5 914 900
93.0 94.2 96.3 95.0 94.7 94.2 92.5 91.7 92.3 90.7 86.5 87.6 85.2 86.9 88.2 83.5 81.3 76.7 76.8 78.8 79.7 78.1 74.3 74.5 74.3 69.5 69.8 68.4 69.8 68.0 64.0 63.5 61.5 60.7 59.1 55.1 62.4 56.2 53.7 56.7 50.2 48.3 48.9 48.7 46.6 51.4 47.2 51.7 40.0 Chapter 1/page 9
Sugar Trading Manual Table 1.2 (cont.) Year
Cane
Beet
Total
Share of cane
1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899
2 138 000 2 597 000 3 502 000 3 040 500 3 561 000 3 531 000 2 840 000 2 842 000 2 869 000 2 995 000 2 881 000
3 536 700 3 679 800 3 480 800 3 380 700 3 833 000 4 725 800 4 220 500 4 801 500 4 695 300 4 689 600 5 410 900
5 674 700 6 276 800 6 982 800 6 421 200 7 394 000 8 256 800 7 060 500 7 643 500 7 564 300 7 684 600 8 291 900
37.7 41.2 51.6 47.3 48.2 42.7 40.2 37.2 38.0 38.5 34.7
Source: Deerr.
followed by further conferences in 1864, 1871, 1873 and 1875. The results of all these conferences were inconclusive, as they concentrated on devising acceptable means for valuing sugar, rather than directly attacking the problem of bounties. Further international conferences were held in 1887 and 1888. France by this time was opposed, having become a major exporter of beet sugar. However, the 1888 agreement was signed by Austria, Belgium, Germany, Great Britain, Holland, Italy, Russia and Spain. The first article declared that: ‘The High Contracting Parties engage to take such measures as shall constitute an absolute and complete guarantee that no open or disguised bounty shall be granted on the manufacture or exportation of sugar.’ However, Great Britain failed to ratify the agreement owing to opposition from the jam and confectionery industries, which benefited from cheap bounty-fed imports, and the agreement was never fully implemented. Finally, the bounty system was ended by the Brussels Convention, signed in 1901 (and this time ratified by Great Britain), which entered into force in 1903. The convention stated that: ‘The High Contracting Parties engage to suppress from the date of coming into force of the present Convention, the direct and indirect bounties by which the production or exportation of sugar may profit, and not to establish bounties of such a kind during the whole continuance of the said Convention.’ The convention was set to run for five years, with annual renewal. Austria, Belgium, France, Germany, Great Britain, Holland, Hungary, Italy, Norway, Spain and Sweden all ratified it. This therefore included all the major beet sugar exporters except for Russia, which joined in 1907.
Chapter 1/page 10
Early history Deerr lists eight consequences of bounties, which clearly had a profound effect on the development of sugar production and consumption: 1 Between the years 1850 and 1904 a quantity of sugar to the order of 60 000 000 to 65 000 000 tons was placed on the market at less than the cost of production. 2 The premium paid by the producing countries had varied within wide limits and, as railway rebates, shipping subsidies and other hidden forms of bounty entered, it is impossible to estimate what the total bounty was. Probably it did not average over the whole period less than 30 shillings per ton of sugar, making the cost to the producing countries engaged to the order of £100 000 000. 3 In the participating countries there was developed an improved system of agriculture, reflected in an increased output of grain and the cultivation of lands which otherwise would have been unproductive. 4 The increased supply of sugar, combined with its sale below cost of production, effected a continuous fall in price. 5 The greater portion of the surplus beet sugar was absorbed in Great Britain and in the USA. The price of sugar in London declined from 25.5 shillings per hundredweight in 1872 to 8.5 shillings per hundredweight in 1903, a decline of 66%. 6 While the bounties afforded the purchasing countries a valuable foodstuff at less than the cost of production, the development of agriculture was arrested, and the English sugar colonies, not yet recovered from the combined effects of the abolition of slavery and competition with slave-produced sugar, drifted into a state of decline and distress. 7 The British refining industry suffered severely and many houses were forced into liquidation. 8 At the same time, and based on supplies of sugar sold at less than the cost of production, a large industry in jam, marmalade, confectionery, chocolates and sweet biscuits developed in Great Britain.
Technical innovation The nineteenth century was not only the century of explosive growth in beet sugar production, but also the century of important technical innovation in the way sugar was extracted and produced. The first half of the century saw a stream of innovations in techniques for crushing cane and diffusing beet. By 1850, sugar factories and mills had taken much of their current shape, in terms of crushing and diffusing.
Chapter 1/page 11
Sugar Trading Manual More important than the steady improvement in crushing, particularly for the quality of the final product, were the invention of the vacuum pan and the centrifuge. In 1813 Edward Howard patented the vacuum pan, which revolutionized the crystallization process. The vacuum pan was rapidly adopted by the industry. In 1837 the centrifuge was patented by Penzoldt (France), but was only used for the drying of textiles. The invention of the first centrifuge specifically for sugar production is attributed to Seyrig (France, 1843). Up until the adoption of the centrifuge the only means of separating the crystals from the mother liquor was by drainage. The improvement in milling capacity, and the invention of the vacuum pan and the centrifuge, enabled the huge expansion in production of the nineteenth century to take place along with a significant improvement in the quality of the final product.
The social history of sugar Readers should already be convinced that sugar is a special product, with strong social, political, geographical and emotional attributes. So, how has sugar come to be the product that we know today? The purpose of this section is to place sugar in its social and political context. Sugar performs many roles, but the two that stand out are as a sweetener and as a source of energy (calories). Sweetness is a very basic sense for the human palate, with a strong emotive quality. Sweetness is pleasurable and is first encountered early in life in breast milk (through lactose). Before 1650, the main sources of sweetness were honey and fruit. Up to that time, sugar had been known (in Western Europe since the Dark Ages) as a rare spice, used to change the taste of food but not sweeten it in the modern sense. As a source of energy sugar remains important. Table 1.3 shows the energy content of 1990 world food output, and it can be seen that, in 1990, sugar was the fourth largest provider of calories. Sugar retains its fourth place in spite of declining per capita consumption in some industrialized countries. In developing countries, sugar is still used as both a sweetener and an energy source, and is particularly important in some areas, e.g. Central and South America, with per capita consumption levels of 44 kg and 43 kg respectively recorded in 1994. How did sugar reach this position in the world’s diet? The history of sugar production has already been discussed but, following Mintz, we will look briefly at the development of sugar consumption in Britain, a path which was paralleled in other developed industrial countries. In Britain in 1650, when most of the population was rural, the diet of the mass of the population was meagre and unpalatable, based around Chapter 1/page 12
Early history Table 1.3 Energy content of 1990 world food output
Wheat Rice Cassava Sugar Meat Milk Oilseeds Fruits and vegetables Pulses Potatoes Other
Production (million tonnes)
Energy content (million calories)
601.7 521.7 150.8 123.4 176.6 537.8 75.5 795.9 58.8 268.1 345.4
2413 1847 530 460 387 349 313 235 200 165 409
Source: Waggoner.
cereals supplemented, when available, by wild animals and domestic chickens. Wealthy people knew sugar as a spice and a luxury. From the mid-seventeenth century, Britain began to acquire and develop colonies in the Caribbean and sugar cultivation and production became the major plantation crop, especially in Barbados and Jamaica. The supply of sugar to Britain by the colonies increased one hundred-fold from 1660 to 1750. Sugar consumption among the labouring classes began in the eighteenth century with sugar as a sweetener associated with three other exotic imports – tea, coffee and chocolate. Since these were not at first sweetened and were bitter to taste, the wealthy early users had started to add sugar. By the time tea drinking became common, it was served hot and sweet. Of the three beverages, tea was the one to be drunk universally because it was cheaper to produce and a little went a long way. Among the poorer classes tea was also used to moisten bread – which was often stale – to make it more palatable. Sugar was used on porridge (as sugar or treacle) again to make a relatively tasteless food palatable. By the mid-eighteenth century the quantities of tea (and sugar) imported were so high and the price had fallen so much that it reached the point where tea, and its condiment sugar, had penetrated fully the working-class market. By the mid-nineteenth century, when import duties were lifted, sugar had begun to take on a further role as an energy provider. Jams, jellies and puddings, all using sugar, became common among the labouring classes now urbanized by the Industrial Revolution. The evolution of sugar consumption in Britain can therefore be summarized as follows: Chapter 1/page 13
Sugar Trading Manual 1650–1750: Sugar is a spice, a luxury, available only to the upper classes, a symbol of wealth and power. 1750–1850: Sugar enters the working-class diet, mainly as a sweetener. The process is accelerated by the Industrial Revolution. 1850–1950: The addition of jams, jellies and puddings adds the energy-providing dimension, and sugar becomes a necessity. By 1900, sugar is providing one-sixth of calorie intake. Sugar was at first a symbol of colonial power, encompassing plantations, slavery, wealth (early capitalism) and the exploitation of the colony by the metropolitan power. Its demographic effect on the world must not be underestimated. The importation of slaves, largely for sugar plantations, has created large African populations in the Caribbean, USA and Central and South America whose social conditions and rights remain an issue today. Sugar was transformed by the spread of its consumption and the Industrial Revolution into a means of power over the working class – tea and sugar was kept cheap and readily available and kept the workers fed well enough to work hard.
Chapter 1/page 14
2 Sugar from the 1900s to the present day Tony Hannah, Sergey Gudoshnikov and Lindsay Jolly International Sugar Organization
1900–14: Rapid expansion 1914–18: Decline during the First World War 1919–39: Rapid growth and cane makes a comeback 1939–45: Decline in both beet and cane sugar production during the Second World War 1945–55: Rapid recovery, first post-war International Sugar Agreement 1955–65: The Cuban Revolution disrupts trade flows 1965–75: The 1974 price boom unleashes far-reaching structural changes for sugar 1975–85: The 1980 price boom reinforces the effects of the 1974/5 boom 1985 to the present day Demand Price dynamics Supply Political environment
World sugar prices – back to volatility? Long-run trend Volatility ‘Golden era’ for sugar prices, 1988–97 The 1992 International Sugar Agreement
The twentieth century has witnessed a great expansion in sugar production and consumption. Between 1900 and 1924 sugar production doubled, from 11.26 million tonnes in 1900 to 23.21 million tonnes in 1924, an annual growth rate of 3.06%. Sugar production doubled again, from 1924 (23.21 million tonnes) to 1957 (43.58 million tonnes), an annual growth rate of 1.93%, slower because of the setback during the Second World War. World production doubled again between 1957 and 1977, from 43.58 million tonnes to 90.35 million tonnes, a growth rate of 3.53% over the 20 years. From 1977 to 1997 the growth rate slowed, but nevertheless world production had reached 125.13 million tonnes by 1997 at an annual growth rate of 1.64%. Overall, sugar production and consumption achieved an eleven-fold increase from 1900 to 1997. During the century two periods of rapid growth stand out. The interwar years, between 1918 and 1939, had an annual growth rate of 3.16%, and an annual growth rate of 7.24% was recorded during the period of recovery and expansion after the Second World War, from 1945 to 1960.
1900–14: Rapid expansion Between 1900 and 1914 world sugar production increased from 11.26 million tonnes to 18.21 million tonnes, an annual growth rate of 3.5%. Cane sugar expanded faster than beet sugar, growing from 5.25 million tonnes in 1900 to 9.9 million tonnes in 1914. However, in spite of the Brussels Convention (1901, entering into force in 1903), which banned the bounties that had subsidised beet sugar exports and undermined prices, beet sugar production also expanded during this period; from 6 million tonnes in 1900 to 8.3 million tonnes in 1914.
1914–18: Decline during the First World War European beet sugar production fell steeply during the years of the First World War, particularly in those countries involved – Russia, Germany, Austria/Hungary and France. World beet sugar production fell from 8.3 million tonnes in 1914 to 3.3 million tonnes in 1919, a fall of 60%. However cane sugar production continued to increase steadily as it was unaffected by the war, and rose from 9.9 million tonnes in 1914 to 11.86 million tonnes in 1919. Consequently, the share of cane sugar in world production rose steeply, from 54.4% in 1914 to 78% in 1919. Chapter 2/page 1
Sugar Trading Manual
1919–39: Rapid growth and cane makes a comeback The inter-war years saw a rapid expansion of world sugar production. The annual growth rate over the 20-year period was 3.16%. Beet sugar production recovered rapidly from the ravages of war. By 1924 world beet sugar production had reached its pre-war level of 8.3 million tonnes, from only 3.35 million tonnes in 1919. Beet sugar production continued to grow thereafter, reaching 11.9 million tonnes by 1930; it remained at around the level of 11–12 million tonnes, except in years of bad weather in Europe, up to 1939. However, the main factor behind the inter-war growth was a rapid increase in cane sugar production. World cane sugar production increased from 11.86 million tonnes in 1919 to reach 19.39 million tonnes by 1939, an annual growth rate of 2.5%. The main factors were the introduction of new varieties of cane, particularly in Java, and the expansion of cane areas in new or infant industries in countries like India, South Africa, Australia and the Philippines. Particularly important for the growth of world cane sugar output during this period were the expansions of production in Cuba, Java, India and the Philippines. Production in Cuba, encouraged by the rapidly growing demand from the expanding United States economy, had grown swiftly from 1900 onwards. Production in 1900 was 284 thousand tonnes and, by 1910, it had risen to 1.804 million tonnes. By 1918, production was 3.44 million tonnes and it continued to rise steeply in the first half of the 1920s, reaching 5.16 million tonnes in 1925. Production in Java also recorded a steep rise after the First World War, confirming Java as the world’s second largest producer and exporter after Cuba. Production was 1.34 million tonnes in 1919, rising to 2.9 million tonnes in 1928. Java’s main market during this period had been India, where only a small centrifugal sugar industry had existed since 1900. Production of sugar in India was concentrated on the traditional open pan sugars, gur and Khandsari. However the introduction of a duty on imported white sugar in 1932 led to the establishment of a major centrifugal sugar industry in India which grew quickly. In 1932 India’s white sugar production was only 290 thousand tonnes. By 1939 it had reached 1.24 million tonnes. The establishment of a major centrifugal sugar industry in India was an extremely important event in the twentieth century. Today India is a giant, consistently the world’s first or second sugar producer with a production of 15–17 million tonnes, whose sugar cycle has an immense impact on the world sugar economy. Production in the Philippines in 1919 was 411 thousand tonnes; by 1933 it had more than Chapter 2/page 2
Sugar from the 1900s to the present day tripled to 1.43 million tonnes. The growth in the Philippines’ production was, like Cuba, fuelled by demand from the USA. The faster growth of cane sugar production in the inter-war period led to a reversal of the domination of beet. During the second half of the nineteenth century the majority of the world’s production of sugar had come from beet, and the cane industry had gone into decline because the bounties on beet sugar had depressed prices. Cane sugar production had fallen to 35% of total world sugar production by 1899. At the beginning of the First World War, cane sugar’s share had risen to 54%. Discounting the war years, when beet sugar production declined severely, the share of cane sugar continued to increase in the inter-war period, reaching 64% by 1929 and 67% by 1939. Cane would never again relinquish its position as the dominant source of sugar. The rapid rise in world sugar production during the inter-war period led to overproduction and, as Table 2.1 shows, the eventual collapse of prices. In turn this led to international action to attempt to rectify the situation. A coincidence of good crops in various parts of the world in 1924/5 raised supplies far above immediate demand and pushed prices back Table 2.1 World raw sugar prices, 1919–39 (US cents/lb) 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
7.59 9.49 3.14 2.82 5.11 4.06 2.44 2.46 2.78 2.36 1.77 1.27 1.13 0.78 0.86 0.92 0.88 0.88 1.13 1.01 1.43
Source: ISC. Chapter 2/page 3
Sugar Trading Manual to pre-war levels, signalling the onset of the inter-war crisis in the world sugar economy. Cuba, which had produced a record harvest of 5.3 million tonnes in 1924/5, roughly a quarter of global productivity, unilaterally restricted its three subsequent crops and tried to persuade other major producers to exercise similar restraint. In what became known, after the Cuban negotiator, as the Tarafa Action of 1927/8, the sugar industries of Czechoslovakia, Germany and Poland agreed to support Cuba’s adjustment policy, although only Czechoslovakia took a tangible step and reduced its beet area. More seriously, echoing Russia’s intransigence in 1901 in not joining the Brussels Convention, the Dutch interests in control of Java’s industry now refused to play. The market east of Suez had not yet deteriorated to the same extent as that west of Suez, and Java was riding the crest of a revolution in cane yields following the introduction of the famous POJ2878 variety. On the importer side, the United Kingdom undermined the Tarafa Action by revising its sugar duties in order to protect British refiners against white and refined imports. New peaks of world production in 1927/8 and 1928/9 brought a further build-up in stocks and drop in prices – and an inquiry by the Economic Committee of the League of Nations. This saw the solution in an output freeze (whether by all important producers or just by the major exporters was left open) to be dealt with at an industry rather than governmental level. Much of the thinking of the day was still imbued with the notion of the ‘battle between beet and cane sugar’ – portrayed as a fight against an unfair, and indeed immoral, attempt to replace a product of innate natural superiority by the artificial creation of protectionism – which obscured the autarkic impulses and imperial preferences mainly responsible for the excess of both. Without waiting for the committee’s report, from which they evidently expected little, Cuba, Czechoslovakia, Germany and Poland, now joined by Belgium and Hungary, negotiated a new accord at a quasiofficial level in the summer of 1929, setting themselves export limits on the assumption that their production would also keep within certain agreed amounts. It was recognized, however, that supply and demand could not be wholly balanced without the co-operation of others, particularly Java, the Dominican Republic, Peru and the Philippines. The report of the Cuban delegation concluded, ‘that the conditions in which the world’s cane and beet sugar is produced are too diverse, and the natural, economic and political factors involved so opposed, that the interests of the various countries are in practice irreconcilable’ (Pérez-Cisneros, 1957). Cuban initiatives thus far had formed part of a package of measures motivated also by a domestic concern to ensure that the older, smaller and more vulnerable Cuban-owned mills survived the adjustment process alongside the fitter American-owned sector. The Wall Street Chapter 2/page 4
Sugar from the 1900s to the present day crash in October 1929, followed by the Hawley–Smoot Tariff Act of 1930, which raised the US duty on Cuban sugar to two cents a pound, equivalent to an ad valorem rate of 160% of that year’s world market price, augured the imminent collapse of all. Significantly, a New York lawyer, Thomas L. Chadbourne, became the central figure in the ensuing negotiations, and the agreement concluded in Brussels in 1931 bears his name. The Chadbourne Agreement reunited the participants of the 1929 Accord. The important addition was Java, at last willing to join, since current world prices even put most of its sugar companies in the red. Peru and Yugoslavia subscribed later. The pact was signed by producer organizations, but clearly could not function without government cooperation and national legislative backup. Formally respectful of the aversion to state intervention shown by the League’s Economic Committee, it was an odd hybrid: neither a commercial treaty between governments nor strictly a cartel of private producers. In essence, the signatories agreed to keep their exports within specified amounts during the five years to 1 September 1935 and to limit production so that segregated surplus stocks would be gradually cleared. An International Sugar Council was established in The Hague to administer the pact. Judged against its aim of restoring world sugar prices to a ‘normal’ level, the Chadbourne Agreement failed utterly. Far from rising, prices fell further, despite the fact that members actually exported considerably less than their quotas, drastically cut total output over the period of the agreement, and substantially reduced their stocks, though not as much as hoped. But the agreement could do nothing about the real problems. Consumption stagnated or declined in many parts of the world owing to the Great Depression. Lower production in the Chadbourne countries was partially offset by higher output in the rest of the world. The growth under tariff protection of centrifugal sugar industry in India virtually put paid to Java’s Indian market, and its Japanese market shrank owing to increased production in Taiwan. Cuba had to cede ground on the US market to mainland beet sugar producers and the Philippines. For all their sacrifices, the Chadbourne countries appear to have received little benefit, unless they gained something from apportioning market shares among themselves. It is hard to imagine that unbridled competition could have driven world prices lower and protective barriers higher, and the argument that the situation would have been much worse without the scheme begs the question – for whom? Not surprisingly, the Chadbourne Agreement was not renewed. In any event, the deliberations on co-ordination of production and marketing of primary products, including sugar, during and after the World Monetary and Economic Conference of 1933 had created the climate Chapter 2/page 5
Sugar Trading Manual for a broader approach. Moreover, conditions were ripe to bring the centres of the two great sugar empires into an international arrangement. With the Jones–Costigan Act of 1934, new ground rules were established for domestic and foreign suppliers of the US market, while in Britain, the Sugar Industry (Reorganization) Act of 1936 set a limit on the volume of subsidized domestic beet sugar. Meanwhile, on the world sugar market, the fundamental situation had improved by the mid-1930s, as far as consumption and stocks were concerned, but prices remained relatively low in the presence of huge excess capacities. This was the setting for the International Sugar Agreement of 1937, negotiated under the auspices of the League of Nations, the direct lineal ancestor to the sugar agreements since the Second World War. Later instruments replicated its basic characteristics although, like the progeny of intensive breeding in other fields, they became more highly strung. Henceforth they would be formally negotiated between governments, not producer associations, and would include importers as well as exporters. They would distinguish between the free market and preferential markets. Their main operational objective would be to promote an orderly relationship between supply and demand in the free market. The main mechanism to this end would be the regulation of exports through adjustable quotas, supplemented by provisions concerning stocks. And they would set a price objective, defined in 1937 as ‘a reasonable price, not exceeding the cost of production, including a reasonable profit, of efficient producers’, and 40 years later as ‘remunerative and just to producers and equitable to consumers’ (see below for further comment on the impact of international sugar agreements). Implicit in the 1937 agreement was a concern to guard against further shrinkage of the free market, and this was met by British and American pledges to maintain the status quo. Short-term perceptions of the balance of costs and benefits determined governmental attitudes towards international sugar agreements, and that the United Kingdom and USA were willing to give such undertakings reflected the mixture of their interests as exporters as well as importers and as centres of large trading blocs. Concern over the size of the free market also illustrated another lasting behavioural trait: the seemingly overriding preoccupation of exporting countries with volume rather than value. This gave negotiations about basic export tonnage and quota adjustments an exclusively quantitative flavour, yet a narrow, essentially static approach to quotas and the extent to which they could be cut in the face of surpluses. This may not have maximized average revenues. How well the 1937 agreement might have worked will never be known because its economic provisions had to be suspended after only two years at the outbreak of the Second World War. Chapter 2/page 6
Sugar from the 1900s to the present day
1939–45: Decline in both beet and cane sugar production during the Second World War World sugar production fell dramatically as a result of the conflict. In 1939 world sugar production amounted to 30.5 million tonnes; by 1945 it was down to 18.185 million tonnes, a fall of 40%. Obviously, being mainly grown in Europe, the decline was greater for beet sugar, which fell from a level of 11.12 million tonnes in 1939 to only 5.37 million tonnes in 1945 (52%). Not only were some important producing areas fought over (e.g. Ukraine) but there was also a severe shortage of labour to produce sugar. Cane sugar production fell from 19.4 million tonnes in 1939 to 12.8 million tonnes in 1945 (34%). Wartime shortages of sugar led to rationing in most major consuming countries.
1945–55: Rapid recovery, first post-war International Sugar Agreement Post-war recovery, particularly in Europe, was spectacularly fast. Beet sugar production regained its pre-war level in 1949, when 10.7 million tonnes were produced, double the 1945 output of 5.37 million tonnes. Beet sugar production continued its rapid increase after 1949 and, by 1955, had reached 15.6 million tonnes. Cane sugar also recovered quickly and, by 1959, had reached 19.5 million tonnes, its pre-war level. Total world sugar production in 1955 was 38 million tonnes, more than double its 1945 level and 25% higher than the pre-war peak. The volatility endemic in sugar prices continued after the war, as Table 2.2 shows, with prices first rising owing to shortages, then peaking in 1951 at 5.7 cents/lb owing to the Korean War commodity price boom. After 1951 prices fell steeply, losing 40% of their value by 1953 (3.41 cents/lb). The continued instability of sugar prices led to international pressure for stabilization through international co-operation and, in 1953, the Second International Sugar Agreement (ISA) was negotiated under the auspices of the United Nations. The 1953 ISA was designed to stabilize prices in the ‘free market’, which was defined as world sugar trade less imports by the USA, imports by the USSR from Czechoslovakia, Hungary and Poland, and imports by the UK under the Commonwealth Sugar Agreement (1951). The countries joining the 1953 ISA represented 84% of net exports to the free market and 54% of imports from the free market. The basic Chapter 2/page 7
Sugar Trading Manual Table 2.2 World raw sugar prices, 1945–60 (US cents/lb, fob Cuba) 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960
3.10 4.18 4.96 4.24 4.16 4.98 5.70 4.17 3.41 3.26 3.24 3.47 5.16 3.50 2.97 3.14
Source: ISC.
instrument used for stabilization was the export quota, adjusted according to price conditions and backed by stocking regulations by which it was hoped to regulate production indirectly. Production was to be adjusted during the term of the agreement so that stocks did not exceed 20% of annual production. There was also a minimum stocking requirement of 10% of the basic export tonnage in order to create a reserve in case quotas were raised. The objective of the 1953 ISA was to stabilize prices in a range of 3.25 cents/lb to 4.35 cents/lb. Judging by its price objective, the 1953 ISA was very successful, with prices straying significantly outside the range in only one year, 1957, when they rose to 5.16 cents/lb. The agreement expired at the end of 1958 and was immediately succeeded, back to back, by the 1958 ISA.
1955–65: The Cuban Revolution disrupts trade flows Between 1955 and 1965 world production continued to grow strongly. World production in 1955 was 38 million tonnes and it had reached 63.72 million tonnes by 1965, an annual growth rate of 5.3%. With the continuing expansion of the beet industry in both Western and Eastern Europe, beet production grew faster than cane production, recording an annual growth rate of 5.76% over the period, to reach a level of Chapter 2/page 8
Sugar from the 1900s to the present day 27.325 million tonnes in 1965 compared to 15.6 million tonnes in 1955. Cane sugar production grew at an annual rate of 5% over the period, reaching 36.4 million tonnes by 1965. By far the most important event for sugar in the 1955–65 period was the Cuban Revolution in 1959, which had a massive impact at the time and its effect still reverberates today. In the five years up to and including 1959 Cuban exports to the USA averaged 2.86 million tonnes annually. In 1960 the USA placed an embargo on imports from Cuba. This had two main repercussions. The USA, which had hitherto received 75% of its supplies from Cuba, had to develop new sources of sugar imports to fill the gap left by Cuba. These new sources were found in Latin America and the Philippines, where an expansion of production took place in order to meet the increased demand. Cuba, meanwhile, was aided by the USSR and, to a lesser extent, China, which agreed to import the displaced sugar. Production had in any case been expanding in the USSR and, in spite of consumption increasing to high levels, the USSR found itself with a surplus, which was re-exported to developing countries as white sugar. Therefore, the reaction of the US to the Cuban Revolution had disrupted the world’s largest trade flow dating back to colonial times, diverting it to the USSR, its satellites and China, while creating a surplus of sugar in the world. This had a depressing effect on world prices, as Table 2.3 shows. The 1958 ISA was unable to cope with the new situation, and ceased operation in 1961. The surplus was temporarily relieved in 1963 after a disastrous crop in Cuba sent prices to 8.34 cents/lb, but the general surplus situation soon reasserted itself and, by 1965, prices had fallen to 2.08 cents/lb.
Table 2.3 World raw sugar prices, 1955–65 (US cents/lb) 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965
3.29 3.51 5.20 3.55 3.02 3.12 2.75 2.83 8.34 5.77 2.08
Chapter 2/page 9
Sugar Trading Manual
1965–75: The 1974 price boom unleashes far-reaching structural changes for sugar After the rapid growth of the 1955–65 period, 1965–75 saw a considerable slowing down in the face of expansion. World sugar production grew from 63.725 million tonnes in 1965 to 78.842 million tonnes in 1975, an annual growth rate of 2.15%. The situation of the previous decade was also reversed whereby cane sugar production grew faster, at 2.7% per annum, than beet sugar production, which grew at an annual rate of 1.36%. As discussed in the previous section, the surplus situation in the world sugar economy had reasserted itself by 1965. It is worthwhile to repeat the reasons. The US embargo on Cuban imports resulted in: 1 An increase in production in alternative US suppliers. 2 The diversion of Cuban sugar to the USSR, its satellites and China. 3 Large re-exports of white sugar by the USSR. The ensuing surplus continued to depress world prices throughout the rest of the 1960s, as Table 2.4 shows. From 1965 to 1968 the raw sugar price averaged only 1.93 cents/lb and, over the whole period up to 1970, only 2.43 cents/lb. The depressed prices of the mid- to late 1960s led to pressure, particularly from exporters, for a new ISA and, in 1968, a new ISA was duly ratified. The 1968 ISA was similar in structure to its predecessors – the basic
Table 2.4 World raw sugar prices,1 1965–75 (US cents/lb) 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1
2.08 1.81 1.92 1.90 3.20 3.68 4.50 9.27 9.45 29.66 20.37
ISA daily price (average of NY No. 11 and London Daily Price or lowest + 5 points). Source: ISO.
Chapter 2/page 10
Sugar from the 1900s to the present day instrument was the export quota, raised or lowered according to the price conditions and backed up by minimum and maximum stock provisions. The price objective was set at a range of 3.50–5.25 cents/lb. It should be noted that the average price from 1965 to 1968 was lower than the agreed minimum price, at 1.93 cents/lb. The agreement therefore began by attempting to raise prices in the face of the surplus. At first the 1968 ISA was successful in that prices rose to 3.2 cents/lb in 1969, to 3.68 cents/lb in 1970 and to 4.5 cents/lb in 1971. From 1972 the 1968 ISA was overtaken by events beyond its control. In 1972 Cuba had a poor crop, 1.3 million tonnes down on the previous year. The USSR had had a poor crop in 1971 and came to the free market for additional supplies. World stocks fell and world raw sugar prices rose to 9.27 cents/lb, 2.02 cents/lb (38%) above the maximum price designated by the ISA. In 1973 came the first oil price shock, which set in motion a general commodity price boom. Sugar was particularly vulnerable owing to the already tight supply situation. Prices in 1973 rose again to 9.45 cents/lb, 80% higher than the ISA maximum price. In 1974 the USSR had another poor crop and by then the commodity price boom had really taken hold. The average price for 1974 was 29.66 cents/lb and the daily price for raw sugar reached a spectacular 64 cents/lb in October 1974. Clearly the price and the world sugar economy were out of any control, and the 1968 ISA ceased operation in 1973 and was not renewed. Prices continued at high levels in 1975, averaging 20.37 cents/lb for the year. It is impossible to overestimate the profound effect that the 1974/5 commodity price boom had on the world sugar economy, and still has today. Of many effects, four stand out: 1 The high prices led to the establishment of an HFCS industry in the US and, to a lesser extent, Japan, which eventually displaced sugar from consumption in soft drinks, its main use, in the US. Sugar now had to learn to live with a competitor for the first time. 2 Because the US introduced quotas to control imports with the effect that the adjustment to lower consumption was borne by imports and not domestic production, developed country imports fell sharply and developing countries began to dominate the import market. The higher price elasticity of developing importers eventually led to a more stable market and a decade of relative price stability from 1988 to 1998. 3 Brazil established its alcohol programme, which more than tripled its cane area, giving it the potential to swamp the sugar market if it transferred cane from alcohol to sugar production. 4 The EU raised quota levels to the point where it eventually (by 1980) became a major net exporter, having been a net importer of sugar up to 1974. Chapter 2/page 11
Sugar Trading Manual
1975–85: The 1980 price boom reinforces the effects of the 1974/5 boom The growth rate of sugar production slowed further between 1975 and 1985, to 2.2%. After 1975 prices fell back sharply, as Table 2.5 shows. Another consequence to the high prices of 1974/5 was a stagnation in consumption and a strong increase in production leading to another surplus in the world sugar economy. The decline in prices again brought calls for an ISA, and a new ISA was ratified in 1977. The 1977 ISA was like its predecessors, based on export quotas and minimum and maximum stocks, with the addition of a special stock provision of 2.5 million tonnes to protect the upper limit of the price range. The price range was set at 11–21 cents/lb with quotas lifted at 15 cents/lb. Once again the price range had been set above the prevailing price. In the first year of operation prices fell to 7.81 cents/lb (1978) from 8.1 cents/lb in 1977. In 1978 prices rose to 9.65 cents/lb, still below the minimum price of the range. Then, again, an ISA was overtaken by events beyond its control. In 1979 and 1980 the USSR had poor crops and again this coincided with a poor crop in Cuba in 1980. The USSR entered the free market for large
Table 2.5 World raw sugar prices,1 1975–89 (US cents/lb) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1
20.37 11.51 8.10 7.81 9.65 28.69 16.83 8.35 8.49 5.20 4.06 6.04 6.75 10.20 12.82
ISO daily price (average of NY No. 11 and London Daily Price or lowest + 5 points). Source: ISO. Chapter 2/page 12
Sugar from the 1900s to the present day qualities to make up the shortfall in supplies. In 1980, additionally and again in parallel with 1974, the second oil price hike had generated a general commodity price boom and once more tight supplies made sugar particularly vulnerable. Prices rose steeply and the average for 1980 was 28.69 cents/lb, the daily price reaching 47 cents/lb in October. Once more the supply response to the high prices was swift. Prices fell to 16.83 in 1981 (above the range), and then to 8.35 cents/lb in 1982, 8.49 cents/lb in 1983 and 5.2 cents/lb (all below the range) in 1984, the last year of the agreement. Such was the build-up in stocks in response to the 1980 price boom that prices in 1985 averaged only 4.06 cents/lb, probably the lowest ever annual average in real terms ever recorded. In terms of its price objective the 1977 ISA failed. The annual average price was never within the range during its whole term. The principal reason for its failure was the non-membership of the EU, then in an expansionary phase. The ISA could not have contained the commodity price boom, but might have held prices up during 1982–4 if the EU had been a member. But the members were not in a mood to restrict production and exports with a major, expanding producer outside the agreement. Technical factors also contributed to the failure. Only around 2 million tonnes of the special stocks of 2.5 million tonnes were in place when prices began to rise and the release mechanism was cumbersome and slow, so that stocks were still being released in 1981 when prices had already begun to fall sharply. The 1980 price boom had similar origins to the 1974/5 boom both inside sugar (production shortfalls in Cuba and USSR) and exogenous to sugar (a general commodity price boom triggered by an oil price hike). The effects, too, were similar; giving further impetus to HFCS, reinforcing the domination of developing country importers and leading to a further increase in the EU support price.
1985 to the present day Growth in world production slowed again after 1985; the annual growth rate for 1985 to 1990 was 2.4%. Nevertheless production in 1990 reached 107.184 million tonnes. Most of the growth from 1985 was in cane sugar production, which reached 70.195 million tonnes in 1990, when cane sugar’s share of world production rose to 63.3%, compared to 46.6% at the beginning of the century. World prices remained depressed for the most of the 1980s but at the end of the decade due to two consecutive seasons of world deficit and considerable reduction of world sugar stocks prices improved considerably. In 1989 the ISA annual average was as high as 12.82 cents/lb compared to 4.06 cents/lb only in 1985. Chapter 2/page 13
Sugar Trading Manual The remainder of this section is dedicated to discussion of continuing structural changes in the world sugar market in the 1990s with a particular focus on the shape in which the global sugar economy has entered into the third millennium. It draws on material from the forthcoming publication The World Sugar Market by Sergey Gudoshnikov, Lindsay Jolly and Donald Spence (Woodhead Publishing, 2004).
Demand Over the past three decades global consumption growth has demonstrated a stable increase at an average rate of around 2% per year. In 2001 consumption reached 130.9 million tonnes, raw value. Population growth remains the key driver of world sugar consumption, explaining about 85% of growth in sugar consumption at the global level. Figure 2.1 illustrates major changes in world sugar consumption since 1985. The trend of stagnating demand in the developed countries and growing consumption in the developing countries established since the mid-1970s has resulted in a steadily growing dominance of developing countries in world sugar consumption (Fig. 2.2). Since the beginning of the 1990s their global consumption share has grown from 72% to 75%. The consumption trend was mirrored by sugar import dynamics (see Fig. 2.3). Developing countries’ share in world imports grew throughout the 1990s. This growth in imports was by no means relentless. At the beginning of the decade imports of the Former Soviet Union (FSU)
6.00
135,000.00 130,000.00
4.00
120,000.00 115,000.00
2.00
110,000.00 105,000.00
0.00
100,000.00 –2.00
19 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 01
95,000.00
2.1
World consumption
Growth rate in %
Linear (growth rate in %)
Linear (world consumption)
Changes in world sugar consumption, 1985–2001.
Chapter 2/page 14
% per year
000 mtrv
125,000.00
Million mtrv
Sugar from the 1900s to the present day 100 90 80 70 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Consumption in developed market economies Consumption in developing countries including economies in transition
2.2
Structure of world sugar consumption, 1990–2001.
30 Million mtrv
25 20 15 10 5 01
00
20
99
20
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
19
19
90
0
Developed economies Developing countries including economies in transition Linear (Developing countries including economies in transition)
2.3
Structure of world sugar imports, 1990–2001.
suffered a considerable setback reflecting the cost of transition from subsidized and government-controlled purchases to market-oriented imports. In the second half of the 1990s the developing countries’ import expansion was interrupted by the financial crisis in Asia. Nevertheless, in the long run, the bulk of the increases in the world imports have come from the developing countries. Their import share has increased from 62% in 1990 to 74% in 2001. The 1990s proved to be a time of considerable change in the geographical and product structure of world sugar imports. The transformation in the geographical structure of world imports is illustrated in Table 2.6. By the end of the decade the abovementioned slump in the FSU imports was over and the region’s purchases rose above the level of
Chapter 2/page 15
Sugar Trading Manual Table 2.6 Imports by selected destinations, 1992–2001 (in million tonnes, raw value)
FSU South East Asia North Africa & Middle East Sub-Saharan Africa USA Western Europe
FSU South East Asia North Africa & Middle East Sub-Saharan Africa USA Western Europe
1992
1993
1994
1995
1996
7.42 6.19 5.81 1.84 2.05 2.23
7.32 5.38 5.31 1.65 1.83 2.28
3.59 7.24 5.84 1.57 1.60 2.40
5.08 9.07 6.73 1.66 1.64 2.81
5.17 8.25 6.94 1.71 2.87 2.73
1997
1998
1999
2000
2001
4.82 8.23 7.90 2.07 2.95 2.49
5.51 8.19 7.74 2.73 2.06 2.23
8.68 7.92 7.94 2.20 1.59 2.28
7.30 7.73 7.82 2.14 1.37 2.31
8.42 8.33 7.99 3.18 1.26 2.28
the first post-Soviet years. Deliveries of sugar from Ukraine, the main sugar supplier of Russia and other FSU countries during the Soviet era, were completely replaced by imports from the world market. Ukraine itself also became a net sugar importer. The FSU regained the leading place in the world importers’ league. South East Asia demonstrated a remarkable growth in imports in the first half of the 1990s but since 1996 the level of annual imports has stagnated at around 8 million tonnes. The most dynamic and consistent importing regions are North Africa and the Middle East (which are counted as a single region) and SubSaharan Africa. In 2001 the two regions imported 11.2 million tonnes, which accounts for nearly one-fourth of the world total imports. From 1991 to 2001 total Arab region imports grew at an average annual rate of 9%. During the same period the total imports of Equatorial and Southern Africa grew on average by 13% a year. This is set against world average annual growth rate of 3% over the same period. Finally, imports by Western Europe remained flat, showing only marginal year-to-year changes while sugar deliveries from the world market to the US shrank from more than 2 million tonnes in the early 1990s to 1.3 million tonnes in 2001. Moving on to the world sugar trade’s product structure changes, we can note a growing dominance of raw sugar in world turnover. The share of raw imports in the world total grew from about 50% at the beginning of the 1990s to nearly 60% in 2001. Characteristically, Chapter 2/page 16
Sugar from the 1900s to the present day 25 Million mtrv
20 15 10 5 0 1992
1993
1994
1995
1996
1997
White sugar imports
2.4
1998
1999
2000
2001
Raw sugar imports
Distribution of world imports between raw and white sugar, 1992–2001.
Table 2.7 Changing structure of import demand, world’s largest importers, 1992 and 2001 (in 000 mtrv) Raw sugar
White sugar
1992
2001
1992
Russia USA Japan EU
2872 1994 1821 1705
Russia EU Japan S. Korea
5708 1647 1568 1516
S. Korea WORLD
1229 1544
Malaysia WORLD
1230 2217
TOTAL Share of world total %
4 62
TOTAL Share of world total %
8 45
Russia Iran Nigeria Saudi Arabia Jordan WORLD TOTAL Share of world total %
2001 2 272 736 697 521
Persian G Algeria Nigeria Syria
924 900 893 874
472 14 055
Indonesia WORLD
840 15 339
33
TOTAL Share of world total %
29
the volume of white sugar trade has remained practically unchanged (Fig. 2.4). According to market commentators, it is often more cost effective to transport raw sugar in bulk and refine it at destination than to ship it in refined form in bags. Over the last decade refineries have been built all over the world, including Algeria, Saudi Arabia, Dubai, Nigeria and Indonesia. Another feature of world imports that emerged in the 1990s was the dispersion of import demand. While in 1991 the world’s ten largest importers absorbed 63% of world imports, by 2001 the share of big players had reduced to 45% of total trade. Table 2.7 illustrates the changes in annual import volumes of both Chapter 2/page 17
Sugar Trading Manual raw and white sugar by top five participants in 19921 and 2001. The dispersion has affected both raw and white sugar buyers. The share of leading importers of raw sugar reduced from 62% to 45% while that of leading white sugar buyers fell from 33% to 29%. While examining the dispersion of import demand, it is worth keeping in mind that imports of white sugar are traditionally much less concentrated than those of raw sugar. Looking at the changes in geographical distribution of imports, the special role of Russia as the world’s leading import power is clear. Since the collapse of the Soviet Union, Russia topped both raw and white sugar import league tables. The 1990s saw the rise of Russia as the dominant raw sugar importer, and by 2001 absorbed more than a quarter of all raw sugar traded internationally. Meanwhile, in the white sugar sector Russia replaced imports of whites from the neighbouring Ukraine by imported raw sugar tolling and, as a result, since the mid1990s Russia has practically disappeared from the white sugar market as an importer.
Price dynamics Throughout most of the 1990s there existed a popular theory that the increasing dominance of the developing countries together with greater liberalization of national sugar markets should bring more stability to the world sugar price. This belief rested on the assumption that the developing countries are more price-sensitive and adjust the quantity they purchase to the pertinent price conditions. It was also expected that greater price stability would vastly improve the ability of producers to plan their investments to keep pace with demand growth, which, in turn, would feed back into even further increases in this stability. The market developments throughout the 1990s generally bore out this theory. Indeed, from 1988 to 1998 world market prices remained remarkably stable by sugar standards (sugar is considered the most volatile commodity traded internationally). World market prices for raw sugar during this period rarely exceeded 14 cents/lb or fell below 8 cents/lb (see Fig. 2.5). The situation, however, changed dramatically 1 1992 is chosen as a basis year as it was the first year after the collapse of the Soviet Union. The disintegration of the Soviet internal sugar market and the COMECON system, which supported preferential imports from Cuba, was the most dramatic politically driven structural change in the world sugar economy since the introduction of the UN embargo on Cuba in the early 1960s. During the Soviet era all the inter-republic deliveries were considered as internal trade and were not included into the international trade statistics (in 1991 Ukraine alone exported nearly 2 million tonnes of sugar to other republics of the Soviet union). This makes post-1991 statistics poorly compatible with data for earlier years.
Chapter 2/page 18
Sugar from the 1900s to the present day 22
Cents/lb
18 14 10 6
LDP (white)
2.5
2001
1999
1997
1995
1993
1991
2
ISA daily price (raw sugar)
World market sugar prices, 1991–2001.
towards the end of the decade. By late 1998 world market prices collapsed below 7 cents/lb, reflecting increasingly bearish global fundamentals (considerable production gains in a number of key producing countries not supported by parallel growth in import demand and the consequent dramatic pile-up of stock). In April 1999 raw sugar prices were as low as 4.78 cents/lb, a level not seen for more than thirteen years, since January 1988. The fall of white sugar prices was not much better. The new millennium brought some relief to exporters. Given the severe drought in Brazil coupled with the unfavourable weather conditions and plant diseases in Thailand and Australia, it seemed likely that the world sugar economy would swing into a deficit phase. In July 2000 raw sugar prices regained a 10 cent/lb level, kept rising in the second half of 2000 and by mid-October were just short of 12 cents/lb. This level, however, proved unsustainable, when the extent of Brazil’s productive recovery in 2001/2 became apparent. During the following two seasons world market values lost all the ground gained earlier. In summer 2002 raw sugar prices fell well below 6 cents/lb level and only stopped a hair’s breadth away from 5 cents/lb. In the second half of 2002 and beginning of 2003 prices improved slightly but stayed well below the level of the early to mid-1990s. Thus, the price dynamic at the dawn of the new millennium had failed to support early expectations of higher price stability and declining volatility (having said that, in absolute terms the current variations in world market prices are significantly lower than those of the 1970s and early 1980s).
Supply How can a new wave of price instability be explained? Probably not by looking at demand. Can the new shape of supply explain it? In Chapter 2/page 19
Sugar Trading Manual
000 mtrv
135,000 125,000 115,000 105,000
19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01
95,000
2.6
World sugar production, 1991–2001.
contrast to consumption, where there has been relatively stable growth over the last fifty years, production remains extremely volatile. As can be seen in Fig. 2.6, during the 1990s global output twice fell by 5 million tonnes or more from one year to the next (in 1992/93 and 1999/2000), once grew by as much as 9.1 million tonnes (1998/99) and experienced a couple of plateaus (in 1996–98 and in 2000–1). Sugar is an agricultural product. In spite of all technological advances in field practices, unfavourable weather can still severely impact on sugar production even in the most efficient industries. Yields may vary very substantially from year to year solely owing to differences in weather patterns and the incidence of disease. As a considerable share of the world production is designated for export, climate-driven changes in production are reflected by world price dynamics. At the world level, however, local impacts of cataclysmic weather conditions are smoothed over because sugar production is so geographically spread out, and years when output drops simultaneously in many producing countries are thankfully few and far between. The new remarkable feature of the world sugar economy, which has surfaced in the 1990s, is the sharp growth in the concentration of sugar production. At the beginning of the 1990s world sugar production was about 114 million tonnes, raw value (an average for 1991–932). With the onset of the new millennium it nearly reached 132 million tonnes (an average for 1999–2001). Thus, global sugar output during ten years only increased by 18 million tonnes. Notably, just two countries account for the bulk of the increase. Currently Brazil’s production averages nearly 20 million tonnes, as against less than 10 million tonnes at the beginning of the 1990s. During the same period sugar production in India 2
In order to reduce the influence of crops particularly affected by extreme weather conditions we have used here a three-year average rather than figures for individual years. Chapter 2/page 20
Sugar from the 1900s to the present day Table 2.8 Sugar production in selected countries, 1991–2001 (in 000 tonnes, raw value) 1991–1993
1999–2001
Increase in 1000 t
Increase in %
Brazil India EU15 USA China Thailand Mexico Australia Cuba Pakistan
9 825.3 12 911.8 16 826.6 6 775.6 7 966.7 4 383.5 4 040.1 4 015.5 6 232.6 2 506.7
19 148.6 19 186.4 17 361.6 8 032.6 7 767.9 5 661.0 5 153.1 4 899.6 3 893.4 2 827.4
+9 323.3 +6 274.5 +535.0 +1 257.0 -198.8 +1 277.6 +1 113.0 +884.2 -2 339.3 +320.7
+95 +49 +3 +19 -2 +29 +28 +22 -38 +13
WORLD
113 904.0
131 886.0
+17 982.0
+16
grew by more than 6 million tonnes from about 13 million tonnes to nearly 20 million tonnes. Other key producers failed to match such vigour in sugar production, and in some cases sugar production even declined (see Table 2.8). As a result of growing concentration of production, the share of the five largest sugar producers in the world total increased considerably, from 46% in early 1990 to 53% in 1999–2001. Contrary to popular belief, concentration in sugar production was not mirrored by concentration of exports. The share of top exporters in world trade totals has remained practically unchanged. At the beginning of the 1990s the bulk of the world sugar supply came from a handful of dominant exporters, with Cuba leading the pack. Today the league of top exporters includes the same countries and their combined supply power (measured as a share in total world exports) remains, generally speaking, untouched. What has changed is the leader. If in 1993 Cuban exports accounted for about one quarter of total world exports while Brazil was only the fourth largest exporter, responsible for 6% of sugar traded internationally, nowadays the South American giant stands as the indisputable export leader. Meanwhile, Cuba has been steadily dropping further and further down and is now just the fifth in the top exporters’ league. There are no dramatic changes in the relative importance of the other leading exporters (Table 2.9). The dominance of few exporters and, hence, the dependence of the market on the supplies from a limited number of producers, explain the continuing vulnerability of world prices to crop developments in key regions throughout the 1990s. In answer to the growing demand for raw sugar exporters have Chapter 2/page 21
Sugar Trading Manual Table 2.9 World’s largest sugar exporters, 1991–2001 1991–1993
1999–2001 Exports (1000 t)
Share of world total (%)
Cuba EU Thailand Australia Brazil Subtotal
6 674.7 5 065.6 3 025.9 2 810.8 1 842.1 19 419.2
23 17 10 10 6 67
World total
29 194.3
Exports (1000 t)
Share of world total (%)
Brazil EU Australia Thailand Cuba Subtotal
10 045.8 5 783.1 3 865.9 3 711.8 3 200.1 26 606.8
26 15 10 10 8 68
World total
39 058.4
Table 2.10 Changing structure of export supply, world’s largest exporters, 1992 and 2001 (in 000 mtrv) Raw sugar
White sugar
1992
2001
Cuba Australia Thailand Brazil Mauritius World Total Share of world total %
5860 2878 2422 681 633 1544 4 77
Brazil Australia Cuba Thailand Guatemala World Total Share of world total %
1992 7 085 3 453 2 926 2 239 1 276 22 600 75
EU China Brazil Thailand Ukraine World Total Share of world total %
2001 4 784 1 808 1 592 1 297 970 15 661 67
EU Brazil India Thailand Turkey World Total Share of world total %
6 060 4 083 1 209 1 125 1 000 18 297 74
increased considerably the share of the latter in their export programmes. Gross exports of raw sugar have grown by 35%, from about 16 million tonnes at the beginning of the 1990s to nearly 21 million tonnes (an average for 1999–2001). By 2001 the share of raw imports rose to nearly 60% of world turnover (Table 2.10 illustrates the major changes in geographical structure of white and raw sugar exports during the 1990s). Brazil replaced Cuba as by far the mightiest raw sugar exporter. Moreover, Brazil also significantly strengthened its position in the white sugar exporters’ league, becoming by the end of the Chapter 2/page 22
Sugar from the 1900s to the present day twentieth century the second largest after the EU as supplier of white sugar to the world market. Another important change in the geographical supply structure is the already mentioned disappearance of Ukraine as a major white sugar exporter. The world’s largest beet sugar producer in the 1980s and still the fifth world’s largest white sugar exporter at the beginning of the 1990s eventually became a net importer of sugar.
Political environment Finally, what were the main developments in sugar politics during the 1990s? Overall, the decade was characterized by accelerated liberalization of several important national sugar markets and curtailment of preferential trade. In discussing the deregulation of domestic markets, one cannot omit the full liberalization of both sugar and ethanol markets in Brazil (currently the world’s leading sugar exporter) and the transition of the sugar sectors from centrally planned to free market-oriented in Eastern Europe and the FSU (particularly in Russia, the world’s largest sugar importer). In recent years the sugar market of India (the world’s largest sugar consumer) has also undergone significant deregulation. It is important to note, however, that liberalization and deregulation of domestic markets do not necessarily guarantee easier access to these markets for imported sugar or, for that matter, a lower level of export support. The example of Russia in the late 1990s shows that liberalized national sugar markets could remain as protected as they had been under full government control. During the last two or three centuries one significant characteristic of the world sugar market has been the share of total trade accounted for by special arrangements, with quantities and prices fixed at government level. The collapse of the USSR and the COMECON system, which subsidized Cuban sugar exports, together with the modifications in the US sugar programme, have resulted in a further shrinkage of preferential trade, which fell from 10.3 million tonnes in 1991 down to just 3.2 million tonnes in 2001. As a result the share of preferentially traded sugar in the global turnover shrivelled from 35% at the beginning of the last decade to just 8% at the beginning of the current one (see Table 2.11). While on the subject of the political environment, the Uruguay Round negotiations on agriculture ought to be mentioned. The Round of the GATT/WTO multilateral trade negotiations was concluded on 15 December 1993 and the Final Act signed in Marrakech in April 1994. The Round for the first time included negotiations on agriculture in general and sugar in particular. The principal Uruguay Round reforms relating to agriculture were the market access commitments, concessions on lower tariffication and domestic support for agriculture, and Chapter 2/page 23
Sugar Trading Manual Table 2.11 Summary of special arrangements and their market share in 1991 and 2001 (in million tonnes, raw sugar) 1991 US TRQ imports EU sugar imports under ACP, SPS and MFN arrangements Cuban exports to USSR China North Korea Central Europe USSR sugar intra-trade Total Share in world trade in % World total exports 1
2001
1.732 1.626
1.154 1.647
3.835 0.797 0.025 0.058 2.273
0 0.359 0 0 0
10.346 35 29.5351
3.160 8 40.897
Including 2.273 million tonnes of the USSR sugar intra-trade.
subsidized exports. Signatory countries agreed to import a minimum share of 3% of their domestic market in 1995, rising to 5% by late 2000. Apart from that they agreed to replace non-tariff barriers and variable import levies by a base rate tariff and to reduce tariffs progressively over the implementation period (until the end of 2000 for developed countries and the end of 2004 for developing countries) by an average of 36% across all commodities, with a minimum reduction for any individual commodity of 15%. According to the ISO’s calculations, in the case of sugar, the average reduction in the tariff rate for raw sugar adds up to 24% – the weighted average base level of 93% had to fall to 72% by the final year of implementation. For white sugar the agreed reduction in the weighted average tariff was 22%, the decline from base tariff level of 100% to 88%. Despite a seemingly considerable drop in tariffs the reductions in real-life tariff levels were on the whole quite small – ceiling bindings were generally set at rates much higher than the existing applied tariffs. This permitted some countries actually to raise tariffs over the implementation period, even though negotiated reductions in bound rates remained in effect. Perversely, the level of border protection actually rose as a result of the Uruguay Round. If truth be told, in the case of sugar, the commitments made under the Uruguay Round did little to achieve the objectives of GATT/WTO – freeing up world trade through more open and less distorted national
Chapter 2/page 24
Sugar from the 1900s to the present day markets. Nevertheless, the Round did bring sugar into the mainstream of the WTO multilateral regulatory system. Frameworks were established for tariffication (a small but important step towards reducing protection) and the treatment of all forms of distortion, which fall into the categories of market access, domestic support and export subsidies. In practical terms, a modest agreed reduction in subsidized EU exports, a lowering of the Japanese tariff on sugar and a modest increase in access to some countries’ markets might slightly reduce sugar surpluses, but not enough to cause a measurable impact on world prices. Thus, the world sugar economy at the boundary of two millennia is characterized by the growing dominance of the developing countries in the world sugar consumption and imports. Also notable is the rising importance of raw sugar in the global turnover. Contrary to the widespread expectations of the first half of 1990s, the increasing prominence of developing countries together with the progressive liberalization of national sugar markets did not bring more stability to the world sugar price. In terms of the world market prices, sugar remains one of the most volatile commodities. In contrast to consumption, where relatively stable growth has taken place over the last fifty years, production remains extremely volatile. As already stated, despite all the technological advances in field practices, unfavourable weather can still severely affect sugar production even in the most efficient agricultural industries. The dependence of the market on supplies by a limited number of leading producers explains a continuingly high level of vulnerability of world prices to crop developments in key origins throughout the 1990s. The emerging dominance of Brazil as the key world supplier of both raw and white sugar became the most prominent market feature at the turn of the millennium. Although during the 1990s in most countries governments ceased to directly regulate the industry, partly or fully liberalized domestic markets driven by market forces rarely provide better access for imported sugar or lower the level of export support. Even though the Uruguay Round brought sugar into the mainstream of the GATT/WTO multilateral trade negotiations, the Round itself did not deliver any significant reform of protectionist or interventionist sugar policies.
World sugar prices – back to volatility? The world sugar market has historically been viewed as a volatile residual market, which tended to be oversupplied except when a coincidence of bad weather and low stocks led to a sharp increase in world prices. This long-term volatility is readily evident in world prices, as can
Chapter 2/page 25
Sugar Trading Manual 40 35 Raw
US cents/lb
30
White
25 20 15 10 5
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
1954
1951
0
Year
2.7
Nominal annual raw and white sugar prices, 1951–2002.
be seen in Fig. 2.7, for both raw and white sugar. UNCTAD’s volatility indices (calculated as the percentage deviation from an exponential trend line) shows sugar during the period 1998–2001 to display an index of 19.2, as against 6.6 for corn, 5.7 for soybeans, 5.4 for rice, and 4.1 for beef. Crucially, recent world price developments, as described in this section, have done little to dispel this view of the market, despite a belief that emerged during the mid-1990s that significant evolution in the structure of the world sugar market – with many industries having undergone deregulation and therefore reacting to and also influencing the world price – meant that the world market had become less marginal and at the same time more stable. Indeed, a period of relative stability during 1987–98, when prices ranged between 8 and 15 cents/lb, and a time when there were not the price spikes or troughs that characterized the market during the preceding three decades, led many analysts at the time to consider if world market prices had moved up to a ‘new’ higher average level, exceeding 10 cents/lb. However, the price crash of 1998/99 proved that this was not the case, as will be discussed later in this section. Long-run trend The long-run trend in raw sugar prices can only be considered when the distortionary effects of inflation have been removed from the annual Chapter 2/page 26
Sugar from the 1900s to the present day 120 100
US cents/lb
80 60 40 20
Raw
2.8
Year Deflated
Expon. (deflated)
Nominal and deflated raw sugar prices, 1951–2002.
world price series.3 The long-run trend in annual real sugar prices is shown in Fig. 2.8. There has been a gradual underlying fall in real prices at a rate of close to 2% each year over the past 50 years, as estimated by ‘fitting’ a trend line to the price data. This underlying trend is important because it illustrates the pressures facing export-orientated producers to achieve constant gains in productivity to maintain revenue in real terms. Volatility Volatility in commodity prices, including sugar, arises as a direct consequence of shocks in the underlying demand and supply conditions, and is affected also by policy measures implemented at the national level. In tight markets, a sudden rise in consumption induces a sharp temporal rise in prices, but in a slack market, the impact of the shock induces the release of stocks, which dampens prices for long periods. This gives rise to price cycles with sharp spikes followed by flat tails. Some sugar analysts during the late 1980s and first half of the 1990s argued that the sugar market had become characterized by less volatil3
The deflator was the US consumer price index, although a deflator that also captures the impact of currency movements could be used, such as the G-5 Manufacturing Unit Value Index prepared by the World Bank. Chapter 2/page 27
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
1954
1951
0
Sugar Trading Manual 35
US cents/lb
30 25 20 15 10 5 0 1951–60
2.9
1961–70
1971–80
1981–90
1991–00
Nominal raw sugar price, 1951–2000.
120
US cents/lb
100 80 60 40 20 0 1951–60
1961–70
1971–80
1981–90
1991–00
2.10 Real raw sugar price, 1951–2000.
ity because of policy reform and deregulation, ensuring faster and broad-based adjustments to production and demand shocks. The precipitous relative decline in the share of developed countries in world imports, from two-thirds in the 1970s to less than 40% since 1995 has also been identified as contributing to the increase in price stability. Analysis of price variability can be shown using box plots, as shown in Figs 2.9 and 2.10 for nominal and real raw sugar prices. Box plots provide a graphical representation of variability in terms of quartiles. A quartile is a statistic that divides the price data for each decade into four intervals, each containing 25% of the data. Lower, middle and upper quartiles are derived by sorting the annual price data from the lowest to the highest, and then identifying the values below that fall 25%, 50% and 75% of the data. The bottom and top edge of each box shows the position of the lower and upper quartile, and the height of the box indicates the ‘spread’ of 50% of the price data. In 1951–60, Chapter 2/page 28
Sugar from the 1900s to the present day 50% of nominal annual prices fell between 3.3 US cents/lb and and 4.05 cents/lb; during 1961–70, between 1.96 cents/lb and 3.56 cents/lb; during 1971–80, between 7.40 cents/lb and 18.15 cents/lb; during 1981–90, between 6.22 cents/lb and 11.96 cents/lb; and 1991–2000, between 8.93 cents/lb and 11.81 cents/lb. What is clear is that the variability of sugar prices peaked in the 1971–80 period. From Fig. 2.10, it is readily evident that real prices during the 1991–2000 period have not only been the most stable but the lowest over the past 50 years. Simple statistical analysis reinforces this view, as shown in Table 2.12. In this table world prices over each of the past five decades are analysed to characterize any changes in their average level and volatility. The most common measure of variability is standard deviation. Complementary descriptions of the price data include skewness and kurtosis. Skewness is a measure of symmetry. In a normal distribution, skewness is zero. Negative values indicate that observations are skewed leftwards (i.e. more downwards spikes than upward spikes). A positive value shows that there were more upward spikes than negative ones. Of interest is the fact that for both raw and white sugar the most recent decade shows a negative skewness whereas the previous decades showed a positive skewness. That is, in the period 1991–2000 there were more instances of downward price movements than upward movements. Kurtosis measures whether the distribution is different from the normal distribution (kurtosis is 3 in this case). Price distributions with a ‘flat top’ at the mean have a low kurtosis value, instead of the high sharp peaks that are associated with a higher kurtosis value. Again, there appears to be a different distribution of prices in the most recent decade, with both raw and white sugar prices showing a low kurtosis. This implies that large price movements were common for sugar in the previous decades relative to the 1991–2000 period. Furthermore, the coefficient of variation is a measure of relative dispersion and is given by: Coefficient of variation = standard devia-
Table 2.12 Basic statistics: sugar (2002) prices by decade Raw sugar
1951–60 1961–70 1971–80 1981–90 1991–2000
White sugar
Average
Std dev.
Skewness
Kurtosis
Average
Std dev.
Skewness
Kurtosis
25.22 19.07 42.54 15.19 11.79
6.73 12.59 29.05 7.46 2.75
1.38 1.89 1.46 1.64 -0.51
1.30 3.22 1.89 3.77 -0.24
na na 52.97 20.16 15.8
na na 33.90 8.57 3.76
na na 1.58 1.58 -0.4
na na 2.35 3.16 -0.79
Chapter 2/page 29
Sugar Trading Manual Table 2.13 Coefficient of variation, 1951–2000
1951–60 1961–70 1971–80 1981–90 1991–2000
Raw
White
0.26 0.66 0.68 0.49 0.23
Na na 0.64 0.43 0.24
tion/mean. It is generally expressed as a percentage, and as can be seen in Table 2.13, the most recent decade displays the lowest value. ‘Golden era’ for sugar prices, 1988–97 The graphical and statistical analysis above, showing a return to much greater price stability during the most recent decade, reveals only part of the story, as will now be explained. For many of the world’s sugar exporting countries there was what can now be viewed as a ‘golden era’ for sugar prices between 1988 and 1997, with prices at a comfortably high level (12–13 US cents/lb) and showing a degree of stability unseen in the previous two decades. However, this golden era ended abruptly in 1998 when prices crashed to levels not seen for more than a decade. The extent and speed of the crash caught many analysts by surprise. With hindsight, prices were simply too high over the previous decade not to draw a response from producers, and export-orientated producers in particular. Especially in the Americas and the Pacific Rim, production capacities had been expanded over recent years without regard to demand. Between 1994/95 and 2000/01 world sugar production grew by 16%, whereas consumption increased by only 11%, leading to a substantial build-up in stocks. By August 2000, surplus stocks had risen to 18 million tonnes, an all time high. Production increases in Latin America were particularly strong – up 25% in the second half of the 1990s, representing 8.7 million tonnes of new production. The region’s consumption grew at around 12% over the same period. Asia was the only region where consumption grew at a more rapid pace than production. Prices recovered in 2000 – in fact they doubled – but the key driver was weather-related shortfalls in production (primarily the droughtaffected crop in Brazil) rather than any underlying market response to the price fall. Indeed, driven by expectations for a long-awaited drawdown in world stocks, prices doubled from a low set in February 2000 to a peak monthly average of 10.75 US cents/lb in October 2000. In Chapter 2/page 30
Sugar from the 1900s to the present day 18.00 16.00 14.00
US cents/lb
12.00 10.00 8.00 6.00 4.00 2.00
ISA
1989–97
1998–2003
19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03
0.00
2.11 Monthly ISA price, 1989–2003.
the event, however, despite the weather-driven fall in global sugar production, a small statistical surplus arose (0.38 Mt) and prices steadily weakened during 2001 to average only 6.79 cents/lb in October 2001, the start of the next crop cycle. Since that time, however, world market prices for both raw and white sugar have remained under downward pressure, and, as shown in Fig. 2.11, monthly prices since 1998 have persistently remained below the 1989–97 average of 11.34 cents/lb, and have averaged around 7.8 cents/lb since that time, below the production costs of many exporters and generally perceived to reflect oversupply on the world market. Importantly, however, volatility in monthly world market prices appears to have changed little. The coefficient of variation is 0.17 for the 1989–97 period, and it is only slightly higher at 0.20 for the 1998–mid-2003 period. The key issue is the lower average level of prices since 1998 rather than any sense of heightened volatility.
The 1992 International Sugar Agreement The International Sugar Agreement 1992 (ISA92) did not include economic clauses designed to defend a price range. Instead, the objectives are given in Article 1: To ensure enhanced international cooperation in connection with world sugar matters and related issues; To provide a forum for intergovernmental consultations on sugar and on ways to improve the world sugar economy; Chapter 2/page 31
Sugar Trading Manual To facilitate trade by collecting and providing information on the world sugar market and other sweeteners; and To encourage increased demand for sugar, particularly for nontraditional uses. The ISA92 has been extended four times, and membership has expanded to 63 countries, including: Argentina, Australia, Belarus, Belize, Brazil, Colombia, Costa Rica, Côte d’Ivoire, Cuba, Dominican Republic, Ecuador, EC (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom), Egypt, El Salvador, Ethiopia, Fiji, Guatemala, Guyana, Honduras, Hungary, India, Iran Islamic Republic, Jamaica, Kenya, Korean Republic, Latvia, Malawi, Mauritius, Mexico, Moldova, Nigeria, Pakistan, Panama, Philippines, Romania, Russian Federation, Serbia & Montenegro, South Africa, Sudan, Swaziland, Switzerland, Tanzania, Thailand, Trinidad & Tobago, Turkey, Ukraine, Vietnam, Zambia, and Zimbabwe. The member-countries of the ISO represent (based on data for 2002) 80% of world production, 63% of consumption, 35% of imports and 91% of exports. The reasons in brief for there being no economic provisions in the ISA92 lie in lessons from the past: first, the overriding objective of price stability cannot be achieved; second, politically negotiated price ranges normally do not reflect market realities, tend to be too narrow to cope with the volatility of commodity prices, and are sending the wrong signals to producers and exporters; third, no effective sanctions are negotiable for non-fulfilment of commitments; fourth, participation of all key players on the exporting and importing side, which would be a precondition for a proper functioning, cannot be achieved; and, last but not least, as a consequence of privatization the gradual withdrawal of governments from the formulation and execution of commodity policies makes those intergovernmental agreements an unworkable option. Besides these reasons in an era of privatization, globalization and liberalization international commodity agreements with economic provisions are generally considered to be outdated instruments unable to contribute to a sustainable and positive development of commoditydependent economies, particularly in developing countries. Driven by the articles of the ISA92, the ISO pursues four key outcomes: • Members benefit from improved transparency in world sugar trade; • Members are fully informed about key drivers and emerging issues impacting the world sugar and sweeteners economy; Chapter 2/page 32
Sugar from the 1900s to the present day • Members are provided with effective fora for debate and dialogue regarding global sugar and sweetener issues; and • Developing countries and economies in transition have access to Common Fund for Commodities (CFC) financing for projects to help facilitate their strategies to improve competitiveness of their sugar industries. In short, instead of defending price ranges, the ISA92 works to help member governments and the private sector of their sugar industries to understand the key drivers of the world sugar and sweeteners markets (economic and policy related), but just as importantly to help them prepare their national sugar industries for the climate of continuing change that shapes the world sugar and sweeteners economy.
Chapter 2/page 33
Part 2 The global picture
3 The current world picture Jonathan Kingsman Société J. Kingsman
Tom McNeill Sugar InSite Pty Ltd
Structural change within the sugar market Consumption growth Economic liberalization Declining beet production Increased trade in raw sugar Export concentration and import diversification Trade flows become more market orientated Increased ‘disappearance’ Declining volatility Multinational sugar producers and users More choice for the consumer and better quality Lower prices Economic liberalization is not a one-way street
Future prospects – closer examination of three key producers Brazil Thailand Big 2002/03 crop sparks system review Freight differentials and the meaning of a deficit Volatility in Thai raw premiums Outlook India
The trading implications of recent changes The spreads Contract terms The flat price
Given the vagaries of the publishing process, any chapter on the current world picture risks being out of date by the time it is eventually read. For this reason we have decided to split the chapter into three parts. The first will concentrate on structural change within the sugar market over the last few years. The second will take a closer look at the three key producers in the world market (Brazil, Thailand and India) and discuss their prospects for further expansion. The third will then briefly examine some of the implications of all these changes for the world market in terms of spreads and flat price.
Structural change within the sugar market Over the last few years, the principal drivers behind the changed patterns in world trade have been the growth in consumption and economic liberalization.
Consumption growth There are three principal factors behind the continuing growth in consumption, as shown in Fig. 3.1. • Population growth: The way it affects consumption depends on individual country growth rates. India, for example, has higher population growth, and higher per capita sugar consumption than China. Many developed countries have little population growth and are close to saturation in terms of sugar usage.
160 140
100 80 60 40 20 0 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Million mtrv
120
3.1
Annual rate of growth of world consumption since 1955. Chapter 3/page 1
Sugar Trading Manual • Income growth: As per capita incomes rise, sugar consumption rises in most countries. There are exceptions – for example, Chinese consumption has been artificially restrained by substitution of saccharin. The relationship normally holds and is demonstrated well by Russia in the early 1990s where consumption growth slumped in line with incomes. • Price of sugar and price of substitutes: The percentage of the growth in sweetener demand captured by sugar depends on the price of sugar relative to substitutes. The best example of this is the USA where sweetener demand rose but sugar has lost market share to substitute sweeteners, such as high fructose syrup made from corn. From 1945 to 1950, world consumption grew at an annual rate of 9% as the world recovered from the chaos and misery of war. In the 1950s, the rate of growth in consumption slowed to an annualized rate of 5% while in the 1960s it slowed further to 3% as the world grew richer and concern grew over the health aspects of sugar. Since then the rate of growth has stabilized at around 2% per year. In 2002, the rate of consumption growth was around 3%, and it is expected to continue to rise at 1.5–2.5% annually as world GDP continues to rise. In Fig. 3.2 three different scenarios for consumption growth are presented: low growth (1.5%), moderate growth (2.0%) and moderate growth including trade reform (2.5%), estimating (or rather guessing) that agricultural trade reform could add one half percentage points to consumption growth. The results are quite staggering, particularly when you look at them in cane tonnage terms. If consumption is going to increase, production will by definition have to increase with it. The sugar will come from two sources: extra acreage
190 Low growth rate
180
Million mtrv
Moderate growth rate Mod. growth + trade reform Mod. growth + reform + ethanol
170 160 150 140 130
02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13
3.2
Projected consumption increase.
Chapter 3/page 2
The current world picture and higher productivity. The obvious candidate for both is Brazil, where there is plenty of land still to be brought into production – over 100 million hectares by conventional wisdom – and gains to be made in productivity, particularly in terms of irrigation. Although Brazil could possibly supply 60/70% of the anticipated increase in production, other efficient cane producers will also have to expand. There is also scope for rebuilding the beet industries in Eastern Europe at least to meet domestic demand. As far as productivity gains are concerned, there is a very large gap between efficient and less efficient cane and beet producers. In cane this may vary from 50 mt/hectare cane in poorly producing countries or regions to over 100 t/ha in high producers. At least some of the increased consumption requirement can come from improved productivity in poorer-yielding countries, while some of the better performing countries should continue to push the productivity boundary outwards. While genetically modified food crops are not currently accepted in many countries, this barrier may be slowly whittled away, particularly for low-risk foods such as sugars, starches and oils.
Economic liberalization The other main driver behind the sugar market is economic liberalization: the lowering of tariff barriers, reduction in producer subsidies, privatization and the exit of government from the sugar business. Of course, consumption growth and liberalization are interrelated. Liberalization impacts on consumption by (a) stimulating economic growth, particularly in poorer countries, which are big exporters of agricultural products; and by (b) changing the relative prices of sugar and sugar substitutes. In many countries, the price of sugar is held at significantly higher levels to provide support for local producers. This constrains consumption, and leads to the substitution of other sweeteners. By reforming trade, sugar becomes a more competitive product. Declining beet production One manifestation of trade liberalization has been the decline in beet production and an increase in cane production (see Fig. 3.3). In a report published in 2000, LMC International found that the world average cost of producing refined sugar from cane is 50% (or less) of the world average cost of producing beet white sugar. As government support programmes have been withdrawn in Eastern Europe, beet production as a percentage of total world production has fallen from 36% in 1990 to around 23% currently. The prime example of this is Russia, where beet production halved through this period. Chapter 3/page 3
Sugar Trading Manual 78 76 74 % cane sugar
72 70 68 66 64 62 60 58 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04
3.3
Declining share of beet production.
Increased trade in raw sugar Over recent years refineries have been built in Algeria, Saudi Arabia, Dubai, Nigeria and Indonesia. During that time only one significant world market-based refinery has closed – in Singapore. It is often more cost effective to move sugar in bulk and refine and pack it at destination, rather than ship it as a refined product in bags. Trade liberalization has also occurred and beet sugar production has fallen as a proportion of total world production – white export volumes have also fallen (see Fig. 3.4). Additionally some developing countries would rather pay domestic workers in refineries than pay an additional premium in scarce foreign exchange for sugar refined elsewhere. In 1995 raw sugar accounted for 47% of total world trade – this has now risen to over 55%. We would expect this trend to continue. As we have seen, sugar produced from cane is about half the price of sugar produced from beet. The EU is under increasing pressure to reduce or end subsidized white sugar exports both externally and even within the EU (see Fig. 3.5). If producers are forced to stop such exports, beet sugar production would then be limited to cover domestic consumption only. This, coupled with the growing use of differential tariff structures for raws and whites, should further support the trend to expanded world trade in raws. Export concentration and import diversification Another consequence of trade liberalization is the growing concentration among exporting countries and dispersal among importing counChapter 3/page 4
The current world picture 65 % White exports % Raw exports
60 55 %
50 45 40 35 30 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 3.4
Declining share of white sugar trade.
180 160 140 US$/mt
120 100 80 60 40 20 0 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03
3.5
Whites premium over recent years.
tries (see Table 3.1). In 2003, the top five exporters will account for around 70% of world sugar exports. This increasing concentration means that prices are much more vulnerable to supply developments in just a few countries. On the demand side, we have to add together the import requirements of over 100 countries before we reach the export capabilities of the top five exporters. Furthermore, 80% of world import demand now comes from developing countries. This increases the price sensitivity of import demand. Chapter 3/page 5
Sugar Trading Manual Table 3.1 Top five exporters and importers for 2002/03 (000 mtrv/Oct–Sept) Exporters
Quantity
Importers
Brazil EU Thailand Australia India
12 750 5 050 4 690 3 947 1 950
Russia EU Indonesia Japan Korea, Rep
Total
28 387
Total
Quantity 4 815 2000 1 845 1 515 1 400 11 575
As production expands to meet growing consumption, Brazil, the lowest cost producer, will take an increasing share of world exports, further increasing export concentration. But even leaving Brazil out of the equation, the trade liberalization policies put in place over the last ten years should in themselves result in continuing export concentration. The countries with a comparative advantage in growing sugar should continue to expand production at the expense of those whose resources are better used in other activities. Trade flows become more market orientated As governments have given up monopoly controls over import and exports in every country except Australia and Cuba, trade flows have become less determined by protocols and long-term contracts (see Fig. 3.6). They respond more to market signals. This sometimes leads to peculiar results. For example, half a million mt of Thai sugar moved from the Far East to the Black Sea in the first half of 2002 because of the way that the Russian import tariffs were structured. That outflow was replaced by an inflow from Brazil in the second half of the year. Although these trade flows may from the outside look irrational no one has yet found a more efficient method of allocating resources than the market. As such these flows are efficient within the context of the market in which they occur. But even the centrally managed exporters are becoming more market orientated. Again during 2002, Cuba took advantage of the inverse structure of the market by exporting more raws in the first half of the year and replaced them with imports of whites from Brazil in the second half of the year. And, with the reduction in Queensland production, that Australian state’s central marketing desk has become less Chapter 3/page 6
The current world picture 25 24
%
23 22 21 20 1995
3.6
1996
1997
1998
1999
2000
2001
Total free market exports as % of world production.
concerned with finding homes for all its sugar and now concentrates more on maximizing returns. Less of its sugar is now going to Canada and the Middle East, for example, and more is staying in the Far East. Increased ‘disappearance’ The privatization of the sugar trade has made it harder to keep track of world sugar statistics. Where there was once only one importer in a country, there are now many. As a result, each transaction is smaller. Not surprisingly, white sugar is increasingly being moved in containers, and these sometimes go unrecorded. The trend for importers to disguise the sugar in ‘blends’ exaggerates the difficulty. Similarly, the ‘democratization of corruption’ has meant more sugar is being smuggled than ten years ago. All this makes it difficult to keep track of trade flows and has led some observers to argue that global consumption is much higher than previously thought. Indeed, this was one of the primary reasons given for the market’s strength at the end of 2002. Declining volatility Twenty-five years ago, developed countries, largely the US, Japan and Canada, dominated the import market. These countries have a low price elasticity of demand and care little about price. When the two price spikes occurred in 1974 and 1980 (see Fig. 3.7), these countries did not reduce their imports, and this helped to exaggerate the price rise. Longer term, however, these price spikes had a negative effect on sugar demand as they created the necessary political landscape that Chapter 3/page 7
Sugar Trading Manual 70 60
US cents/lb
50 40 30 20 10 0 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03
3.7
NY11 futures values from 1967.
permitted the introduction of high minimum domestic prices. High prices not only promoted domestic production but also reduced sugar consumption and allowed alternative sweeteners to take market share from sugar producers. In the USA particularly – and Japan to a lesser extent – high minimum sugar prices backfired by creating a guaranteed profit margin for the high fructose corn syrup industry, allowing the new industry elbow room to undercut sugar prices and capture market share. The consequent decline in Japanese and US sugar imports, together with the more rapid rise of consumption in the Third World, has made the developing countries the main force on the world sugar market. These poorer countries have higher price elasticity of demand. Added to this, the collapse of communism has made the countries of the FSU more price-sensitive than they used to be. As a result of these changes, overall sugar price volatility has declined since the 1980s. Multinational sugar producers and users Deregulation and privatization of sugar industries in certain countries has provided investment opportunities for sugar producers in other countries. The obvious example is investment by the EU producers into the Eastern European countries. There are other examples: French producers are investing in Brazil; Belgian producers have invested in Australia. Sugar producers are becoming multinational. The investment potential and role of multinational producers has gone hand in hand with the expansion of multinational sugar users. Chapter 3/page 8
The current world picture While the new investors are facilitating the improvement in productivity and quality, harmonization of quality standards and improvement in logistics and handling of sugar has been spurred on by multinational sugar users. The combination of these two forces should continue to accelerate technological change within the sugar economy, as it is with most other commodities and foods. More choice for the consumer and better quality Over the last few years we have seen the trade in raw sugar become differentiated by quality. The liberalization of the Brazilian sugar economy has provided a supply of high polarization, low colour raw sugar. Other producers have risen to the challenge. South African raw sugar is usually of 1500 / 1700 ICUMSA units with polarization around 99 degrees. Queensland has no fewer than four grades of raw sugar including a new product, QHP, of approximately 99.7 degrees pol and 600 to 700 ICUMSA colour. The Thai industry is also making progress towards improving the quality of its sugar and is now guaranteeing a minimum polarization of 98.5 degrees on some of its production. As for whites, they are becoming like many other consumer products where the brand becomes more important than the product itself. We have seen this particularly in the Far East where grain size, bag colour and brand have been added to the traditional criteria of polarization and sugar colour. Lower prices Promoters of free trade will argue that liberalization and the increased competition that it brings should result in lower prices. While it is difficult to separate out the effect of increasing efficiency in commodity industries generally, it appears that the expected impact of continued liberalization is having the desired effect on sugar prices. Figure 3.7 shows the long-term decline in nominal prices – this price decline is even more dramatic if real prices are used.
Economic liberalization is not a one-way street During the last decade and more, the combination of the collapse of communism and the Asian economic crisis gave the IMF and other international financial institutions leverage to impose import tariff reductions on a number of sugar importing countries, most notably in Indonesia and Russia. In hindsight, it was perhaps a little naive of those importing countries to agree to dismantle their tariff protection without a corresponding reduction in tariff barriers and subsidies in the EU, USA or Japan. Chapter 3/page 9
Sugar Trading Manual Many countries have now seen the error of their ways and, under pressure from their local sugar industries, governments have put various import controls in place. The most notable of these have been Russia and Indonesia, who have not only increased tariff protection but have also differentiated between raws imports and whites imports. Many countries now operate a two-tier tariff policy aimed at encouraging raw sugar imports and discouraging white sugar imports. Other countries have resorted to non-tariff barriers. There has also been a renewed move to domestic subsidies. In Australia these have been small, but sufficient to take the edge off Australia’s free trade rhetoric. India (another member of the free tradeadvocating Global Alliance) has introduced several subsidies on exports to try to reduce domestic stocks, and the government is now meeting mill payment arrears to farmers. In Indonesia the government is under ongoing pressure to subsidize agricultural inputs and raise import tariffs. Meanwhile, the difficulty that domestic producers have in competing against marginally priced exports has led to bankruptcies and the government coming back into the business. The best example is Mexico – temporary nationalization of part of the industry, which may last a while. A slowing of liberalization should lead to higher domestic prices and a shift in power from consumer to producer. The obvious example of this is in Russia, where the domestic price is now €200 per mt higher than it would be without tariff protection. Lastly, increased export concentration should lead to a rise in price volatility. In 2001, poor weather in just one country (Brazil) led to the doubling of the world sugar price in a short time – with almost as rapid a decrease as the weather improved. With Brazil forecast to take an ever increasing share in world sugar exports, the world price is likely to become even more sensitive to potential supply disruptions in that one country or to its will not to export at low prices.
Future prospects – closer examination of three key producers There are a number of reasons behind the low world sugar prices that prevail at the time of writing (October 2003) – larger than expected Thai, Indian and Chinese crops, disappointing offtake and fund selling are some of the culprits. However, at the heart of the price weakness is the continued expansion of cane in the Centre-South of Brazil and a concern it will swamp the market. While that is good news for buyers, most producers view the current market with concern. Not only are world prices falling below breakeven cost in many countries (excluding Chapter 3/page 10
The current world picture protected producers), but appreciating exchange rates are further eroding returns for many producers.
Brazil Brazilian expansion plans relate to new projects based mostly in the north and west of Sao Paulo state – where there is ample cleared grazing land available, sugar cane is the most profitable crop. Many established mills also have their own expansion plans – additional land, increased yields, additional milling capacity, or an upgrade of distilling capacity. The bigger milling groups in CS Brazil have attempted to control their expansion, because they realize the importance of maintaining a remunerative price on the world market. But new entrants and smaller expansionary groups, as well as co-operatives producing other crops, see the large profits the alcohol and sugar producers are making, and want to participate (Fig. 3.8). Profitability in the alcohol and sugar industry in Brazil reached alltime highs in early 2003. Over the past year, both domestic alcohol and sugar prices have been high and the industry made exceptionally good returns. Brazil’s Centre-South industry, through UNICA, has a broad business plan that encompasses the following: • promote fuel alcohol usage in other countries and boost trade opportunities for alcohol (e.g. Japan and India) • encourage the Brazilian government to further promote fuel alcohol usage domestically, as a substitute for imported oil
Million mt
400 350
Centre-South
300
North North-East
250 200 150 100 50 0 90/91
3.8
92/93
94/95
96/97
98/99
00/01
02/03
Brazil cane production, 1990–2003. Chapter 3/page 11
Sugar Trading Manual • nurture the world sugar market, as it is currently the most important variable in the equation • promote export industries that add value to raw products such as sugar, in order to broaden the revenue base. The Brazilian government is keen to support fuel alcohol usage. In 2003 it put in place an alcohol stock fund of R$500 million (US$175 million) at reduced interest rates. It has encouraged car manufacturers to recommence the production of alcohol cars, and has been a strong advocate of the flex-fuel vehicles now being manufactured by a number of auto companies in Brazil. It has participated in industry efforts to boost fuel alcohol usage in other countries and is following through WTO trade challenges instigated by the previous Cardosa government. But it appears to have few solutions for an industry that is expanding aggressively without sufficient outlets for its production. With Brazil’s cane production cost the lowest in the world, and the industry efficient, its vast areas of agricultural land should underwrite continued expansion of the cane industry. But such expansion is not limitless, and will occur at a rate determined by the market. Brazil has sizeable potential to grow more cane, and its costs are low. It is important, though, not to fall into the trap of simply extrapolating the present exceptional growth rate a long way into the future. Figure 3.9 plots the year-on-year changes in production for the North North-East and Centre-South of Brazil. The NNE has been highly variable over the period since 1991/92, fluctuating between 34 and 56 million mt of cane with average growth around 1%. The Centre-South meantime has been characterized by steadier growth averaging 4.6%, on a much higher base tonnage. The major drop in 2000/01 and recov-
NNE change
CS change
40
20
%
0
–20
–40 91/92
3.9
93/94
95/96
97/98
99/00
01/02
Annual change in Brazil cane growth by region.
Chapter 3/page 12
93/04
The current world picture 500 Total Brazil Aggressive expansion
450
Linear trend Million mt
400 350 300 250 200 90/91
94/95
98/99
02/03
06/07
10/11
3.10 Brazil cane growth scenarios.
ery the following year are important features of the growth of CS cane production. Further rapid expansion is probable, but media and industry reports sometimes exaggerate the pace of expansion, making it appear much larger than actual growth. It is important to keep a longer-term perspective on growth. The long-term average growth rate is shown in Fig. 3.10 by the trendline through the historical data. If this 14-year average growth rate is extended forward, the ‘Linear trend’ line results. There is no doubt that the CS Brazil cane industry has grown at a rate higher than the longer-term average in the last three years. But this average growth rate of 3.6% is also influenced by a rebound in production following the sharp fall in production in 2000/01. The ‘Aggressive expansion’ line shown in the chart projects growth at a significantly faster expansion path than the historical linear trendline. The ‘Aggressive expansion’ line has Brazil exceeding 400 million mt of cane by the 2008/09 processing year, whereas the Linear trend line growth shows Brazil reaching this point in 2012/13, five years later. The growth rate will ultimately be determined by many factors, some outside the scope of this chapter. For example, Brazil’s rapid currency devaluation in 2002 and 2003 has given Brazilian producers a large boost in competitiveness. If the Brazilian economy is able to revert to better growth, the currency is likely to appreciate, which will take away part of this competitive boost. Ethanol legislation and usage in other countries will also be an important factor, as will the rate at which trade liberalization occurs. The historical data in Fig. 3.10 above illustrates the dangers of extrapolating short-term trends. The history of agricultural production Chapter 3/page 13
Sugar Trading Manual shows that weather and disease tend to intervene with monotonous regularity. CS Brazil may be less prone to crop fluctuation than NNE Brazil or some other producers, but it is not immune to droughts, frost or disease. The world sugar market is also a strong regulating factor. Brazil is the lowest cost producer of sugar and ethanol worldwide, but the assistance it has received from a sharp currency devaluation is not a guaranteed factor in its competitiveness equation. These factors will temper the straight line projections being used by optimists, but the end result probably isn’t in question – CS Brazil will be the centre of growth of cane production for both sugar and alcohol in the next 10–20 years at least.
Thailand By comparison to Brazil, Thailand might be a small producer, but it is an important supplier to the Asian region, and one of the few producers offering freely traded sugar to the world market. Thai producers have been able to continue to expand production even in the face of low world prices in the past few years (see Fig. 3.11). In 2001/02 and 2002/03, Thai producers harvested substantially more than had been generally expected, owing to an increase in planted area and good rainfall through the growing season. In 2001/02, a 22% increase in cane led to a 23% increase in sugar, and the following year, a 25% increase in cane yielded a 19% increase in sugar produced. In neither year did Thai industry forecasts indicate that a significant increase was expected. Most of the production increase has
80
8 Cane production
70
7
60
6
50
5
40
4
30
3
20
2
10
1 –
0 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03
3.11 Thailand production cane and sugar. Chapter 3/page 14
Million tonnes sugar
Million tonnes cane
Sugar production
The current world picture 3500 3000
00/01
01/02
02/03
000 mt
2500 2000 1500 1000 500 0 North
Central
East
North-east
3.12 Thai sugar production by region.
come from Thailand’s NE region, which is the largest producing region (see Fig. 3.12). In 2002/03, yield suffered because cane was harvested early, and mills had insufficient capacity in some regions to cope with the increase. This heavy early cane supply also led to quality problems in sugar – so much so that the growing trade to Russia was jeopardized by the shipment of poor-quality sugar. Receivers reported problems with removing sugar from ships and railcars, and processing in factories was difficult. On the face of it, the higher production is a huge success for the Thai industry. Beneath the surface, however, the Thai industry is a victim of its own success. The bigger crop has brought with it bigger problems. Big 2002/03 crop sparks system review The cane price paid to Thailand’s growers has been provisionally fixed prior to harvest, based on a combination of Quota A domestic fixed prices, and the price obtained for the 400 000 mt of Quota B sugar sold by the Thai Cane and Sugar Corporation. The TCSC holds tenders to sell the physical sugar to trade houses and then prices the corresponding futures against New York futures. Mills try to match or ‘mirror’ these prices in order to obtain the same – or better – returns as the TCSC. In 2002/03, by the time the mills realized that the crop was so much bigger, the world price was declining. Mills had no way to match the TCSC prices – even though they still had to pay farmers the provisional price for the cane. By selling their sugar at the cheaper Chapter 3/page 15
Sugar Trading Manual prevailing market prices, the mills would have locked in a loss. This in turn meant repaying commercial bank financing at a loss. So rather than sell the sugar and be unable to fully repay the loans, the mills held off from selling the sugar for longer than normal, until they took the view that it was unlikely that storing it any longer would have resulted in better returns. Thai banks managed to restrain some sales until very late in the year, hoping that the market would revert to higher prices, but this did not happen. As a result, the government has decided to implement fixed prices for cane, and commenced a review of the whole sales system, including the system of auctioning B quota tonnage in October or November each year. At the time of writing no major changes had been announced. Freight differentials and the meaning of a deficit Thai raws have usually traded at premiums to Western Hemisphere sugar for a number of reasons. The most important of these is that the Far East has traditionally been a deficit area. Regional producers have in the past been ‘protected’ by their freight advantage in the area. The freight rate from Brazil to China for a 30 000 tonne cargo would normally be around $35 per mt based on a load rate of 6000 mt per day. This compares with a freight rate from Thailand to China based on a load rate of 1500 mt per day of around $16 per mt – a difference of around $19 per mt or 0.85 c/lb. If the Far East in deficit, Thai sugar should therefore be worth at least 0.85 c/lb more than Brazilian sugar. By increasing their production in the last two years, the Thais have pushed the Far East into surplus. The freight differential portion of the premium has disappeared. When the Far East is not in deficit, Thai sugar has had to find alternative homes in the Western Hemisphere. In 2002 about 500 000 mt was shipped across into the Black Sea and in excess of 700 000 mt was shipped there in 2003. For larger vessels, the freight from Thailand to Black Sea has usually been less (by about $2.0 per mt) than for Cuba or Brazil to the Black Sea based on similar (or 3000 mt per day) load rates. On a like-for-like basis, therefore, Thai raw sugar should still trade at a (small) premium to Western Hemisphere sugar regardless of whether the Far East is in surplus or not. Brazilian sugar now trades based on a load rate of between 4000 and 10 000 mt per day. The NYBOT has increased the load rate on the futures contract from May 2003 to 3000 mt per day. The sugar that has been moving to Russia from Thailand has been bought from the Thai mills at these load rates or higher. However, the standard TCSC terms still trade basis 1500 mt per day – and in Kohsichang at 1000 mt per day. The issue of load rates is one that still needs to be addressed by the Thai industry. Chapter 3/page 16
The current world picture Quality problems are another thorny issue for the Thai industry. The general trade in raw sugar has become differentiated by quality. High polarization, low colour sugars with low levels of other undesirable quality features may cost more to produce, but they also cost less to refine and are therefore generally worth more. The Thai industry has had little incentive in the past to improve production quality. Not only has it been protected by the higher freight rates and longer voyage times into its region but it also had a captive audience in Japan and South Korea where import legislation has restricted imports to relatively low polarization sugar. South Korea has increased its polarization limit in recent years but Japan still insists that imported sugar should have a polarization lower than 98 degrees. Now that Thai sugar has to find homes outside the region, the incentive exists for the industry to lift raw sugar quality. Some milling groups are moving in this direction and will now guarantee a minimum polarization of 98.5 degrees for some buyers. However problems with starch, colour and dextran still need to be addressed, particularly after the complaints from Russian buyers in 2002 and especially in 2003. The severe caking of Thai sugar has caused substantial logistic delays and increased handling and processing costs. Unfortunately, this differentiation by quality and by load rates does fragment the market and reduce what was the Thais’ greatest attribute – their uniformity or homogeneity, which made them widely tradable. In the past, the second-hand market in Thai sugar has been both liquid and transparent. A buyer would often pay more for fobs Thais than, say, for the equivalent sugar on a cost and freight basis, because of the ability to trade out of the position if either the trade house or buyer changed their mind. A buyer committed to take sugar on a cost and freight basis from, say, Australia, knows that if the sugar is not required, it would most likely have to be sold back to the seller. If it was Thai sugar, it could be sold to a variety of buyers in the inter-trade market. Over recent years, liquidity in the inter-trade market has declined for various reasons. An inter-trade market on Thai raws still exists, even if the liquidity is greatly reduced, and although not perfect, it is still better than nothing. Volatility in Thai raw premiums Over the last ten years Thai premiums have ranged from a high of over 200 points or US 2 cents/lb (well above any possible freight differential) to a low of a discount below New York futures prices. The reason for such high premiums is that on more than one occasion in the past, trade houses have sold Thai raws with the idea of squeezing them into the New York futures. On one occasion in particular, they miscalculated, sold more than existed and were instead squeezed themselves. Chapter 3/page 17
Sugar Trading Manual 250 200
Points
150 100 50 0 –50 91
92 93
94
95
96
97
98
99
00
01
02
03
3.13 Thai raw sugar premium.
As per Fig. 3.13, Thai sugar traded at huge premiums in 1995 when China was a major sugar buyer. At that time there were a number of active importers rushing to be the first to get their sugar to the domestic market. As a result, the time element and shorter voyage time became worth a lot. The discounts to futures in 1999 occurred because of the incompatibility of Thai terms and New York terms. This has once again become an issue with load rates on Thai sugar at 1500 mt per day compared to 3000 mt per day under New York contract terms. Even when the Far East is in deficit the premium can disappear if the New York futures are squeezed. This happened on the May 2001 expiry when Thais traded into 15 points premium over May in the last days prior to expiry. This is largely a technical situation: relative to the following month the Thai raws maintained their premium. Outlook The Thai industry is being forced to undergo intensive soul-searching and is questioning all elements of the country’s sugar policy – including the way that the cane price is calculated and the very existence of the TCSC. A review was carried out during 2003 of all aspects of the industry. However, it should not be forgotten that the country has a number of important advantages over its competitors: • a freight advantage over most other origins to most major importers of both raws and whites • tremendous flexibility over whether it produces raws or whites – and when • low labour costs Chapter 3/page 18
The current world picture • a history of strong financial and regulatory support from government • a budding ethanol programme, which should reduce its dependence on world sugar exports. With reasonable price incentives, and farmers with a known capacity to expand the industry, it could be expected that sugar quality improvement and changed trading terms will be the next focus for Thai millers. But if several years of low world sugar prices and severe quality problems in 2003 in Russia have not provided an incentive to change, the Thai industry is in for further tough times. If it can make the changes required, and quickly, it stands a chance of regaining its standing as the primary tradable sugar in the Far East and further afield. And that could be bad news for its competitors.
India Interest in the machinations of the Indian sugar industry tends to be quite limited, particularly when account is taken of its vast size and possible export potential. Its cane production is second only to that of Brazil, and it is the world’s largest consuming nation. Its ‘partial’ involvement in the world sugar market in the past has led some analysts to downplay its importance as a factor in world prices. There may be good reason for this – India has turned from being a cyclical importer/exporter to a hesitant exporter in the last few years (see Fig. 3.14). Stocks have burgeoned, but exports have not measured up to the industry’s plans, or their potential. Parts of the industry have lurched from crisis to crisis, as mills defaulted on payments to cane growers,
2000 Net exporter
Trade balance
1500
500 Net importer
000 mtrv
1000
0 –500 –1000
02/03
01/02
00/01
99/00
98/99
97/98
96/97
95/96
94/95
93/94
92/93
91/92
–1500
3.14 Indian sugar exports/imports. Chapter 3/page 19
Sugar Trading Manual and the government grudgingly financed mill payment defaults to sustain the industry. But just as the industry’s political leverage should not be underestimated, neither should its future ability to export under the right conditions. India has long been used to carrying strategic stocks, to cope with the cyclical nature of its sugar production. As Fig. 3.14 shows, throughout the 1990s, India fluctuated between net exporter and net importer, and the cycles had an element of predictability about them. Low domestic prices led to government intervention and production cutbacks, which then led to higher prices and production increases, which led to a further slump in prices, mill payment defaults, and so on. Two or three years in five, India was a net exporter – the other years an importer. But this has changed recently – not even poor monsoons seem able to constrain the production surge. As shown, net exports have been a constant feature over the most recent three years – reaching as high as 1.8 million mt in 2002/03. It is highly unlikely that India will need to import sugar in the next three to four years (or maybe more) unless there is a dramatic change of sugar policy. Consumption of sugar in India is relatively high compared with other Asian countries, and it continues to increase (see Fig. 3.15). As per capita income increases, the popularity of non-centrifugal sugars (gur, khandsari) is falling, and consumption of centrifugal sugars increasing. Additionally, although the availability of cheap sugar through ration shops has declined, the circumvention of government quota controls in recent years pushed prices lower and led to an increase in the affordability of sugar.
24 Production 22
Consumption
Million mtrv
20 18 16 14 12 10 91/92
93/94
95/96
97/98
3.15 Indian sugar production/consumption. Chapter 3/page 20
99/00
01/02
The current world picture W'sale USD/t Traded 100 ICUMSA Traded Thai raws
360 320
USD/t
280 240 200 160 120 Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
3.16 Indian sugar prices.
This flood of sugar on to the domestic market, pushing prices lower, has only recently been stemmed. This is one factor that indicates that India’s sugar stocks are overstated. For almost two years the government has been unable to rein in these ‘excess’ domestic market sales as mills obtained court orders to circumvent the bureaucracy and red tape imposed by various layers of government. It was only in the second half of 2003 that central government was able to reimpose control on these sales, with a resultant increase of several rupees per kg, but these levels are still well below prices that prevailed during 2001 and 2002 (see Fig. 3.16). The root cause of the large mismatch between sugar production and consumption in India is government regulation of the cane price. Indian politicians show little willingness either to deregulate cane prices or reduce them to levels that would ‘balance’ the equation and reduce the enormous stock levels in the country. Compounding the difficulty has been intervention by both central and state governments – the Indian government sets the statutory minimum price (SMP) and states set the state advised price (SAP), which have been 20 to 25 per cent above the SMP. In 2002 an inter-ministerial group of secretaries on sugar said that the states were acting illegally in setting an SAP and should cease the practice. The Indian government in September 2003 announced an INR 6.09 billion (US$133 million) sugar cane assistance package for farmers. Various states are working to bail out co-operatives in serious financial difficulties caused by paying a higher regulated cane price than the revenues available from the production, storage and sale of sugar. And so Chapter 3/page 21
Sugar Trading Manual the cycle continues – politicians regulate high cane prices to capture farm votes, giving the farmers incorrect market signals, production expands, sugar is sold at a loss both domestically and more so internationally, and politicians then set about propping up mills in a financial mess that the politicians initially created.
The trading implications of recent changes The spreads One of the main features of the sugar market during the first half of 2003 was the way that the futures board flattened on both raws and whites. At the start of the year the July 03 / July 04 spread in New York was trading at inverse of around 135 points while in London the August 03 / August 04 spread was valued at close to $25.0 per mt. By the middle of the year the July 03 / July 04 spread had narrowed to under 10 points while the August equivalent in London was trading at under $10.0 per mt. To explain this apparent structural change it is necessary to try and understand why sugar spreads have historically traded at an inverse. Colleagues in the grain trade have always had a hard time understanding the structure of the sugar board. A conventional configuration for a commodity board is a ‘carrying-charge’ that broadly reflects the cost of carrying that commodity over time. Those costs include warehouse rent, insurance and interest charges – as well as some element to take account of the cost of keeping the commodity in good condition or an adjustment to allow for any quality deterioration during storage. When a commodity is plentiful, then futures spreads should more or less reflect the real economic costs of carrying (storing) that commodity. When there is an abnormal surplus, warehouse space may be limited and long holders may be willing to discount spot prices further than the real cost of carry in order to free up space for, say, the new harvest. At such a time the spot month may ‘disconnect’ from the economic reality of the cost of carry and decline to such a level where other market participants are prepared to take over the storage of the commodity in their own warehouses (for example in importing countries) or where the price declines sufficiently to prompt an increase in demand for spot consumption. In a time of tight supplies, buyers may find themselves in a bidding war to obtain their needs. In the case of raw sugar, it can be expensive to close a refinery for a short period, and it may make sense to bid up values in order to ensure supply. Similarly for white sugar, the
Chapter 3/page 22
The current world picture elasticity of demand is low and most consumers are insensitive to the price of it. (This is primarily because sugar purchases make up such a small percentage of total consumer expenditure.) As such, consumers have plenty of economic room to bid up prices to ensure that they keep their families supplied. In times of tight supply, spot prices may be bid up to levels where producers are encouraged to advance production or to reduce their own domestic (pipeline) stocks to below ‘normal’ levels. Alternatively, if the spot price rises significantly, other importers or consumers may be persuaded to reduce their purchases or delay their imports. So far, any grain trader reading this would say, ‘Fine, I understand all that, but sugar has been in excess supply for pretty much the last fifteen years. I still don’t understand the inverses.’ To gain a better insight into that, we have to look beyond the simple textbook theory. The move from carrying charges to inverses in the sugar market coincided with the collapse of communism and a surge of liberalization in the world economy. The two are related. Historically, the sugar trade had usually been carried out by governments. One of the principal historic trade flows in sugar was from Cuba to Russia, with deals done on a long term basis between two state-run government organizations. Another was from Cuba to China. Until the mid-1980s in Brazil, the IAA (a quasi-government agency) was the sole exporter. And in many importing countries, particularly in the Middle East but also in Indonesia (the world’s biggest whites importer), the government was always the principal player. In all of these cases, price was less important than supply and the imperative was to ensure adequate supply. As a result, deals were done long in advance. Liberalization changed that. Producers suddenly had to learn not only how to market their sugar but also to finance their business. The preferred solution was to sell production as far forward as possible and then take the sales contracts to the local banks to obtain crop finance. Meanwhile, importers, now private independent businesses, became less interested in ensuring adequate supplies for the general population and more interested in turning a profit. It became too risky to buy supplies too far forward; it was much better to respond quickly to spot price signals, importing only when domestic prices were above world prices, allowing a profit in the process. The result of these changes was to create a situation where producers sell forward while consumers (importers) buy spot. In terms of order flow this lends itself, obviously, to an inverted market structure. However, it is still not enough in itself to explain the inverses. After all, if it was only a question of order flow, there would be plenty of arbitragers out there to take the other side and compensate for the time differential in pricing.
Chapter 3/page 23
Sugar Trading Manual Another reason often given for the inverse structure in sugar is the activity of investment funds. It is argued that funds traditionally target the front month – because that is where the volume is – and buy more often than they sell. This in turn distorts the structure of the market by ‘over-valuing’ the spot month relative to the forward positions. At the end of 2002 and the beginning of 2003 the funds built up massive positions in sugar, peaking at over five million tonnes in mid-February 2003. Their ensuing liquidation was obviously one factor behind the flattening of the futures curve. Fund buying and holding in the spot month can distort the market for a while by creating an ‘artificial’ demand for spot sugar. However, funds never (or very rarely) take delivery but roll forward their longs. Logic would therefore dictate that any distortion would be temporary and resolved at each expiry. In other words, if fund activity was the reason for the inverses in sugar then those inverses should disappear at each expiry; each spot month should expire at a level that reflects real economic conditions. However, this hasn’t happened and spot months have continually expired at premiums. As such, one has to look elsewhere for an explanation. The real reason why sugar has traditionally traded in an inverse can be found where the technicalities of the futures contracts meet the structure of world trade flows. Although that sounds complicated, it isn’t. For many years, the Far East has been a deficit area for raw sugar that has required inflows from the Western Hemisphere. Because of the additional freight cost of moving sugar into the area, sugar already in the region has traditionally traded at a premium to Western Hemisphere origin. This premium has been roughly equivalent to the freight differential adjusted for differences in quality, shipment periods, voyage times etc. The traditional indicator for this differential has been the Thai premium in the inter-trade market – although of course other producers in the area (Australia and South Africa) have also benefited (Fig. 3.17). At times of relative excess supply in the Far East, Australia helped to make sure that the premium was maintained by moving enough sugar out of the region to keep it in deficit. This strategy began to fall apart a few years back with an inflow of first Guatemalan and then Brazilian sugar as the freight economics changed and boats got bigger. (Return voyage rates from Central America to South Korea were particularly low.) Even more recently, Brazilian terminal operators have begun to ‘coat’ their sugar with syrups, reducing the polarization enough to meet Japan’s stringent import regulations. However, having said all that, the Far East was in deficit more years than not, keeping Thai premiums high enough to bring in sugar from the Western Hemisphere to balance the situation. Chapter 3/page 24
The current world picture 250 200
Points
150 100 50 0 –50 91
92
93
94
95
96
97
98
99
00
01
02
03
3.17 Thai raw premiums.
Contract terms Future contracts are traditionally a hedging and pricing mechanism. Most markets have a delivery mechanism, but delivery is usually – and purposely – inconvenient and considered as ‘a last resort’. No delivery mechanism can be perfect; first, because it takes time for rules to be changed and to be kept up to date with changing trade flows; second, because there is always something that will favour either the deliverer or receiver at one time or another. Sugar has in a way been an unusual commodity in that very little of world supply could actually be delivered against the expiry futures contract. Cuba, for many years the world’s biggest exporter, has always been excluded for political reasons. Australia has never delivered its production – partly for political reasons and partly to preserve the premium for sugar in the region. South Africa was for many years excluded on the grounds of politics. Since the end of apartheid that is obviously no longer the case, but the industry has never delivered into New York – for reasons similar to those of Australia. However, all this sugar is priced against New York futures and those short hedges have to be brought back prior to the spot month expiry. This obviously helps support the inverse going into a delivery (the order flow argument we made above), but more importantly it reduces the supply of sugar that is technically deliverable against the exchange. There are reasons other than politics for not delivering. New York rules require that the deliverer keeps the sugar available at seven days’ notice for a period of 75 days. In some cases this is very difficult. In Colombia, for example, a lack of warehouse space sufficiently close to the ports makes it almost impossible for producers there to meet the Chapter 3/page 25
Sugar Trading Manual delivery requirements. As such, the Colombians prefer to sell on a 30day shipment window, even if it means that their sugar is worth a discount to New York futures. Terminal operators in Brazil also like to sell on a 30- or even 15-day window. They have such a large throughput that they need to plan and space their shipments carefully. If too many vessels arrive at the same time they can’t load them quickly enough and demurrage payments rise. If insufficient vessels turn up, they run out of warehouse space and the harvest backs up deep into the country. Thailand is one exporter whose sugar is deliverable both in London and New York. Thai raw sugar historically trades on a 75-day shipment window and, unlike Australians or South Africans, is freely traded on the inter-trade market. However, as we saw above, Thai sugar is usually worth a premium to sugar from the Western Hemisphere. For Thais to be delivered the premium has to be reduced to zero. This happened very rarely, and in the period from 1994 through to the end of 2001 less than 100 000 mt of Thais were delivered into New York (out of a total delivered tonnage of over five million mt) (Fig. 3.18). What is true for New York is also true for London, but for slightly different reasons. Only refined sugar from a narrow range of origins can be delivered against London. However, a lot of the world’s trade in white sugar is in lower qualities – 150s, 100s and even 60 ICUMSA sugars. These lower quality sugars were traditionally hedged against London, and those hedges needed to be bought back prior to expiry – leading to the same problems of order flow. More important, however, was the actual supply and demand of sugar technically deliverable. The inverses in the London market have been a function of the relative
80 70 60
US$/t
50 40 30 20 10 0 –10 –20 93
94
95
96
97
3.18 Thai whites premiums. Chapter 3/page 26
98
99
00
01
02
03
The current world picture tightness of refined sugar that can technically be delivered. Even when the world whites market has been in surplus, high quality refined sugar has often been scarce and the futures inverses have reflected that tightness. Over the last ten to fifteen years the futures markets have been ‘biased’ towards the receiver. Even in times of excess world production, there has often been a deficit of sugar that can technically be delivered against the futures. A surplus in world production has often hidden a deficit of deliverable supply, and this deficit has driven the inverses in New York futures values. From a trader’s point of view, there has always been more upside in being long of futures than being short of them. The upside has been to ‘squeeze’ Thais into the tape, or to force Brazilian terminal operators to ‘surrender’ their flexibility by giving a 75-day shipment window. And in the order flow process, it was always fun to ‘squeeze’ the futures shorts, the Cuban, Australian and South African hedges that had to be bought back in New York and the lower quality whites hedges that had to be bought back in London. Even at times when the deficit of deliverable sugar has been marginal, it could be exaggerated by creating demand. Trade houses were able to transfer demand for non-deliverable sugar into demand for deliverable sugar by discounting prices at destination, establishing a sales book and then buying futures, and effectively sourcing the sugar from the exchanges. Even if non-deliverable sugars (Cubans in the case of Russia or Thai 100s in the case of Indonesia) were trading at discounts to the futures, traders stayed long of the futures, pushing the spreads out in the process. One of the consequences of playing the technical nature of the futures markets has been that there has been a disconnection between the value of deliverable sugar and nondeliverable sugar. A lack of deliverable sugar coupled with the Far East premium has at times been an explosive mixture. During 2003, however, a number of expiries failed to explode. This is partly because holders of nondeliverable sugars have wised-up, taking avoiding action ahead of time by rolling their hedges forward earlier – or, in some cases, not hedging their sugar at all. It is also because deliverers have frustrated potential squeezes by using the technicalities of the contracts against the receivers. Finally, and most importantly, it is because the structure of the market has changed. We will take each one in turn. Market participants have become used to technical squeezes on the futures markets and have begun to take avoiding action before the full effect of a squeeze sets in. They roll forward their hedges well in advance. Or they have used an alternative hedging medium. This is particularly the case of the August London – often a target in the past. When exports began to pick up from South Brazil in the early 1990s, Chapter 3/page 27
Sugar Trading Manual the position was used as a hedge for non-deliverable lower quality Brazil whites. However, after a couple of years of being squeezed, traders began to hedge more of that sugar in New York and the August squeezes pretty much ended. Another reaction has been not to hedge the sugar at all. After all, low quality whites buyers often trade basis flat price. And now, with India a big supplier of low quality whites on a flat price basis, hedging low quality whites has become more risky than not hedging them. In this sense, the white sugar business is becoming more like the rice business, where there is no futures market. Over the last few years, traders have frustrated a number of squeeze plays by exploiting the technical nature of the delivery mechanism. Sugar is fairly special in the world of commodities in that the futures delivery mechanism is not based on warehouse receipts but vessel presentation. Deliverers do not have to prove that the sugar is available at the time of delivery. Instead their obligations consist of loading the receiver’s vessel in a timely fashion when it is presented at load port. This distinction is particularly important at the start of a harvest. We have seen cases in the last few years where deliveries have been made of sugar that had not been produced at the time of the futures contract expiry but was going to be produced during the delivery period. As long as the deliverer has enough sugar to load one vessel at the relatively slow contractual rate, the delivery obligations are met. When this was perceived to be happening, receivers have tried to place the deliverer in default, arguing that the sugar was not available at the time of delivery. However, so far all arbitrations have ruled in favour of the deliverer. At times of relative shortage, or when there is a time restraint such as a Russian import quota time deadline, the receiver will want to have the sugar loaded as quickly as possible at the start of the shipping period. If the receiver knows, for example, that the May expiry sugar will only be loaded in July, then it is difficult to argue that it is worth a premium to July. The attractiveness of taking delivery of the spot month at a premium to the second month has been reduced. On the whites, deliverers have begun to use a different technicality to frustrate receivers. Under LIFFE rules as they stand (at the time of writing), deliverers are not obligated to provide any marks on the bags, nor to ensure that the bags are uniform in colour (apart from for each 50 mt lot). By charging high prices to mark bags for the receiver, the deliverers can increase the cost of taking delivery. By providing the sugar in various colour bags, they can reduce the value of the sugar actually delivered. Not only that, but because a potential receiver does not know in advance what the charges will be, it is much harder to value the sugar. This uncertainty obviously reduces the attractiveness of taking delivery. From an order flow perspective any reduction in the quantity of nondeliverable sugar that is hedged in futures will reduce the extent to Chapter 3/page 28
The current world picture which an expiry can be squeezed. The collapse in Cuba’s sugar production has obviously reduced the quantity of futures hedges that have to be bought back or rolled forward at each expiry. The same applies to Australia, which has suffered from poor weather over the last few years and also to South Africa, which is selling more of its production as white sugar to neighbouring countries and so needs to hedge less of its production in New York. If you take 2003, the reduction in exports from South Africa, Cuba and Australia could be as much as two million mt compared to 2002. This is two million mt less futures that have to be bought back or rolled in New York. On the other side of the coin, there has been an expansion in the quantity of sugar that can be delivered. We mentioned earlier that the Brazilians don’t like to deliver their sugar because it creates logistical difficulties at the ports. However the expansion in the number of export terminals (with accompanying warehouse space) in South Brazil has made it easier for them to deliver sugar into a 75-day window. (It’s still not that easy, but it’s easier.) They might need to be paid to do it, but a small inverse may be enough now to make it worth their while. The biggest difference, however, has been the expansion in Thai production, which has not only increased the supply of deliverable sugar but also buried the Far East premium by swinging the region into structural surplus. If there is no Far East premium, there is no incentive to try and squeeze Thais into the tape. And any attempt to source other origins through the exchange will be frustrated by massive deliveries of Thais. If, as we believe, the inverse structure in the world sugar market has been caused by a deficit in supply of deliverable sugars, then that situation is now over. Increased production in Thailand coupled with infrastructure changes in South Brazil have combined to increase supply of deliverable sugar. Even if it hadn’t, with the Far East moving into surplus, the incentive even to try a squeeze play has been removed. As such, the futures spreads should now more closely reflect the supply and demand of all sugars, including non-deliverable ones, and respond more to the straight economics of warehouse costs and interest rates. This doesn’t mean that inverses are a thing of the past. At times of tightness, importers will still be prepared to pay more for spot arrivals and producers will need to be encouraged to advance harvests or run down pipeline stocks. But all these will be based on fundamental considerations rather than technical ones.
The flat price The flat or futures price of raw sugar has obviously declined in both real and nominal terms since 1999. During the 1990s, futures (nominal) prices average around 10.5 c/lb, and spent most of the time trading Chapter 3/page 29
Sugar Trading Manual 16 14
US cents/lb
12 10 8 6 4 90
91 92
93
94
95
96
97
98
99
00
01
02
03
3.19 World market prices 1990–2003.
between 7 and 16 c/lb. This changed coming into the new millennium, as Brazil became a driving force in world sugar production. At the same time, Brazil floated its currency, with an immediate fall in the value of the real. The combination of a lower currency and a more vigorous drive for exports in Brazil sent the price of sugar crashing to lows not seen since the mid-1980s when subsidized sugar from the EU sent the market into a downward spiral. As a result, raw sugar prices since 1999 have averaged around 7 c/lb (see Fig. 3.19). The competitiveness of the Brazilian sugar and ethanol sector is driven by many of the factors listed above. But the devaluation of the currency has had a major impact, as it fell from 1.20 per US dollar to almost 4 in the space of only four years. It has since recovered, but the impact of such a dramatic devaluation has left many other producers in a difficult position. With a very low currency, many Brazilian mills have an average cost of production less than 6 c/lb, and a marginal cost of production less than 5 c/lb. Even their most efficient competitors cannot come close to these numbers – most have costs of production between 7 and 10 c/lb. Others such as Cuba have production costs well above 10 c/lb, and this has resulted in rapidly declining production in the last five years. The constant oversupply of sugar to the market in the past three to five years has kept prices under pressure. Ethanol usage in Brazil and exports to other countries has been lower than anticipated, which is beginning to result in higher ethanol and sugar stocks. The outlook for the sugar flat price is critically related to the following: Chapter 3/page 30
The current world picture • world consumption, which is recovering only slowly from a world recession, but is estimated under normal conditions to be between 1.5% and 2% • trade liberalization, which could open up larger markets • ethanol usage and the extent to which sugar and sugar-related products are used in its manufacture. This, in turn, depends on the extent to which governments adopt measures to reduce global warming and are prepared to shift subsidies from agricultural production for food to agricultural production for fuel • the value of the Brazilian currency, and the extent to which new technologies reduce costs of production further. Volatility in the futures price has been reduced overall in recent years because of the oversupply and the extent to which the futures market represents the value of Brazilian sugar. There is a risk, however, for the market in relying too heavily on one single supplier. If CS Brazil were to have a sizeable drought, frost or cane disease, the market would react very rapidly to such an event. This was evident in 2001, when the price doubled in the space of several months, and the market’s reliance on Brazil has increased since then. Unless such events occur, the sugar market seems doomed to trade at low levels until a change occurs in one of the four factors mentioned above. Until then, prices will continue to reflect the marginal cost of the lowest cost producer – Brazil.
Chapter 3/page 31
4 Costs of production Philip Digges and Dr James Fry LMC International
Rationale behind production cost studies Choice of benchmark Comparing sugar production costs with the world sugar price Comparing sugar production costs with other sugar producers
A comparison of cane and beet sugar production costs A comparison of sugar production costs for a group of selected cane and beet sugar producing countries Technical performance and its impact on costs Field performance Factory performance
Conclusion
In this chapter, we introduce the concept of sugar production costs and demonstrate how an assessment of production costs can form a valuable component of any analysis that seeks to assess the international competitive position of a national sugar industry. We divide the chapter into five main sections: • We begin with a brief assessment of the rationale for analysing production costs. • This is followed by a comment on the choice of benchmark when conducting production cost exercises. • In the third section, we introduce the distinction between cane and beet sugar production and provide a broad overview of their relative competitiveness. • In section four, we undertake a comparative analysis of sugar production costs for five cane sugar producing countries and five beet sugar producing countries. • Finally, we draw upon the analysis of production costs for the selected list of cane and beet sugar producing countries, and examine how technical performance impacts upon production costs and the competitive position of an industry.
Rationale behind production cost studies The main objective in making estimates of sugar production costs is usually to establish a basis for international comparisons of competitiveness in production. The concern of decision-makers, whether within individual sugar companies, at the industry level or within government, is to arrive at a method that generates an unbiased ranking of countries producing the same product under very different circumstances, so that they can determine whether or not the domestic production of sugar represents an efficient use of resources. However, conducting a rigorous cost of production exercise that generates an unbiased estimate of production costs is not an easy task. Indeed, it is precisely the difficulty of overcoming some of the methodological problems faced when estimating production costs, which leads many analysts to compare industries on purely technical terms: for example, they make comparisons on the basis of measures such as the number of tonnes of sugar produced per worker; the rate of use of energy per tonne of output; or the yield of beet, cane or sugar per hectare (or per hectare per year). While a comparison of the technical performance of sugar industries is an important aspect of assessing the relative competitive position of Chapter 4/page 1
Sugar Trading Manual a sugar industry, economic theory tells us that this represents only part, if an important part, of the full story. In the final analysis, the best guide to the efficiency of production in a specific context is the demands that production places upon scarce resources. Prices represent the simplest, and best, way to take adequate account of the relative values of different scarce resources. Ultimately, therefore, the comparison of production costs can be defended as an appropriate means – and even as the sole justifiable means – for assessing one country’s competitive advantage vis-à-vis another.
Choice of benchmark Having made a case in favour of the merits of conducting cost of production studies, an important aspect of any cost study is to choose an appropriate benchmark against which to judge the competitive position of an industry. Two possible benchmarks, the merits of which we discuss below, are: • the world sugar price; • the production costs of other sugar producers.
Comparing sugar production costs with the world sugar price An argument that is often heard against the use of the world sugar price as an appropriate benchmark against which to judge the competitive position of an industry, is that the world sugar market is a residual market in which sugar prices are distorted by the protectionist policies of national governments. This, it is argued, makes the world sugar price an inappropriate basis on which to judge the competitive position of the industry. However, to counter this argument, one can argue that many, if not most, of the world’s sugar producing countries are obliged to take into account the long-term trend in world market prices in some aspects of their decision-making. In exporting countries, production for export can only be justified if the returns from export sales can be expected to cover the costs of producing the sugar for export. In importing countries, investments designed to expand domestic output often have to be justified in terms of the long-term savings that they promise in relation to the alternative strategy of importing sugar from the world market. To test the claim that world sugar prices provide a poor basis for gauging the competitive position of an industry, in Fig. 4.1, we compare Chapter 4/page 2
Costs of production 500 450 400
2001 US$/tonne
350 300 250 200 150 100 50 0 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 Real world cane sugar production costs
4.1
Long-run trend world raw sugar price
Real world cane sugar production costs and the long-run trend in the world raw sugar price, 1980/81–2001/02.
LMC’s estimates of the world average cane sugar production costs over a 20-year period, with the long-run trend in the world raw sugar price.1 If the claim that the world sugar market provides a poor benchmark for assessing the competitive position of an industry is accurate, one would expect world sugar prices to bear little or no relation to the average cost of producing sugar. However, there is in fact a surprisingly strong link between the international sugar prices and production costs. Figure 4.1 indicates that average costs have been only slightly higher than the long-run trend price, and both exhibit a downward trend. This observation has several important implications. It raises doubts about the validity of the argument outlined above, and suggests that sugar prices and production costs are, after all, related to one another. Moreover, it implies that approaching half of world cane sugar output is produced at a cost that is below the long-run average world raw sugar price. Thus, if an individual producer, or a whole industry, has costs that are in the bottom half of world sugar production costs, it should be confident of its ability to survive in the long run at world sugar prices. It also implies that the world sugar price is an appropriate benchmark against which sugar producers should compare their costs when 1
The costs presented in Fig. 4.1 represent the weighted average of cane raw sugar production costs, expressed on a bulk, ex-factory basis, as reported in LMC’s regular survey of sugar and HFCS production costs. The weightings used to establish the world average figures are each country’s output of cane sugar. The long-run trend price is a linear trend that has been fitted to real (inflation-adjusted) raw sugar prices over the period 1962 to 2001. Chapter 4/page 3
Sugar Trading Manual deciding whether or not to expand output, either to generate more sugar for export or to displace imports. Another important point to note about Fig. 4.1 is that there is a discernible downward trend in real prices and production costs. This implies that producers must work continually to lower their costs if they are to maintain, and moreover improve, their competitive position in the international arena.
Comparing sugar production costs with other sugar producers In recognition of the misgivings that are sometimes levelled against using the world sugar price as a choice of benchmark, an alternative, but by no means mutually exclusive benchmark is the production costs of other producers. Those within the sugar industry or within government are much more likely to be persuaded to provide protection and assistance to a sector that can produce at a cost below that of a large proportion of the world’s producers than they are to one which appears costly in international production cost comparisons. This argument is reinforced by the current moves towards greater liberalization of international trade. As barriers to trade are reduced, the world sugar market should become an increasingly free one, in which government support of national producers becomes less and less significant. If so, growers and processors will increasingly have to be able to cover their production costs, or else go out of business.
A comparison of cane and beet sugar production costs An important distinction that needs to be made at the outset when comparing costs of production, is the distinction between cane and beet sugar producers. Sugar is an unusual commodity in that it can be produced from two completely different agricultural crops that are grown under different climatic conditions. Therefore, the production processes in the field and in the factory are also different, and it will come as no surprise to learn that the basic economics of the production of beet sugar and cane sugar are different as well. Before examining the relative competitive position of cane and beet, it is necessary to point out the methodological problem of how one compares the costs of producing cane raw sugar with beet white sugar. In order to compare like with like, it is necessary to allow for the cost of upgrading cane raw sugar into white sugar. Two factors need to be taken into account: Chapter 4/page 4
Costs of production 80 70 60
%
50 40 30 20 10 0 Field
4.2
Factory
Total
World cane sugar production costs expressed as a percentage of world beet sugar production costs, average 1999/00– 2001/02.
• The first step is to make an allowance for the cost of the change in polarization that occurs during refining. Given that our cane sugar production has been estimated on the basis of raws with a polarization of 96 degrees, we first multiply our raw sugar production costs by the widely accepted adjustment factor of 1.087, which assumes that 1.087 tonnes of raw sugar are equivalent to one tonne of refined sugar. • Unfortunately, there is no simple means of assessing the process costs incurred in refining on a consistent basis for all countries. This is because not all countries process part of their raw sugar output into white. Moreover, among those that do, some produce mill white sugar, while others produce refined sugar. In the absence of a country-by-country solution, we have chosen instead simply to add a fixed cost of US$65/tonne, which equates to our estimate of the world average cost of upgrading raw sugar to refined sugar in autonomous refineries, in which most of the world’s refined sugar is still produced. In broad terms, the production of beet sugar is less competitive than cane sugar. This is illustrated graphically in Fig. 4.2, in which we express the weighted average of worldwide cane sugar production costs as a percentage of worldwide beet sugar production costs. A distinction is made between costs in the field, factory and total costs. Figure 4.2 reveals that the weighted average of world cane sugar production costs, at both the field and the factory level, is substantially below the weighted average world beet sugar production cost. At the Chapter 4/page 5
Sugar Trading Manual 210 190 170 Rate of decline = 1.6%
Index
150 130 110 Rate of decline = 3.8% 90 70 50 1980
1982
1984
Beet sugar
4.3
1986
1988 Cane sugar
1990
1992
1994
Beet sugar trend
1996
1998
2000
Cane sugar trend
Real world white sugar production costs.
field level, cane field production costs are approximately half the level of beet field costs. At the factory, the cost advantage is less pronounced. Taken together, the weighted average world cane sugar production cost is estimated to be around 60% of the world beet sugar production cost. An analysis of the trends in cane and beet sugar production costs worldwide also suggests that the cost advantage enjoyed by the cane sector has also improved over time. This is illustrated in Fig. 4.3, where we depict the evolution of real costs of production for cane sugar and beet sugar worldwide over the period between the 1980/81 and 2001/02 crop years. We have added the year-on-year trend in refining costs to cane raw sugar costs, so that both beet and cane sugar costs are expressed on the same basis (i.e. white value). The numbers which are printed on the diagram represent the average yearly rates of decline in these real costs. These reveal that the average decline in the real global production cost of cane sugar fell by an average annual rate of approximately 3.8%. By contrast, the corresponding decline for beet sugar was 1.6% per annum, 2.2% slower than the cost reductions achieved by cane sugar producers. Part of the explanation for the greater decline in cane sugar production costs has been the dramatic growth of sugar production in the Centre-South of Brazil, a low-cost sugar industry. From around 9% of global cane sugar output in the early 1980s, the Centre-South of Brazil now accounts for approximately 17% of global cane sugar output. As we shall demonstrate, this combination of low costs and expanding output has lowered significantly world average cane sugar production Chapter 4/page 6
Costs of production 120
Real costs (1979 = 100)
110 100 90 80 70
4.4
2 /0
0
01 20
99 19
/9
/0
8
6 97 19
95
/9
4 /9
/9
93 19
91
Averages using fixed weights
19
2
0 19
/8
89 19
87 19
/9
8
6 /8 85
/8
4 19
2 /8
83 19
81 19
19
79
/8
0
60
Averages using actual weights
Weighted averages of real cane sugar production costs using actual and fixed output weights.
costs, owing to the increased weighting that Brazil’s low costs have in the global average. In order to demonstrate the impact that these changes have had on world cane average production costs, we have prepared Fig. 4.4. This expresses the weighted average world cost of cane sugar production, in index form, using two different methods of weighting individual producer’s costs. One method weights each country’s costs according to its level of sugar production in each year. This measure we refer to as averages using actual weights. In Fig. 4.4, we set the world average cost of production in 1979/80 equal to 100. The other measure has been derived by weighting each producer’s costs by its sugar output in 1979/80. In other words, we have fixed each producer’s weight on the basis of its output in the first year for which costs are presented. We have labelled this measure averages using fixed weights, and have again set the world average cost in 1979/80 equal to 100. This simple piece of analysis reveals that the averages using actual weights are either similar to or less than the averages using fixed weights. This reflects the fact that sugar producers with below-average costs of production have, on average, expanded their output more rapidly than producers with above-average costs. The dramatic divergence between these two cost measures in the 1990s is explained in large part by the surge in sugar production in Centre-South Brazil. Chapter 4/page 7
Sugar Trading Manual 300 250
%
200 150 100 50 0 Australia
C/S Brazil Field
4.5
Jamaica Factory
Mexico Total
South Africa
Raw cane sugar production costs expressed as a percentage of the world cane average, 1997/98–2002/03.
A comparison of sugar production costs for a group of selected cane and beet sugar producing countries Having demonstrated the relative cost advantage of cane over beet, when viewed on a world level it should be remembered that these figures conceal an enormous difference in cane and beet sugar production costs between and also within countries. This is illustrated in Fig. 4.5, in which we present a comparison of cane sugar production costs for a selected group of cane sugar producing countries expressed in relation to the world cane average. A comparable diagram for beet sugar is presented in Fig. 4.6. In our list of cane sugar producing countries Jamaica has the highest level of costs, with costs at the field and factory level well in excess of the world cane average. By contrast, Australia, the Centre-South of Brazil and South Africa all achieve field and factory costs below the world cane average, while Mexico sits broadly in line with the world cane average. For our five beet sugar producing countries, the Ukraine is the highest cost producer with field and factory costs well above the world beet average. China has lowered its costs significantly in recent years as output has increased. The US beet industry is the lowest cost producer overall out of our sample of beet sugar producing countries. Chapter 4/page 8
Costs of production 180 160 140 120 %
100 80 60 40 20 0 China
EU Field
4.6
Poland Factory
Ukraine Total
US beet
Beet sugar production costs expressed as a percentage of the world beet average, 1997/98–2002/03.
Technical performance and its impact on costs Cost competitiveness is influenced by a whole range of factors. This includes the price industries pay for their inputs, such as wages and fertilizer prices, the exchange rate as well as the technical performance of the industry. In this section we will confine our analysis to the technical aspects of performance and how this impacts on production costs.
Field performance Sucrose yields are arguably the single most important indicator of field performance, as they take into account not just cane or beet yields and sucrose content, but also the efficiency of cane and beet harvesting and transport. The latter is reflected in sucrose yields, because cane and beet is sampled for quality either when it arrives at the mill or enters the factory, and the length of time that elapses between harvesting and sampling has a significant bearing on the sucrose content of both beet and cane. Figures 4.7 and 4.8 summarize the average sucrose yield per hectare per year for our list of cane and beet sugar producing countries, respectively. Australia stands out as having the highest sucrose yields among this group of countries. This high level of performance in the field contributes to Australia’s low field costs. Chapter 4/page 9
Sugar Trading Manual 11
Tonnes per hectare per year
10 9 8 7 6 5 4 3 Australia
4.7
C/S Brazil
Jamaica
Mexico
South Africa
Sucrose yields per hectare per annum for selected cane countries, 1998/99–2002/03.
12
Tonnes per hectare per year
10
8
6
4
2
0 China
4.8
EU
Poland
Ukraine
US beet
Sucrose yields per hectare per annum for selected beet countries, average 1998/99–2002/03.
At the other extreme is Jamaica, which is the only country in our sample which has field costs significantly above the world average. A sucrose yield of less than 7.0 tonnes per hectare partly explains Jamaica’s relatively high field costs.
Chapter 4/page 10
Costs of production 12000
Tonnes cane per day
10000 8000 6000 4000 2000 0 Australia
4.9
C/S Brazil
Jamaica
Mexico
South Atrica
Factory size in selected cane countries, average 1998/99–2002/03.
The EU and the US beet sugar industries stand out as having highly efficient field sectors, which helps both achieve field costs well below the world average. By contrast, the Ukraine and China fare less well and achieve comparatively poor sucrose yields. The impact is particularly pronounced in the Ukraine where field costs are well in excess of the world beet average. However, China manages to keep field costs below the world average despite the poor level of field performance, owing to the cheap cost of labour.
Factory performance For the factory sector, we have chosen to present two indicators of technical performance, despite the fact that factory costs generally make up the smaller part of an industry’s total production costs. The two performance indicators that we have chosen are: • Average factory size, which we express in terms of daily milling capacity (Figs 4.9 and 4.11). This indicates the extent to which an industry is able to exploit economies of scale, which are an important determinant of unit capital and labour costs. • Capacity utilization, which we measure in terms of tonnes of sugar produced per tonne of installed daily cane or beet milling capacity (Figs 4.10 and 4.12). This performance indicator measures how extensively an industry utilizes its processing capacity. However, it measures more than just how many net days its factories operate
Chapter 4/page 11
Tonnes sugar per tonne of daily milling capacity
Sugar Trading Manual 30 25 20 15 10 5 0 Australia
C/S Brazil
Jamaica
Mexico
South Africa
4.10 Capacity utilization in selected cane countries, average 1998/99–2002/03.
10000 9000
Tonnes beet per day
8000 7000 6000 5000 4000 3000 2000 1000 0 China
EU
Poland
Ukraine
US beet
4.11 Factory size in selected beet countries, average 1998/99–2002/03.
for, because it is also influenced by the tonnes beet or cane/tonnes sugar ratio, which is determined, in turn, by the quality of beet/cane (principally its sucrose content) that mills receive and their efficiency at recovering sucrose in the form of sugar. Chapter 4/page 12
Tonnes sugar per tonne of daily slicing capacity
Costs of production 25
20
15
10
5
0 China
EU
Poland
Ukraine
US beet
4.12 Capacity utilization in selected beet countries, average 1994/95–1998/99.
As can be seen from Figs 4.9 and 4.10, Australia, the Centre-South of Brazil and South Africa stand out as having relatively efficient factory sectors and this helps to explain their relatively low processing costs. Jamaica faces greater cost pressures as a consequence of having relatively small under-utilized mills. Figs 4.11 and 4.12, illustrating factory size and capacity utilization, demonstrate how the US beet sugar industry stands out as having a highly efficient factory sector. A relatively large average slicing capacity, coupled with a high rate of capacity utilization, ensures the US beet sugar industry achieves factory costs well below the world beet average. The EU also fares relatively well. Although factory capacity utilization is well below that of the US, the industry benefits from a large average factory capacity, which helps to lower processing costs. The Ukraine and China fare less well. Both countries suffer from having small beet factories. Furthermore, the Ukraine also suffers from a relatively low rate of capacity utilization. As a result, it is no great surprise to find that factory costs for the Ukraine and China are well in excess of the world average of beet sugar producers.
Conclusion In the course of this chapter we have introduced the concept of the cost of production, and have demonstrated the potential merits of this approach as a means of assessing the competitive position of an industry. Chapter 4/page 13
Sugar Trading Manual We have demonstrated the competitive advantage of cane over beet, when viewed at a world level, a feature being reinforced by the faster rate of decline in cane costs versus beet costs over time. However, we also demonstrate that an aggregate view of the world is too simplistic and that production costs vary considerably between cane sugar producing countries and beet sugar producing countries. Finally, we have highlighted the downward trend in real sugar prices over time and shown that producers must work continually to lower costs if they are to maintain, let alone improve, their competitive position.
Chapter 4/page 14
5 Alternative sweeteners Lindsay Jolly International Sugar Organization
Starch sweeteners High fructose corn syrup (HFCS) World review Americas: sugar and HFCS United States: historical perspective Factors supporting development of HFCS in the United States Net costs for corn sweeteners not expected to weaken HFCS production/consumption falling again in 2003 Price outlook 2004 HFCS exports falter under US–Mexico sweeteners trade dispute Other Americas Mexico Sweeteners agreement remains elusive Argentina Asia: sugar and HFCS Japan South Korea Taiwan Other Asian countries Thailand Europe: sugar and HFCS European Union European Union – enlargement will not boost isoglucose production Former Soviet Union Summary: short-term outlook Longer-term potential for HFCS to further substitute for sugar HFCS prices in the United States Costs of HFCS production Sugar prices
High intensity sweeteners Global perspective By major HIS Saccharin Aspartame Cyclamates New sweeteners HIS by major country/region United States Asia Sugar and saccharin in China Europe Intense sweeteners and low calorie bulking agents (poly-ols) Prospects for intense sweeteners Sweetener blends HIS blends Synergies from blending HIS with sugar Sweetener cost savings from blending Powerful market impact in the UK Sugar/HIS blending in other markets European regulations on blending
Conclusion HFCS and sugar HIS and sugar
Appendix: Characteristics of high intensity sweeteners and polyhydric alcohols References
As a nutritive sweetener, sugar competes with starch-based glucose and fructose, the most important of which is high fructose syrup (HFS), also widely known as high fructose corn syrup (HFCS) since nearly all of the world’s HFS is made from corn (maize). HFCS, where it is priced lower than sugar to end users, has readily been a substitute for sugar in liquid applications, particularly in soft drinks. Over the past decade, HFCS has gained market share from sugar on a global basis. The solid form starch sweeteners (e.g. dextrose and crystalline fructose) are more expensive to manufacture and, because they cannot match sugar in its functionality, have not been substitutes for sugar to any great extent. Poly-ols are sugar alcohols and have a sweetness level similar to sugar. These exhibit similar bulking characteristics in food and beverage applications. Over recent years, poly-ols have been increasingly used as bulking agents in conjunction with intense sweeteners in food applications, to meet growing consumer demand for low calorie (lite) products. Intensive sweeteners are mainly synthetic and have many times the sweetening power of sugar, but with much lower caloric value. There are two main attractions of intensive sweeteners. Firstly, they are a cheap alternative to sugar (expressed in sugar equivalent terms) and, secondly, they are a calorie-free sweetener for consumers of diet and lite foods and beverages. In this chapter the recent development of alternative sweeteners to sugar is reviewed and examined with a view to identifying the key factors that have determined the extent of their substitution for sugar since the 1980s. The review is conducted on a country/regional basis and also by major sweetener type. Issues critical to the prospects for further substitution of alternative sweeteners for sugar are identified.
Starch sweeteners The development of enzymatic extraction techniques and microbial processes has allowed sweetness to be derived from many plants with high starch content – corn, wheat, potatoes, rice and tapioca, as shown in Table 5.1. HFCS-42 consists of 42% fructose, 50% dextrose and 8% higher saccharides. HFCS-55 consists of 55% fructose, 40% dextrose and 5% higher saccharides. By 1972 the US corn wet milling industry had developed the technical ability to commercially produce HFCS-42. Further technological development of the process led to HFCS-80 and HFCS-90, but then later blending with HFCS-42 led to the commercial production of HFCS-55 (as sweet as sugar) around 1977 (Gray et al, 1993). HFCS is produced in liquid form, making it particularly suitable as a sweetener in the soft drinks sector. At the same time it makes it Chapter 5/page 1
Sugar Trading Manual Table 5.1 Starch sweeteners Sweetener
Origin
Sweetness relative to sugar
HFCS-42
Corn, wheat, potatoes, rice, tapioca as above Invert sugar Cereals Chicory
0.7
HFCS-55 Fructose Glucose/dextrose Inulin
0.95 1.1–1.4 0.1–0.5 0.9
costly to transport. It is important to note that HFCS and sugar are not perfect substitutes. For instance, sugar has a number of bulking, texture and browning characteristics that make it preferable for confectionery, bakery and cereal industries. So, on a worldwide scale, HFCS is primarily competing with liquid sugar (invert sugar). Since HFCS basically has the same features as invert sugar, the choice between the two sweeteners is largely a function of relative prices. While HFCS is seen as a less expensive replacement for sugar (where technically feasible), sweetness is a secondary consideration in the case of fructose syrup and dextrose in food and beverages. This is because their primary use is to improve a food’s desirable characteristics, such as texture and appearance.
High fructose corn syrup (HFCS) World review On a global basis, HFCS (including small volumes of HFS from other starch rich sources) is capturing an increasing share of the world sweetener market. However, a striking slow down in HFCS offtake since 1999 (partly because of low world sugar prices) has seen the share of HFCS in the combined markets for sugar and HFCS stagnate at around 9.6%. Even so, as can be seen in Table 5.2, during the early 1990s HFCS was accounting for as much as 30% of the annual growth in nutritive sweetener consumption. Over the past five years, annual growth in HFCS consumption has averaged 2.3%, while growth in sugar demand has been slower at around 1.7% annually. Importantly, the strong growth in HFCS consumption/production over the past decade is not a feature of all sugar producing and consuming countries. Instead, HFCS is produced and consumed in large volumes in a few countries only, typically those with high domestic sugar prices, although there are some notable exceptions (discussed below) – see Chapter 5/page 2
Alternative sweeteners Table 5.2 World HFCS and sugar consumption – 000 tonnes white value HFCS
1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02
6 843 7 186 7 220 7 548 7 795 8 128 8 422 8 928 9 427 9 771 10 409 10 920 11 043 11 361 11 437 11 665
Sugar
94 077 98 018 98 049 100 196 100 833 101 831 104 894 104 045 105 387 108 800 112 035 114 935 114 581 117 997 118 544 121 879
Sugar & HFCS 100 921 105 204 105 269 107 743 108 628 109 959 113 316 112 973 114 815 118 570 122 445 125 855 125 624 129 358 129 981 133 544
%HFCS
7.3 7.3 7.4 7.5 7.7 8.0 8.0 8.6 8.9 9.0 9.3 9.5 9.6 9.6 9.6 9.6
Annual growth HFCS
Sugar
na 5.0 0.5 4.5 3.3 4.3 3.6 6.0 5.6 3.6 6.5 4.9 1.1 2.9 0.7 2.0
na 4.2 0.0 2.2 0.6 1.0 3.0 -0.8 1.3 3.2 3.0 2.6 -0.3 3.0 0.5 2.8
Source: F.O. Licht and International Sugar Organization.
Table 5.3. Because of the technical properties of HFCS, there is no world trade, apart from small volumes of land-based trade in North/Central America. Also, little HFCS is stored from year to year; therefore, production levels approximate consumption in most regions and countries. The US is the dominant world producer, accounting for around 72% of the world total (see Fig. 5.1) at 8.43 million tonnes (dry basis) in 2000/01. Japan is the distant next largest producer, at 0.74 million tonnes, accounting for a further 6.5% of global production. Other significant HFCS producing countries include Turkey (2.6%), Canada (2.4%), Argentina (2.2%), South Korea (2.3%) and the European Union (2.6%). Together, these countries account for most of world production (91%). Because of the dominance of so few countries, any analysis of the world HFCS market is best conducted on a country-by-country basis.
Americas: sugar and HFCS The United States HFCS sector dominates developments in the Americas (see Table 5.4). For much of the past two decades the US sector has been an ‘engine of growth’ but during the past two years an oversupplied US sweetener market, overcapacity within the HFCS Chapter 5/page 3
Sugar Trading Manual Table 5.3 World HFCS production – tonnes dry basis 1986/87 Belgium Finland France Germany Greece Italy Netherlands Portugal Spain United Kingdom European Union Bulgaria Hungary CIS ex-Yugoslavia Poland Slovakia Turkey Europe Egypt/ Africa Argentina Canada Mexico USA Uruguay Americas China India Indonesia Japan Malaysia South Korea Taiwan Thailand Asia Australia/Oceania World
1987/88
1988/89
1989/90
72 250 7 000 19 855 35 684 750 20 438 5 686 322 82 993 27 305 272 283 0 46 000 0 60 000 0 0 0 378 283 0 169 000 237 000
72 248 7 000 20 022 35 509 2 692 19 359 8 414 370 82 990 26 974 275 578 15 303 40 000 0 40 000 0 0 0 370 881 30 000 164 000 240 000
72 250 8 000 19 986 35 679 6 357 20 115 9 175 389 82 976 27 483 282 410 14 673 40 000 5 000 27 300 0 0 0 369 383 38 000 146 000 240 000
72 250 8 000 20 022 35 662 7 440 20 463 9 175 1 276 82 973 27 356 284 617 12 359 40 000 5 000 25 300 0 0 0 367 276 48 340 157 000 240 000
5 158 000 0 5 564 000 10 000 3 000 15 000 688 006 16 000 148 000 15 000 3 000 898 006 3 000 6 843 289
5 396 000 6 000 5 806 000 10 000 3 000 18 000 728 977 16 000 178 000 19 000 3 000 975 977 3 000 7 185 858
5 392 000 10 000 5 788 000 10 000 3 000 16 000 712 244 16 000 198 000 51 000 15 000 1 021 244 3 500 7 220 127
5 597 000 18 000 6 012 000 30 000 3 000 15 000 742 410 16 000 220 000 67 000 18 000 1 116 410 3 500 7 547 526
1990/91
1991/92
1992/93
72 252 9 000 20 022 35 684 9 795 20 463 9 159 5 214 83 000 27 469 292 058 6 845 40 000 8 000 10 000 0 0 0 356 903 40 310 175 000 250 000 0 5 745 300 18 000 6 188 300 30 000 3 000 14 000 782 788 16 000 225 000 110 000 20 000 1 025 788 3 500 7 794 801
71 668 15 000 19 926 34 496 12 334 20 439 9 176 6 609 82 999 27 432 300 079 5 348 40 000 8 000 8 000 0 0 0 361 427 39 600 180 000 250 000 0 6 053 750 18 000 6 501 750 30 000 5 000 12 000 794 405 18 000 213 000 125 000 24 000 1 221 405 3 500 8 127 682
72 250 20 000 20 022 35 684 11 711 20 476 9 174 7 899 82 992 27 397 307 605 5 000 40 000 10 000 5 000 0 0 0 367 605 51 240 188 000 255 000 0 6 331 350 18 000 6 792 350 35 000 5 000 10 000 746 889 18 000 199 000 165 000 28 000 1 206 889 3 500 8 421 584
sector together with a flat offtake of soft drinks (the industry’s single largest customer), have led to only sluggish growth in output. United States: historical perspective Glucose and dextrose were the main corn sweeteners produced prior to the advent of HFCS but, with the expanding use of HFCS, consumption of these two sweeteners has shown little growth (see Fig. 5.2). Around 80% of glucose syrup and dextrose is used in commercially prepared foodstuffs. Crystalline fructose is a comparatively recent entrant to the US corn sweeteners market (around 1987). In 2000, total starch sweeteners consumption reached 12.2 million short tons, up from 9.2 million short tons a decade earlier. Chapter 5/page 4
Alternative sweeteners
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/ 2000
2000/01
2001/02
72 250 20 000 20 022 35 684 12 736 20 475 9 175 9 261 83 000 27 303 309 906 5 000 40 000 10 000 10 000 0 0 0 374 906 69 387 210 000 260 000 0 6 769 526 20 000 7 259 526 35 000 5 000 14 000 727 416 20 000 215 000 173 000 30 000 1 219 416 5 000 8 928 235
72 250 11 930 20 022 35 684 12 985 20 490 9 175 10 000 83 000 27 318 302 854 15 000 104 000 10 000 25 000 0 0 0 456 854 73 196 205 000 255 000 0 7 071 624 25 000 7 556 624 50 000 5 000 14 000 805 819 25 000 213 000 180 000 42 000 1 334 819 6 000 9 427 493
66 725 12 425 20 000 35 684 12 985 21 213 8 956 10 000 83 000 26 778 297 766 20 000 117 000 10 000 30 000 0 0 0 474 766 93 000 190 000 255 000 25 000 7 333 805 20 000 7 823 805 70 000 5 000 25 000 783 621 28 000 221 000 195 000 50 000 1 377 621 1 500 9 770 692
72 091 11 930 20 022 35 328 13 000 20 465 9 174 10 000 83 000 27 016 302 026 10 000 130 000 15 000 30 000 0 0 0 487 026 94 000 210 000 265 000 125 000 7 750 000 0 8 350 000 85 000 5 000 30 000 878 461 28 000 231 000 165 000 54 000 1 476 461 2 000 10 409 487
72 232 11 930 20 022 35 684 13 000 20 468 9 140 10 000 83 000 27 245 302 721 10 000 130 000 30 000 25 000 0 15 000 35 000 547 721 94 000 220 000 260 000 240 000 8 218 000 0 8 938 000 85 000 5 000 25 000 789 000 22 000 213 000 155 000 44 585 1 338 585 2 000 10 920 306
72 250 11 930 20 022 35 684 12 997 20 470 9 175 10 000 83 000 27 483 303 011 35 000 135 000 20 000 10 000 10 000 28 253 85 000 626 264 93 000 230 000 255 000 255 000 8 273 755 0 9 013 755 90 000 5 000 20 000 760 000 22 000 218 000 153 000 34 000 1 302 000 8 000 11 043 019
72 250 11 930 20 022 35 684 13 000 20 470 9 175 10 000 83 000 27 478 303 009 30 000 130 000 20 000 8 000 20 000 41 664 120 000 672 673 86 000 235 000 260 000 350 000 8 414 123 0 9 259 123 95 000 5 000 22 000 755 000 25 000 240 000 155 000 38 000 1 335 000 8 000 11 360 796
69 394 11 400 19 258 34 405 12 534 19 737 8 846 9 642 81 174 26 387 292 777 30 000 130 000 30 000 10 000 40 000 43 429 220 000 796 206 91 000 280 000 265 000 360 000 8 262 840 0 9 167 840 95 000 5 000 18 000 741 000 25 000 265 000 170 000 55 000 1 374 000 8 000 11 437 046
71 592 11 872 19 846 35 389 12 911 20 274 9 099 9 700 82 400 27 237 300 320 30 000 135 000 35 000 12 000 50 000 52 000 300 000 914 320 100 000 260 000 280 000 220 000 8 431 278 0 9 191 278 110 000 5 000 20 000 761 000 25 000 295 000 175 000 60 000 1 451 000 8 000 11 664 598
Production of HFCS commenced in 1967 but it was the extremely high sugar prices of 1974, together with the expiration of patents on HFCS production technology in 1975, which provided the impetus for the development of large-scale production, along with the maintenance of high domestic sugar prices relative to world market levels. Growth in HFCS production and consumption was rapid during the 1980s, as it quickly became a substitute for sugar in liquid applications, particularly in the US soft drinks sector (see Fig. 5.3). Liquid sugar was all but replaced by HFCS by 1985. Since 1995, sugar’s use in the beverage sector has remained between 165 000 and 196 000 short tons. Domestic use of HFCS and other corn sweeteners grew larger than sugar use for the first time in 1986 and, in 1995, accounted for around 54% of the caloric sweetener market (including honey & edible Chapter 5/page 5
Sugar Trading Manual Table 5.4 HFCS and sugar consumption: The Americas (000 tonnes, white value)
United States
Canada
Argentina
Mexico
Other
Total Americas
HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS
HFCS
HFCS
HFCS
HFCS
HFCS
HFCS
1986/87
1987/88
1988/89
1989/90
1990/91
1991/92
1992/93
5 197.3 6 890.4 12 087.7 43.0 125.0 1 065.8 1 190.8 10.5 169.0 1 066.4 1 235.4 13.7 0.0 3 286.7 3 286.7 0.0 0.0 11 394.4 11 394.4 0.0 5 491.3 23 703.7 29 195.0 23.2
5 413.2 7 024.3 12 437.5 43.5 125.0 1 047.0 1 172.0 10.7 164.0 885.1 1 049.1 15.6 0.4 3 473.2 3 473.6 0.0 6.0 12 139.2 12 145.2 0.0 5 708.6 24 568.8 30 277.4 23.2
5 395.9 7 082.8 12 478.8 43.2 125.0 1 028.0 1 153.0 10.8 146.0 837.8 983.8 14.8 0.4 3 711.8 3 712.2 0.0 10.0 11 560.4 11 570.4 0.1 5 677.4 24 220.8 29 898.2 23.4
5 601.0 7 302.4 12 903.4 43.4 126.1 981.3 1 107.5 11.4 157.0 972.2 1 129.2 13.9 3.9 3 729.2 3 733.1 0.1 18.0 12 550.8 12 568.8 0.1 5 906.0 25 536.0 31 442.0 23.1
5 720.7 7 489.8 13 210.5 43.3 165.3 981.3 1 146.6 14.4 175.0 1 018.0 1 193.0 14.7 8.6 4 267.4 4 276.0 0.2 18.0 11 466.2 11 484.2 0.2 6 087.6 25 222.7 31 310.4 24.1
6 080.9 7 551.7 13 632.6 44.6 140.7 1 028.0 1 168.8 12.0 180.0 1 138.1 1 318.1 13.7 17.9 4 045.7 4 063.6 0.4 18.0 12 926.5 12 944.5 0.1 6 437.5 26 690.1 33 127.6 24.1
6 383.9 7 567.9 13 951.8 45.8 122.6 1 046.7 1 169.4 10.5 188.0 1 097.1 1 285.1 14.6 30.0 4 020.0 4 050.0 0.7 18.0 13 073.8 13 091.8 0.1 6 742.5 26 805.6 33 548.0 25.2
Source: F.O. Licht and International Sugar Organization.
9
Million tonnes, dry basis
8 7 6 5 4 3 2 1 0 Europe
USA 1998/99
5.1
Other Americas 1999/00 2000/01
World HFCS production.
Chapter 5/page 6
Asia 2001/02
Other 2002/03
Alternative sweeteners
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/2000
2000/01
2001/02
6 769.5 7 656.2 14 425.7 46.9 142.7 1 074.8 1 217.5 11.7 210.0 1 121.5 1 331.5 15.8 67.2 4 157.7 4 224.9 1.6 20.0 13 169.3 13 189.3 0.2 7 209.5 27 179.4 34 388.9 26.5
7 071.6 7 901.1 14 972.7 47.2 201.5 1 098.1 1 299.6 15.5 205.0 1 211.2 1 416.2 14.5 49.8 4 084.3 4 134.2 1.2 25.0 13 539.5 13 564.5 0.2 7 552.9 27 834.3 35 387.2 27.1
7 333.8 8 019.0 15 352.8 47.8 178.8 1 121.5 1 300.3 13.7 190.0 1 261.7 1 451.7 13.1 102.7 4 133.9 4 236.6 2.4 20.0 13 897.8 13 917.8 0.1 7 825.3 28 433.9 36 259.1 27.5
7 750.0 8 131.9 15 881.9 48.8 202.9 1 144.9 1 347.7 15.1 210.0 1 259.3 1 469.3 14.3 313.5 3 952.2 4 265.7 7.3 0.0 14 494.8 14 494.8 0.0 8 476.4 28 983.1 37 459.5 29.2
8 218.0 8 224.3 16 442.3 50.0 272.9 1 144.9 1 417.8 19.2 220.0 1 224.2 1 444.2 15.2 398.6 3 954.2 4 352.8 9.2 0.0 15 094.8 15 094.8 0.0 9 109.5 29 642.4 38 751.9 30.7
8 273.8 8 457.3 16 731.0 49.5 238.9 1 121.5 1 360.4 17.6 230.0 1 261.7 1 491.7 15.4 434.3 4 012.3 4 446.6 9.8 0.0 15 523.8 15 523.8 0.0 9 177.0 30 376.6 39 553.6 30.2
8 414.1 8 473.4 16 887.5 49.8 223.6 1 121.5 1 345.1 16.6 235.0 1 355.1 1 590.1 14.8 497.8 4 112.1 4 609.9 10.8 0.0 15 997.1 15 997.1 0.0 9 370.5 31 059.2 40 429.7 30.2
8 262.8 8 458.9 16 721.8 49.4 207.3 1 154.2 1 361.5 15.2 280.0 1 387.9 1 667.9 16.8 477.1 4 317.0 4 794.1 10.0 0.0 16 296.5 16 296.5 0.0 9 227.2 31 614.5 40 841.7 29.2
8 431.278 8 541.1 16 972.4 49.7 225.7 1 158.9 1 384.6 16.3 260.0 1 420.6 1 680.6 15.5 255.7 4 539.0 4 794.7 5.3 0.0 16 508.9 16 508.9 0.0 9 172.7 32 168.4 41 341.1 28.5
000 short tons, dry basis
10 000 8 000 6 000 4 000 2 000 0 1975
1978
1981
1984
Dextrose
5.2
1987
1990
Glucose
1993
1996
1999
2002
HFCS
US: consumption of corn sweeteners.
syrups). This figure is estimated to have reached 55% by the year 2000. This loss of the beverages market to HFCS did not reduce sales of domestic sugar. Instead, because the United States was in a sugar deficit, sugar imports took the brunt of the decline. HFCS is used predominantly in the beverages sector but also finds applications in the baking and confectionery sectors. HFCS-55 is the dominant sweetener used in soft drink manufacture and this normally Chapter 5/page 7
Sugar Trading Manual
000 short tons, dry basis
12 000 10 000 8 000 6 000 4 000 2 000 0 1975
5.3
1978
1981
1984
1987
1990
Sugar
HFCS
1993
1996
1999
2002
US: sugar and HFCS consumption.
accounts for around 90% of its use. In contrast, HFCS-42 relies on the beverage sector for only 45% of its use. It is more important in other food categories, especially in processed foods, cereal and bakery products. HFCS (and other corn sweeteners) have been making inroads into other sugar markets because US food processors have had an economic incentive to use substitutes, as shown by the ‘sugar to corn sweetener’ price relationship (discussed later). Under present conditions, HFCS has captured all of the potential market in the soft drinks sector. Among other industrial end users, HFCS’ share is rising to a ceiling of around 30%. By 2002, HFCS-55 use reached 5.6 million short tons and HFCS-42 use totalled 3.7 million short tons. US production of HFCS at 9.4 million short tons exceeded domestic consumption, however, because exports to the neighbouring countries of Canada and Mexico reached 326 thousand short tons. See Fig. 5.4 for US–Canada HFCS trade. Factors supporting development of HFCS in the United States A key factor supporting HFCS producers has been US sugar policy. In particular, the sugar programme has provided a floor for sugar above the cost of producing liquid HFCS and thereby guaranteed that sugar could not be price competitive with HFCS. Lord (1995) argued that the sugar programme’s guaranteed price floor for sugar stimulated investment in HFCS facilities and allowed a more rapid acquisition of share in the US sweetener market. Furthermore, higher HFCS revenues also allowed the funding of substantial research and development in the corn wet milling industry, which also benefited other products made from corn starch, particularly ethanol. Fundamental to the growth of the corn sweetener industry in the United States has been an abundant supply of corn at a relatively low Chapter 5/page 8
Alternative sweeteners 300
Metric tons commercial basis
250 200 150 100 50 0 –50
–100 –150 –200 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Exports
5.4
Imports
Canada’s HFCS trade with the United States.
cost. The cost of corn can be seen on either a gross or net basis. As sales of the three by-products of the wet milling process (corn gluten feed, corn gluten meal and corn oil) generate revenues, they reduce the gross cost of corn. Factors supporting the development of the HFCS sector in the United States are examined further below when the future prospects for the sector are discussed. Net costs for corn sweeteners not expected to weaken Net corn sweetener costs are not expected to retreat far during coming months from the relatively high levels seen during the first half of 2003. Indeed, the July level of 3.50 cents/lb remained well above the average annual value of 2.98 cents/lb seen over the previous five years. Firm corn prices due to a smaller 2002/03 crop mostly explain the continuing high net corn sweetener costs over recent months, but a modest decline in revenue from by-products (corn oil, corn meal and corn gluten feed) also contributed. Over coming months corn prices are not anticipated to weaken much, despite a USDA projection for a record corn output from the 2003 crop. The USDA puts 2003/04 production at 10.064 bn bushels, 1 bn bushels above 2002/03. Cash prices, Central Illinois, which had ranged between US$2.30 and US$2.40 a bushel during the first six months of the year, fell to US$2.13/bushel in July in reaction to the expectations of far greater availability during the 2003/04 marketing year. However, Chapter 5/page 9
Sugar Trading Manual they have since strengthened because the month of August was extremely hot and dry across much of the Midwest corn belt. Analysts therefore expect the USDA to pare back its crop forecast in its September crop prospects report. The potential for higher corn prices than initially expected is shown by developments in futures prices. Prices for the nearby contract on the Chicago exchange weakened considerably during early August (to as low as US$2.06/bushel), but have since regained much of the lost ground to be around US$2.34/bushel. The USDA in August put farm level prices for the 2003/04 season to range between $2.00 and $2.40/bushel, as against the 2002/03 level of US$2.30. In short, net corn sweetener costs are expected to remain firm (and may increase if revenues from by-products weaken any further) during coming months, and there is little chance of them returning to the average levels seen during 1999–2001. HFCS production/consumption falling again in 2003 Calendar year 2002 was initially hoped to have marked a turning point in the fortunes of the HFCS industry with the resumption of growth after production declined in both 2000 and 2001. However, writing in 2003, this is not expected to be the case, as the USDA is forecasting a fall in production and offtake for calendar year 2003. The USDA now puts deliveries at 9160 short tons, dry weight, down 1.45%, and in stark contrast to the growth of almost 1.6% seen in 2002. The general malaise in sweetener consumption in the United States since 2000 therefore appears to be continuing. Most critically for HFCS, the market for carbonated soft drinks (CSD) has been plagued by sluggish growth over recent years. Data compiled by the Beverage Marketing Corporation (as reported in F.O. Licht, 2003, ‘World HFS production falls for the first time in history’, F.O. Licht’s International Sugar and Sweetener Report, Vol. 135, No. 18, 17 June) show that CSD sales rose by less than 1% during 2002. More importantly, on a per capita basis consumption of CSD fell for the fourth consecutive year, in part reflecting competition from non-carbonated beverages. No upsurge in CSD sales is expected during the short term. A recent dynamic in the US sweeteners market is the onset of declining or at best stagnant consumption of sugar and sweeteners. After experiencing strong and steady growth during the 1990s (after the US beverages sector completed its conversion to corn sweeteners), US consumption of sugar has stagnated since fiscal year 2000 (FY 2000) – October 1999/September 2000. Sugar deliveries for domestic food and beverage use for FY 2001 were estimated at 9.998 million STRV, little changed from the FY 2000 level. For FY 2002 the USDA estimates 9.7 million STRV (note however that the USDA forecasts a Chapter 5/page 10
Alternative sweeteners 1% rise in deliveries for FY 2003, at 9.8 million STRV). Furthermore, per capita consumption of all sweeteners tracked by the USDA reached an estimated high of 68.7 kg in 1999, whereas the 2001 estimate was 66.7 kg (a fall of almost 3%). Both sugar and high fructose corn syrup consumption fell. (Source: Haley et al, 2002a.) The USDA has observed that there have been no satisfactory explanations for the decline in sugar and overall sweetener consumption. The decline coincided with a fall in US economic activity, suggesting that aggregate disposable income and sweetener consumption could be related. Consumption of sweeteners was also adversely affected by the events of September 2001, with the monthly consumption level estimated to be the lowest in over ten years. Another factor could be a change in dietary habits, while analysts also point to the possibility that sugars contained in imported products have increased sufficiently to negatively affect domestic deliveries. In short, more sugar enters the US than explicitly allowed for under the tariff rate quota scheme. A recent analysis conducted by the USDA (Haley, S., 2003, ‘Measuring the effects of imports of sugar containing products on US sugar deliveries’, SSS237-01, USDA, September), shows that the sugar contained in imported products increased from 111% to 124% between 1995 and 2002, and yearly increases have been between 38 500 and 48 000 short tons. Price outlook 2004 Despite the lacklustre demand outlook, HFCS producers are reportedly looking for higher prices in 2004 for annual supply contracts with major users. Increases of between $1.00 and $2.00/hundredweight (cwt) are being sought on the back of expectations for continuing relatively high net corn costs, consolidation of the supply base, and the potential for wet millers to divert additional capacity to ethanol. HFCS exports falter under US–Mexico sweeteners trade dispute With production capacity surging ahead of sales, US producers began looking for additional markets, and the geographical proximity of Mexico offered great potential. That potential reflected the fact that Mexico has the second largest soft drinks consumption per capita in the world after the US. Sugar use in that sector amounts to around 1.4 million tones, equating to one-third of annual domestic deliveries for Mexico’s sugar sector. However, the US HFCS industry’s desire for greater access to Mexico’s carbonated soft drinks sector has been frustrated since February 1997 when Mexico enacted anti-dumping duties, as discussed in the next section. Chapter 5/page 11
Sugar Trading Manual Other Americas
Mexico Two Mexican companies – affiliated with US HFCS producing companies – started production of HFCS in 1996/7: the Almidones Mexicans (Almex plant), a joint venture between Archer Daniels Midland and A.E. Staley, with an annual capacity of 150 000 tonnes; and Arancia Corn Productions, a joint venture between CPC International and the largest local wet corn millers Arancia, producing also around 150 000 tonnes annually. Initially both plants used imported corn, sourced from the United States under the NAFTA tariff rate quota. The United States began to export HFCS to Mexico in the early 1990s and reached around 67.2 thousand tonnes, dry basis, in fiscal 1994 (October/September). The trade jumped markedly in fiscal 1996 to around 89.2 thousand tonnes. At that time HFCS imported from the United States did not have to compete with local origin HFCS, as Mexico had no indigenous production capacity until 1997. HFCS imports rose sharply again and reached 188.5 thousand tonnes in fiscal 1997, according to USDA figures (see Fig. 5.5) (although there were claims, early in 1998 by Mexico’s sugar industry, that imports were in fact much higher than this, at around 300 000 tonnes). The surge in imports of US origin HFCS was perceived by Mexico’s sugar industry as a clear threat and steps were taken to extinguish the potential for HFCS to displace significant volumes of domestic sugar in Mexico’s soft drink sector. In February 1997, Mexico’s National Sugar
200 000 180 000
Metric tons, dry basis
160 000 140 000 120 000 100 000 80 000 60 000 40 000 20 000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
5.5
US exports of HFCS to Mexico.
Chapter 5/page 12
Alternative sweeteners Industry Chamber, the association of Mexico’s sugar producers, accused US corn wet millers of dumping HFCS on Mexico’s sweetener market. This action was followed by the Mexican government initiating an anti-dumping investigation. Mexico’s Commerce Secretariat, SECOFI, responded by imposing temporary tariffs on US HFCS on 25 June 1997. The temporary tariffs were set at specific rates ranging between US$66.57 and 175.50 per ton for HFCS-42 and HFCS-55 from each supplying company including Cargill Inc, A.E. Staley Manufacturing Co, CPC International Inc and Archer Daniels Midland Co. Permanent duties were announced by SECOFI on 23 January 1998, after a formal investigation, at a level between US$55.40 and $175.00 per ton. Faced with the duties on HFCS, the United States referred a complaint to the WTO dispute settlement panel in October 1998. In a ruling released 28 January 2000, the panel determined that Mexico’s antidumping measures were inconsistent with the WTO Antidumping Agreement. In response, Mexico, on 20 September 2000, released an analysis of the economic factors more properly establishing injury, as required under the WTO Antidumping Agreement, and confirmed the application of the countervailing duties from January 1998. However, the United States argued that the duties were still in violation of free trade rules and referred the matter back to the WTO. A WTO Ruling released 22 June 2001 confirmed that the steps Mexico had taken to comply with the earlier WTO panel ruling (January 2000) were insufficient. In response to the adverse rulings of the WTO, on 22 April 2002, the Secretariat of Economy announced that it was establishing a tariff rate quota for HFCS imports. For marketing year 2001/02 (October– September), the in-quota amount would be limited to 148 000 tonnes (dry weight) at a 1.5% duty, mirroring ‘tonne for tonne’ the level of Mexico’s access to the US sugar market. HFCS imports into Mexico outside of the quota face a tariff of 210%, the same level as already applying to imports from non-NAFTA countries, and the maximum allowable under the WTO. Shipments of US HFCS to Mexico have slumped since implementation of the duty – see Fig. 5.6. Furthermore, Mexico’s government in January 2002 implemented a 20% tax on beverages that contain HFCS, and although it was suspended by presidential decree in March, the tax was reapplied in July 2002 when Mexico’s Supreme Court of Justice voted to nullify the President’s decision to suspend the tax. In December 2003 the tax was extended for a further year. Mexico’s consumption of HFCS slumped in response to the 20% tax on soft drinks. As a result of the tax all bottling companies in Mexico that were using HFCS in their products switched to usage of cane sugar in their product formulas. Almost no HFCS has since been sold to soft
Chapter 5/page 13
Sugar Trading Manual 700
000 tonnes, dry weight
600 500 400 300 200 100 0 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03
5.6
Mexico’s HFCS consumption.
drink bottlers since the tax was first introduced. USDA estimates show HFCS use in Mexico’s soft drink industry at 450 000 tonnes for the 2001 fiscal year (Oct.–Sept.), whereas in the following fiscal year use was confined to the October–December period and amounted to 112 500 metric tons. Use of HFCS in soft drinks is expected at zero for fiscal 2001. HFCS demand in other sectors, primarily for industrial use (bakery, food processing, fruit and canning, and yoghurt industries), is forecast at 150 000 metric tons. Developments in total HFCS consumption are shown in Fig. 5.6. Crucially, the slump in HFCS use has led to a commensurate increase in sugar offtake by the soft drinks industry. The USDA balance estimates issued in early 2003 indicated a 600 thousand tonne (raw value) rise in deliveries to industrial end users between FY 2001 and FY 2003. While part of this growth could be attributed to growth in income and population, most of the growth stems from reduced HFCS consumption owing to the 20% tax (Haley et al, 2003). Furthermore, the USDA’s January 2003 balance sheet for Mexico indicated that Mexico would not be a net surplus producer under the USDA formula (Mexico’s projected sugar production less projected consumption of sugar and HFCS). Indeed, no raw sugar TRQ allocation was made for Mexico for fiscal year 2002/03 and again in 2003/04. Sweeteners agreement remains elusive US and Mexico negotiators had not reached agreement in the sweeteners dispute by early March 2004. During the second half of 2002, Chapter 5/page 14
Alternative sweeteners expectations were heightened that a deal was being framed that would give Mexican sugar producers increased access to the US sugar market in return for similar access for US-made HFCS in the Mexican market. In July the US proposed allowing duty free access of 275 000 tons for both Mexican sugar and US HFCS annually, increasing by 25% of any growth in the US sugar market over the life of the agreement. The deal would be a temporary measure while the countries negotiated a long-term solution to the dispute. Early in September Mexico reportedly counter-offered allowing duty free access of 300 000 tons for both Mexican sugar and US HFCS annually. However, negotiations thereafter appeared to stall, in part because of disagreement over how to deal with Mexico’s sugar imports over and above the duty free quota (i.e. the US was wanting to limit the volume of Mexico’s sugar that could enter the US at the high-tier tariff under NAFTA). Very significantly, however, the January 2003 announcement of the revised OAQ effectively increased supplies to the domestic market (by increasing allotments together with the sales of CCC stocks, as discussed above), leaving no room for a large Mexican quota; perhaps an unsurprising move given the expectations of only a small surplus production in Mexico, as estimated by the USDA.
Argentina Production of HFCS declined during the 1980s, but has grown since the mid-1990s, fuelled by increasing soft drinks consumption. According to F.O. Licht, there are presently three companies producing HFCS: Ledesma (Glucovial), Productos de Maiz and Arcor. High corn prices in 1996/7 and a drop in demand for soft drinks, owing to a general economic recession, impacted adversely in that year but HFCS production soon recovered. Lower internal prices for sugar in 1994 (owing to government reform of sugar policy), and again in 1999, acted to discourage substitution of HFCS for sugar. Even so, HFCS accounts for around 5% of the combined HFCS/sugar market. Today, HFCS producers benefit from corn prices similar to the world market level, but profitability is heavily influenced by the level of domestic sugar prices.
Asia: sugar and HFCS Asia’s sweetener market is dominated by sugar and, although consumption of starch-based sweeteners is expanding, they still account for less than 3% of the combined HFCS/sugar market (see Table 5.5). Asia accounts for 12% of global HFCS production, of which Japan is the dominant producer and consumer (consuming around 760 000 tonnes dry weight). The region’s other major HFCS industries are found Chapter 5/page 15
Sugar Trading Manual Table 5.5 HFCS and sugar consumption: Asia (tonnes, white value)
Japan
South Korea
Taiwan
Other Asia
Total Asia
HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS
HFCS
HFCS
HFCS
HFCS
HFCS
1986/87
1987/88
1988/89
1989/90
1990/91
1991/92
1992/93
688.0 2 529.6 3 217.6 21.4 148.0 668.4 816.4 18.1 15.0 495.0 510.0 2.9 52.0 27 949.4 28 001.4 0.2 903.0 31 642.5 32 545.5 2.8
729.0 2 529.6 3 258.6 22.4 178.0 727.0 905.0 19.7 19.0 505.1 524.1 3.6 55.0 28 978.1 29 033.1 0.2 981.0 32 739.9 33 720.9 2.9
712.2 2 529.6 3 241.9 22.0 198.0 769.2 967.2 20.5 51.0 490.6 541.6 9.4 65.0 28 868.2 28 933.2 0.2 1 026.2 32 657.6 33 683.8 3.0
742.4 2 529.6 3 272.0 22.7 220.0 770.1 990.1 22.2 67.0 509.6 576.6 11.6 87.0 30 065.3 30 152.3 0.3 1 116.4 33 874.7 34 991.1 3.2
782.8 2 529.6 3 312.4 23.6 225.0 788.6 1 013.6 22.2 110.0 526.9 636.9 17.3 88.0 31 251.6 31 339.6 0.3 1 205.8 35 096.7 36 302.5 3.3
794.4 2 529.6 3 324.0 23.9 213.0 802.6 1 015.6 21.0 125.0 498.3 623.3 20.1 94.0 32 683.6 32 777.6 0.3 1 226.4 36 514.1 37 740.5 3.2
746.9 2 529.6 3 276.5 22.8 199.0 803.6 1 002.6 19.8 165.0 494.1 659.1 25.0 96.0 33 564.7 33 660.7 0.3 1 206.9 37 392.1 38 599.0 3.1
Source: F.O. Licht and International Sugar Organization.
in South Korea and Taiwan where annual production and consumption is around 290 000 and 175 000 tonnes respectively. All three countries are net importers of both sugar and grains. In effect, governments have chosen to use tariffs and taxes to encourage importation of grain (for HFCS production) rather than of sugar – a strategy that helps to redress a trade imbalance with the United States. Historically, Japan was a pioneer in the development of the enzyme technology critical to the initial success of HFCS. In consequence, Asia’s share of global HFCS output was higher in the early 1980s. More recently, Japan’s consumption of HFCS has stagnated, reflecting changing consumer preferences in the beverages market. However, in South Korea and Taiwan, the market for HFCS appears to have expanded further (see Fig. 5.7). In 1998, the HFCS sectors suffered from the adverse impact of the financial crises and economic turmoil afflicting the region. In particular, currency devaluations increased the cost of imported corn feedstock. South Korea and Taiwan experienced strong growth in 1999/2000, bouncing back after the region’s economic crises. Japan Japan’s production and consumption of HFCS has shown little growth during the 1990s (see Table 5.5). Around 65% of HFCS is used in the beverage industry where soft drinks account for 40% of the Chapter 5/page 16
Alternative sweeteners
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/2000
2000/01
727.4 2 529.6 3 257.0 22.3 215.0 796.4 1 011.4 21.3 173.0 494.1 667.1 25.9 104.0 34 960.2 35 064.2 0.3 1 219.4 38 780.4 39 999.8 3.0
805.8 2 529.6 3 335.4 24.2 213.0 883.1 1 096.1 19.4 180.0 494.1 674.1 26.7 136.0 36 492.5 36 628.5 0.4 1 334.8 40 399.4 41 734.2 3.2
783.6 2 529.6 3 313.2 23.7 221.0 973.2 1 194.2 18.5 195.0 494.1 689.1 28.3 178.0 37 525.6 37 703.6 0.5 1 377.6 41 522.6 42 900.3 3.2
878.5 2 529.6 3 408.1 25.8 231.0 1 034.1 1 265.1 18.3 165.0 494.1 659.1 25.0 202.0 39 147.5 39 349.5 0.5 1 476.5 43 205.4 44 681.9 3.3
789.0 2 529.6 3 318.6 23.8 213.0 1 040.2 1 253.2 17.0 155.0 494.1 649.1 23.9 181.6 39 399.8 39 581.4 0.5 1 338.6 43 463.8 44 802.4 3.0
760.0 2 529.6 3 289.6 23.1 218.0 921.4 1 139.4 19.1 153.0 494.1 647.1 23.6 171.0 39 137.0 39 308.0 0.4 1 302.0 43 082.2 44 384.2 2.9
755.0 2 529.6 3 284.6 23.0 240.0 903.0 1 143.0 21.0 155.0 494.1 649.1 23.9 185.0 40 742.5 40 927.5 0.5 1 335.0 44 669.3 46 004.3 2.9
741.0 2 529.6 3 270.6 22.7 265.0 945.6 1 210.6 21.9 170.0 494.1 664.1 25.6 198.0 42 110.4 42 308.4 0.5 1 374.0 46 079.8 47 453.8 2.9
30 25
%
20 15 10 5 0 Japan
South Korea 1999/2000
5.7
Taiwan 2000/01
Other Asia
Total Asia
2001/02
Asia: share of HFCS, in total sugar and HFCS consumption.
sector’s output. Carbonated soft drinks are becoming less popular with consumers compared to other beverages, particularly canned coffee and tea. The HFCS sector operates within a sweeteners regime that provides little incentive for expansion of output. Japan’s government has recently introduced measures to reduce the wholesale price of Chapter 5/page 17
2001/02 761.0 2 529.6 3 290.6 23.1 295.0 1 015.0 1 310.0 22.5 175.0 494.1 669.1 26.2 220.0 43 502.1 43 722.1 0.5 1 451.0 47 540.8 48 991.8 3.0
Sugar Trading Manual sugar, which will act to reduce the price competitiveness of HFCS. Another factor that acts as a disincentive to HFCS production is the way in which HFCS producers are required to tie the purchase of dutyfree imported corn (from a semi-annual import quota) to the purchase of local starch (potatoes), in a ratio of 11 to 1. This effectively requires 1/12 of starch used by HFCS producers to be supplied from local starch sources. Bound to take the local starch (in order to access the duty-free corn imports), the HFCS producer has to find a use for it, adding to their production costs. Surcharges are applied by the government to HFCS producers in order to prevent HFCS from disrupting the sugar market. Furthermore, the Ministry of Agriculture, Forests and Fisheries calculates quarterly target volumes for each manufacturer. This policy has acted to keep output broadly stable over the recent past. The HFCS market in Japan is mature and little growth is expected for the future. South Korea As in Japan, demand for caloric soft drinks waned during the second half of the 1990s. Consequently, HFCS output increased only modestly and its share of the combined HFCS/sugar market stagnated at around 17–18%. However, soft drinks consumption has resumed growth over more recent years: in 2002 reflecting higher offtake of soft drinks during the Football World Cup. As is the case in Japan and Taiwan, development of an HFCS industry relies on an advantageous tax and import regime for grains as against sugar. There is no domestic sugar industry so sugar prices to consumers are high. Taiwan The government of Taiwan also intervened in the sweetener market to ensure HFCS was treated favourably. With a 30% discount against sugar, HFCS use had risen to over 26% of the combined HFCS/sugar market by the mid-1990s. However, both sugar and HFCS use have changed little over the past five years. The industry faces increased competition from imported sugar over the coming years. Other Asian countries Conditions for the development of HFCS sectors in other Asian countries have not been sufficiently favourable over the past decade. Analysts have often pointed to the potential for China to significantly expand HFCS output and consumption (e.g. Fry, 1996), citing a low rate of utilization of existing HFCS facilities (located in the southern coastal provinces), expected improvements in distribution systems and its Chapter 5/page 18
Alternative sweeteners rapidly growing soft drinks sector, and a ready market for the main byproducts of corn wet milling. In June 2002, Cargill started to produce HFCS locally in a joint venture with Global Biochem (F.O. Licht, 2003), triggering a decision by Coca-Cola to switch to HFCS (instead of sugar) at several of its plants. Thailand Thailand’s production and use of starch sweeteners has also grown but continues to represent a very small component of the total sweeteners market. There is one plant producing HFCS from tapioca starch. Nearly three-quarters of output is consumed in the beverage industry. Given Thailand’s status as a large surplus producer of sugar, the HFCS sector was initially expected to have difficulties expanding, but the government is allowing more factories to produce HFS from cassava starch. Production was 60 000 tonnes in 2001/02, but is estimated to have reached 100 000 tonnes in 2003.
Europe: sugar and HFCS Europe has shown one of the lowest rates of HFCS penetration (see Table 5.6), partly because in the European Union, the sugar regime has ensured that binding production quotas apply to HFCS. In the eight
Table 5.6 European Union HFCS and sugar consumption (tonnes white value)
1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
HFCS
Sugar
Sugar & HFCS
%HFCS
272 276 282 285 292 300 308 310 303 298 302 303 303 303 293
12 691 12 677 12 730 12 897 12 905 12 925 12 904 12 747 12 798 13 283 13 439 13 247 13 247 13 615 13 110
12 963 12 953 13 012 13 181 13 197 13 225 13 212 13 057 13 101 13 581 13 741 13 550 13 550 13 918 13 403
2.1 2.1 2.2 2.2 2.2 2.3 2.3 2.4 2.3 2.2 2.2 2.2 2.2 2.2 2.2
EU-15 1994/95 onwards. Source: F.O. Licht and International Sugar Organization. Chapter 5/page 19
Sugar Trading Manual East European and two Mediterranean countries acceding to the European Union in May 2004, imposition of production quotas will stifle growth. European Union The European Union produces a variety of cereal-based sweeteners, including glucose, dextrose, maltose, fructose syrups and polyalcohols. As in the United States, not all of these can be truly regarded as sugar substitutes, since some of their use is driven by factors other than sweetness (bulking properties, control of crystallization and maintenance of humidity). Producers of cereal sweeteners are entitled to export refunds, but typically not for HFCS as its physical properties limit trade (see earlier discussion). Each member state of the European Union faces an isoglucose production quota as part of the sugar regime (isoglucose is the way HFS is described in EU regulations). These quotas were imposed in response to the competitive threat of HFS to the EU sugar industry. Child (1996) noted that the sugar industry realized that HFS production in Europe could cause a catastrophic reduction in sugar consumption, resulting in factory quota reductions. The beet sugar lobby informed the authorities of the implications, stressing the fact that HFS was derived from imported corn. Starch production refunds were withdrawn from isoglucose and the product was brought within the EU sugar regime where it was subjected to production levies, effectively rendering output uneconomical. After a battle with the community authorities and in the Court of Justice, HFS producers managed to overturn these prohibitive arrangements but a highly restrictive quota system was instead imposed. Output of HFS typically equates to the maximum allowable under the quota system, presently around 303 000 tonnes, dry basis, 42% fructose equivalent. This definition also acts as a major disincentive to producing HFS of higher fructose content. Furthermore, any excess production above the quota must be exported, without subsidy, on to the world market – not a viable option as it is logistically difficult to ship HFS long distances and because HFS costs in the EU are high, reflecting the relatively high EU grain prices as against world market levels. There is another high fructose syrup produced in the European Union – inulin syrup – produced from chicory and Jerusalem artichoke. Production of this syrup is also subject to quotas, presently granted to three countries: Belgium, France and The Netherlands. The quota in 1999/2000 was set to 323 160 tonnes, white sugar/isoglucose equivalent (total of A and B quotas). Farmers have consistently not grown chicory for the B quota. Consequently, inulin syrup producers in Belgium and The Netherlands have never produced to the limit of their Chapter 5/page 20
Alternative sweeteners A quota total of 254 570 tonnes, production in 1999/2000 being around 230 000 tonnes. Table 5.6 shows EU HFCS and sugar consumption. In order to comply with its WTO obligations, the EU for fiscal 2000/01 cut its production quotas for sugar, isoglucose and inulin syrup in total by 498 800 tonnes, dry basis. The reduction for isoglucose was 9931 tonnes to 293 084 tonnes and for inulin syrup was 10 592 to 312 458 tonnes. Although output of HFCS and inulin syrup consequently fell in 2000/01, institutional prices have not been touched and producers continue to achieve profitability as fructose prices trade at only a modest discount to the high EU sugar process. There was also a need to cut production quotas in 2001/02 and 2002/03. European Union – enlargement will not boost isoglucose production Of the ten countries set to accede to the EU in May 2004, three were given isoglucose quotas (the same as HFCS), as shown in Table 5.7. In most cases, the final quotas were less than the quantities being sought by the candidate countries. Indeed, the European Commission’s initial offers were much below what the countries were anticipating. Slovakia was requesting a 60 000 tonne quota and saw the EC’s calculation as faulty when it offered a quota based on average production in the 1995–99 period when production there started only in 1997. Its final quota of 42 547 tonnes is against production of 52 000 to 53 000 tonnes in the past two years. Similarly, in Poland, where Cargill had invested in an isoglucose plant, the initial quota offered by the EU was only 2500 tonnes. However, Poland had success in negotiating a much larger quota of over 26 000 tonnes, as against production in the past two years of 50 000 tonnes. Hungary’s quota, on the other hand, appears to reflect its recent production history, achieving 136 000 tonnes in 2002/03. Elsewhere, Turkey’s production and use of HFCS has grown strongly over recent years, starting in 1997/98 at 35 000 tonnes and increasing to 300 000 tonnes in 2001/02. According to F.O. Licht, there are three international and two local companies producing starch-based Table 5.7 Final isoglucose quotas (tonnes HFCS-42, dry matter) Country
A-quota
B-quota
Total
Hungary Poland Slovakia
127 627 24 911 37 524
10 000 1 870 5 023
137 627 26 781 42 547
Total
190 062
16 893
206 955
Chapter 5/page 21
Sugar Trading Manual sweeteners, with a total annual capacity of 900 000 tonnes. However, the industry faces two major obstacles to utilizing that capacity. First, the government has approved high duties on imported corn, raising the cost of starch sweeteners, and second, the government determines an annual HFS production quota, as part of the country’s Sugar Law. The quota was set at 351 150 tonnes in 2002/03. Former Soviet Union In the FSU, some analysts over recent years have mooted plans in Russia (a large sugar-deficit country) to increase the output of starch sweeteners which, if implemented, would lead to the establishment of a HFCS industry using domestic corn and wheat as feedstocks. Presently, however, such a development looks remote in the near term in light of Russia’s economic malaise.
Summary: short-term outlook In the United States, the two-decade-old HFCS industry has already displaced sugar in many markets. The substitution process is therefore coming to an end and demand will grow more sluggishly than previously. The industry is suffering from a general malaise evident throughout the US caloric sweetener sector, and growth prospects over the short to medium term remain subdued. Several producers are already attempting to focus on higher-value niche markets, such as speciality starches, and there will continue to be a diversion of wet milling capacity to fuel ethanol production. In Europe, production quotas will continue to constrain isoglucose output levels in the enlarged European Union. The only country in Europe where production could continue to flourish is Turkey, but prospects will depend on the industry’s success in negotiating annual production quotas with government. In Asia, prospects are firm, but growth will be slow because of needed investments in infrastructure. Even so, international investors appear to have at last begun building up a HFCS infrastructure in China.
Longer-term potential for HFCS to further substitute for sugar Although the short- to medium-term outlook suggests modest growth only in the world HFCS sector, taking a longer-term perspective raises the possibility of sugar and sweetener policy reform, which as in the case of the United States had supported HFCS production, but as in the case of the European Union has limited the size of the sector. From the preceding review of the world HFCS industry, it would appear that differences in the level of penetration of HFCS in a Chapter 5/page 22
Alternative sweeteners country’s sweetener market can largely be explained by the level of domestic sugar prices. Most of the countries where HFCS has taken a significant share of the market have, or have had, relatively high domestic sugar prices, suggesting that domestic sugar policies have played a major role in the expansion of HFCS. Prospects for HFCS in both existing producing countries and in potential producing countries therefore depend, to a large degree, on future developments concerning domestic sugar prices and their relationship to the costs of HFCS production (which is a direct function of the price of starch raw material). As the United States is the country where HFCS has most penetrated the sweetener market, analysts frequently turn to evaluate the particular conditions in this country that allowed HFCS to become established and to flourish, in order to try to determine the potential for HFCS to expand in other countries. Buzzanell (1995) argues that the US HFCS sector illustrates all of the prerequisites needed for successful development of an HFCS industry, including the following: 1 2 3 4
A domestic deficit of sugar and a high internal sugar price. Sufficient supplies of starch. A well-developed food production and consumption infrastructure. The availability of capital for investment in research and development and plant and equipment. 5 A favourable government policy. Vuilleumier (1997) extends this list to include a large soft drinks industry; a skilled labour force that can be trained to use sophisticated production equipment; and enzymes, processing chemicals, fresh water and energy sources that are readily accessible. Not only are these conditions met in the United States, but also in Japan. The US, as the world’s largest corn producer has a ready supply of starch for the production of corn-based sweeteners. Japan’s starch feedstock comes from domestically produced potatoes and large-scale imports of corn from the US. Both the US and Japan also have a welldeveloped handling system for liquid sweeteners, and a significant portion of total sweetener consumption is in industrially prepared beverages and foods (Buzzanell, 1995). Government support was also an important factor in both countries. In the US the price support policy for sugar led to high and stable domestic sugar prices. This allowed an expanding supply capacity for HFCS to develop. At the same time there was continuing research and development on production quality and consumer acceptance. The switch from sugar to HFCS in the majority of carbonated soft drinks was achieved in two major stages. In January 1980, HFCS was approved as 50% of the sweetener content of the drink Coca-Cola. In April 1983, HFCS was approved as 30% of the sweetener in the drink Chapter 5/page 23
Sugar Trading Manual Pepsi-Cola. In November 1984, the 100% level of HFCS was approved for both colas. In the European Union all of the prerequisites for the successful development of a large-scale HFCS industry existed, but for one – favourable government policy. As identified above, the EU Commission continues to impose restrictive production quotas on HFCS, effectively limiting production and consumption.
HFCS prices in the United States Prior to 1995, when excess production capacity began to blight the sector, the dynamics of HFCS pricing on an annual basis could be closely modelled. HFCS prices showed a strong correlation with net corn sweetener costs and the refined beet sugar price. Regression analysis showed that three-quarters of the year-to-year variation in the HFCS-42 list price could be explained by movements in these two factors alone (see ISO 1995). HFCS-55 and HFCS-42 have consistently sold at discounts to wholesale refined beet sugar prices (typically around 30%), ensuring a competitive advantage. Prices for HFCS collapsed in early 1997 and, as can be seen in Fig. 5.8, the dynamics of HFCS pricing have changed fundamentally since that time. During the early 1990s, list prices for HFCS followed a regular seasonal pattern, with high prices prevailing in the hot summer months when consumer demand for carbonated soft drinks surged. But in 1995 the typical peak in HFCS prices faltered and in 1996 list prices showed no movement. In fact, because HFCS producers did not change their list prices for over 12 months, a general opinion emerged among analysts that these prices had become an unreliable indicator of the values at which HFCS was being traded (in fact the USDA ceased publishing list prices). Consequently, attention has focused on the spot price for HFCS (available for HFCS-42 since
35 US cents/lb
30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Sugar HFCS-42 HFCS-55 Spot
5.8
US HFCS and sugar prices.
Chapter 5/page 24
Alternative sweeteners 1995 only). Between the HFCS price collapse of 1997 and early 2002, spot prices typically represented only 37–47% of the refined beet sugar price (wholesale) – a far cry from the much higher levels for the first six years of the 1990s. With the onset of oversupply in the US sweeteners market late in 1999, sugar prices collapsed, sending the HFCS/sugar price ratio back up to 60%. The ration has averaged 52% during 2001 and 2002.
Costs of HFCS production In the United States, HFCS production costs are estimated to be lower than the world sugar price except if circumstances force world sugar prices to artificially low levels. Haley (2001), in reporting estimates of average HFCS production costs compiled by LMC International, showed that HFCS-42 costs in the United States ranged from 9.8 to 14.5 cents/lb during the period 1994/95 to 1998/99. The average level of HFCS production costs for the 15 major producing countries was considerably higher, ranging between 11.8 and 16.8 US cents/lb. Further analysis showed that both processing costs and net corn costs were significantly lower in the US than in non-US producers. The US net corn cost was estimated to be less than 40% of the non-US average. This advantage was argued to stem from abundant corn supplies and efficient production and marketing of non-HFCS starch, oil and feed products. Table 5.8 shows costs of production by selected categories of world producers.
Sugar prices In order to determine the extent to which HFCS might penetrate individual country sweetener markets, these production cost estimates must be seen against the future level of both domestic and world sugar prices (note, technical advances in HFCS production are not likely to lead to a significant reduction in costs over the longer term). In an environment of increasing agricultural policy reform, domestic prices for sugar and starch sources, such as corn, would increasingly reflect world market developments. In Japan and the US – where the HFCS industry developed under the protective shield of sugar support policies – the longer-term reform of those sugar policies is likely to hold negative impacts on their respective HFCS sectors. However, the cost estimates above suggest that, because the average level of world sugar prices is expected to increase if agricultural protection (including sugar) diminishes, then there would be greater incentive for other countries to invest in HFCS production capacity. If the policy reform process proceeds more rapidly for starch sources (cereals) than for sugar, then the price relativity between sugar and starch-based sweeteners will be a key issue (Ross, 1996). Chapter 5/page 25
Sugar Trading Manual Table 5.8 Averaged costs of producing raw cane sugar, beet sugar and high fructose corn syrup, by selected categories of world producers Category
1994/95 1995/96 1996/97 1997/98 1998/99 Cents/pound1
Raw cane sugar producers Low-cost producers2 Major exporters3 Cane sugar White value equivalent Low-cost producers2 Major exporters3 Beet sugar, refined value Low-cost producers4 Major exporters5 High fructose corn syrup6 Major producers7
7.43 10.37
8.1 10.6
8.18 10.72
7.78 10.52
7.58 9.73
11.02 14.23
11.75 14.48
11.84 14.61
11.41 14.38
11.19 13.53
21.31 25.47
23.16 26.87
23.09 25.9
21.21 23.56
22.67 24.75
13.45
16.78
13.57
12.86
11.76
1
Measured in current US cents per pound, ex mill, factory basis. Average of five producing regions (Australia, Brazil-Centre/South, Guatemala, Zambia and Zimbabwe). 3 Average of seven producing regions (Australia, Brazil, Colombia, Cuba, Guatemala, South Africa and Thailand). 4 Average of seven countries (Belgium, Canada, Chile, France, Turkey, United Kingdom and United States). 5 Average of four countries (Belgium, France, Germany and Turkey). 6 Cents per pound, HFCS-55, dry weight. 7 Average of 19 countries (Argentina, Belgium, Canada, Egypt, Finland, France, Germany, Hungary, Italy, Japan, Mexico, Netherlands, Slovakia, South Korea, Spain, Taiwan, Turkey, United Kingdom and United States). 2
In the short term, US HFCS production would not decline without the US sugar programme. The variable costs of HFCS production are estimated to be below the world price of refined sugar seen during the 1990s and, as shown in Fig. 5.9, HFCS spot prices, although historically low, have typically been less than the world sugar price since 1995. While HFCS-55 list prices have averaged much higher during the 1990s (except for the period of very low world market prices in 1999 and 2000), this in part reflects the fact that substantial discounts against these list prices were made to large commercial buyers, perhaps as much as 8 cents/lb (Buzzanell, 1995). Therefore, with so much investment in fixed capacity, HFCS producers would be likely to maintain their market share regardless of US sugar policy and price, by reducing their prices and still being able to cover variable costs. But, in the long run, sugar prices closer to world market levels could see contraction of the sector and sugar regaining some liquid sugar markets. Chapter 5/page 26
Alternative sweeteners 30
US cents/lb
25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 LDP fob
5.9
HFCS-42
HFCS-55
Spot
US HFCS prices as against world market sugar price.
There will be another factor to consider, as agricultural policy reform and liberalization of the sugar market are expected to lead to an increase in the average level of world sugar prices – although the magnitude of this increase is the subject of considerable debate. To the extent that prices move beyond the range of 9–13 cents/lb (raws) in a liberalizing market, then the negative impacts of sugar policy reform on existing large producers of HFCS will be lessened. At the same time, the stimulus to increase HFCS production in other countries will be on average greater than during the 1990s. In fact, some analysts argue that too rapid a reform of the world sugar market could lead to significant sugar price rises, opening the door to substantial HFCS production and large displacement of sugar over the longer term (e.g. Hannah, 1997). It is well established that the use for HFCS and its substitution for sugar was boosted by the sugar price peak of 1974 and also the rise in sugar prices that followed in 1980, which would have influenced expectations for future sugar prices. The boost for HFCS was maintained by high domestic sugar prices (particularly in the United States and Japan). Had domestic sugar prices not been protected, then HFCS production and consumption would still have expanded in the US, but it would have been much slower. Even assuming a greater average incentive for HFCS production through higher average world sugar prices, the liquid nature of HFCS and the required efficiency in transport will only be achieved in most developing countries at high costs, acting as a disincentive for the establishment of a HFCS industry. It is also evident from recent history that, although HFCS use has spread to countries that are large sugar Chapter 5/page 27
Sugar Trading Manual producers and exporters, such as India, Argentina and Thailand, the HFCS industries have had difficulty expanding.
High intensity sweeteners During the past two decades, high intensity sweeteners (HIS) have emerged as another important group of sweeteners. HIS have a sweetness far stronger than sugar and are typically used to lower the caloric value of food and beverages as most of them are non-caloric. The most well-known HIS are saccharin, aspartame, acesulfame-K and cyclamate, but there are also others (see Appendix for a description of each HIS and its main properties and uses). The use of alternative sweeteners in food and beverages is typically controlled by governmental food and drug regulations, so not all HIS are available for the same applications in all countries. International authorities include the UN’s Joint Expert Committee for Food Additives and the EU’s Scientific Committee for Foods, which examine food additives and fix acceptable daily intakes. In the United States, some substances have taken years to pass the rigorous testing and procedures required by the Food and Drug Administration (FDA). Analysis of the world HIS market is frustrated by a dearth of up-todate published statistics reflecting commercial sensitivities. Despite this frustration, analysts generally agree that HIS have gained an increasing share of the global sweeteners market (see Table 5.9), rising from 6.9% in 1985 to 8.8% in 1995 and 9.6% in 2000. During the 1990s HIS consumption rose at around an average rate of 5% annually. This compares favourably with HFCS at 4.2%, but far exceeds the average annual growth of sugar consumption over the same period, which was around 1.6%. The demand for HIS can be considered in terms of two main segments: first, HIS use in the ‘lite’ or low calorie food and beverages
Table 5.9 The global sweeteners market* Sweetener
Unit
1985
1990
1995
2000
Sugar (white value) High Fructose Syrup High Intensity Sweeteners Total HIS share HFS share Sugar share
Mt Mt Mt Mt % % %
91.5 6.2 7.2 104.9 6.9 5.9 87.2
101.5 7.6 8.5 117.6 7.2 6.5 86.3
108.9 9.7 11.5 130.1 8.8 7.5 83.7
118.5 11.4 13.8 143.7 9.6 7.9 82.5
* excluding glucose/fructose. Chapter 5/page 28
Alternative sweeteners sector and, second, use in blends with other sweeteners in order to lower sweetening costs for non-lite or regular foods and beverages. It is in this smaller latter segment that sugar competes directly with intensive sweeteners.
Global perspective Global consumption of HIS in total is estimated to have grown from around 8.5 million tonnes sugar equivalent in 1990 to 13.8 million tonnes in 2000 – an increase of around 62%. All categories of HIS have shared in the gain, but consumption remains dominated by saccharin (see Figs 5.10 and 5.11). On a regional basis, Asia dominates consumption (50% of global consumption), mainly because of its large use of saccharin (in China). North and South America account for 30% (largest users of aspartame). Europe follows at 17%, while Africa accounts for only 3%.
By major HIS Saccharin Saccharin is the oldest high intensity sweetener (developed in 1897), and it has dominated global use of high intensity sweeteners with an estimated share of around 68% in 2000, amounting to around 9.0 million tonnes of sugar equivalent. Since 1995 consumption has risen by around one million tonnes. Saccharin has a bitter and metallic aftertaste, but it can be manufactured relatively easily and at low cost. The
Europe
1995
2000
Africa
Americas
Asia
0.0
10.0
20.0
30.0 Percent
40.0
50.0
60.0
5.10 Global HIS consumption by region, 1995 and 2000. Chapter 5/page 29
Sugar Trading Manual
Million tonnes sugar equivalent
10 9
1985
8
1995 2000
7 6 5 4 3 2 1 0 Saccharin
Aspartame
Cyclamate
Others
5.11 Global consumption of HIS.
price per unit of sweeteners is also very low, thereby making it attractive to price-sensitive food and drink manufacturers in developing countries (saccharin is 300 times as sweet as sugar). Asia is the major market for saccharin, where it is a cheap substitute for sugar (especially in China), and where its use continues to increase. Saccharin, just as importantly, is the preferred sweetener in many traditional Asian foodstuffs such as pickles and pastes. Asia’s saccharin consumption reached about 6.1 million tonnes se (sugar equivalent) in 2000. Within Asia, China dominates, with an estimated consumption of around 4.5 million tonnes se. There is evidence, however, that consumption fell substantially in 2001 to only 2.4 million tonnes se in response to government-mandated measures to curtail consumption of the sweetener. In developed countries, particularly North America and the EU, the use of saccharin appeared to stabilize in the mid-1990s, as aspartame became the preferred HIS in diet beverages. Gains in non-food uses, such as in pharmaceutical products, ensured a continued demand for saccharin, however. More recently, the practice of blending saccharin with other caloric and high intensity sweeteners, particularly in the European Union, is ensuring a bright future for saccharin. In Asia and other developing countries, the gains in saccharin use do not always reflect use in diet and lite products, but instead use in food and beverages in place of sugar, often on an unauthorized basis. Aspartame Aspartame is the next largest HIS and after its introduction in the United States in 1981, made rapid growth in use to reach 2.4 million tonnes Chapter 5/page 30
Alternative sweeteners se in 1995 and almost 3.0 million tonnes in 2000. However, growth has slowed considerably since the mid-1990s, reflecting a slowing in demand for diet soft drinks in the US (see later discussion – the US accounts for almost three-quarters of global aspartame consumption). The growing practice of using HIS blends (because of blending synergies and cost and functional gains), rather than aspartame solely, is also acting to slow aspartame’s gains, to the benefit of saccharin and acesulfame-K.
Cyclamates Cyclamates, which are rarely used alone because of their taste limitations, have also shared in the general growth in HIS over the past decade. However, use is focused in Asia, where cyclamates are typically used in blends with saccharin. Cyclamate use reached 0.9 million tonnes se in 2000, of which 0.5 million tonnes was in Asia. Consumption of cyclamates in Europe and America has shown little growth during the 1990s. The saccharin/cyclamate blend was successful in the US soft drinks market during the 1960s but disappeared from the US market after concerns were expressed about its possible harmful effects on human health. Even so, there is a petition before the FDA to reapprove cyclamates.
New sweeteners Of the new sweeteners, acesulfame-K has shown rapid growth, but its use remains limited relative to aspartame and saccharin. Its use in 1995 reached around 150 000 tonnes and was consumed chiefly in Europe and North America. By 2000, consumption is estimated to have more than doubled to around 300 000 tonnes. Importantly, where approved, the sweetener is blended with aspartame in soft drinks. In Canada, both major cola manufacturers quickly switched to the aspartame/acesulfame-K blend. The US FDA approved acesulfame-K for use in soft drinks on 6 July 1998, which has boosted its demand but with negative impacts for aspartame use. The popularity of acesulfame-K/aspartame blends is likely to grow further. Sucralose and alitame, approved for use well after aspartame and acesulfame-K became established, have both faced difficulties in capturing a slice of the HIS market. Even so, the list of countries that have received regulatory approval for these two sweeteners is growing. Sucralose (made from sugar) was first approved by Canada in 1991 as a table top sweetener, competing with aspartame and sugar. Sucralose was approved on 1 April 1998 by the US FDA for use in soft drinks and other foods, and is facing a brighter future with more Chapter 5/page 31
Sugar Trading Manual countries (around 50) giving approval for its use, including the EU in September 2000. Stevioside and glycyrrhizin (see Appendix at the end of this chapter for a description) have made limited inroads in Asia and amounted to less than 200 000 tonnes se in 2000. Neotame is a new-generation sweetener with the potential for a significant demand. It is forty times sweeter than aspartame and 7000 to 13 000 times sweeter than sugar. The US FDA approved the use of Neotame as a general purpose sweetener in July 2002. It is also approved for use in Australia and New Zealand.
HIS by major country/region United States North America consumes around 3.8 million tonnes of intense sweeteners (sugar equivalent) annually, accounting for almost 28% of global consumption. Around 40% is aspartame (see Fig. 5.12), making the US the dominant world consumer, accounting for around 45% of global aspartame consumption. Aspartame was introduced in the mid-1980s and quickly displaced saccharin in diet soft drinks and in tabletop sweeteners, leading to strong growth in its consumption. However, by the mid-1990s, more moderate rates of demand were evident, suggesting the aspartame market had reached maturity. By 2000, aspartame use had stagnated, and fell from 1.6 million tonnes in 1998 to 1.4 million tonnes in 2002. A fall in demand for diet beverages (which rely on intense sweeteners) is a major factor contributing to the fall-off. The use of aspartame in this sector approached 1.0 million tonnes in sugar equivalent terms by 1998.
Others
2000 1995
Cyclamate
Aspartame
Saccharin 0
0.5
1 Million tonnes wse
1.5
5.12 North America’s use of intense sweeteners. Chapter 5/page 32
2
Alternative sweeteners However, the share of diet carbonated soft drinks in the US carbonated soft drinks market is declining, limiting growth in the use of aspartame in the sector over recent years. At the same time a rise in consumption of ‘new age’ beverages such as sports drinks and ready-to-drink teas has been attributed by some analysts to depriving the lite drinks sector of market growth. More recently, the US CSD sector has suffered a general stagnation, compounding the other factors limiting offtake of aspartame. Furthermore, the trend towards blending HIS has seen the use of saccharin and acesulfame-K increase at the expense of aspartame (see later discussion on prospects for HIS). Aspartame is also used in the manufacture of tabletop sweeteners, frozen desserts, yoghurt and sweets. A new encapsulated form of aspartame was approved late in 1995 by the US FDA for baking. Encapsulation protects aspartame to high heat and releases it during the final stage of baking. Also, in mid-1996, the FDA approved the use of aspartame as a general purpose sweetener, extending its use as a sweetener in all foods and beverages including syrups, salad dressings and certain snack foods where prior approval had not been granted. Most of the aspartame used in the US is produced domestically (the NutraSweet brand), although imports from Japan are growing in importance. In Canada, growth in demand for aspartame has also slowed in recent years because of the growing practice of blending sweeteners. During 1995 large soft drink manufacturers (Coca-Cola Company and Pepsi-Cola) switched from using aspartame-only formulations to using aspartame/acesulfame-K blends in diet drinks. Cyclamate has been banned in the US since 1970, therefore its use in North America is confined to Canada, but remains small. Acesulfame-K has broad approval for use in Canada, but in the US was approved for only a small number of food products, such as baked goods, yoghurt, dry drink mixes and as a tabletop sweetener until July 1998, when FDA approval was granted for its use in soft drinks, through the growing popularity of acesulfame-K/aspartame blends. The saccharin market in the US is well established. Even so, increased blending of caloric and high intensity sweeteners could now result in greater use of saccharin. This reflects the fact that saccharin was removed from the list of products reasonably anticipated to be a carcinogen by the Ninth Report on Carcinogens of the National Toxicology Program. Asia The use of high intensity sweeteners in Asia is growing rapidly, keeping pace with growth in sugar use and capturing a larger market in Asia than starch sweeteners. As a proportion of global demand for high intensity sweeteners, Asia’s share rose from 33% in 1980 to 46% by Chapter 5/page 33
Sugar Trading Manual
Others
2000 1995
Cyclamate
Aspartame
Saccharin
0
2
4 6 Million tonnes wse
8
5.13 Asia’s use of high intensity sweeteners.
1995 and 50% by 2000, clearly dominating global consumption. In absolute terms, Asia’s consumption of high intensity sweeteners has grown from 1.5 million tonnes, expressed in sugar equivalent terms, in 1980 to around 5.3 million tonnes in 1995 and 6.9 million tonnes in 2000. Saccharin is the most popular artificial sweetener in Asia, reaching around 5.9 million tonnes (accounting for over half of world saccharin consumption) – see Fig. 5.13. The very low cost of saccharin (on a sugar equivalent basis) means that its cost to industrial users can be equivalent to as little as 10% of the price of sugar. China’s use of saccharin is high for this reason and is often seen as illegally substituting for sugar in soft drinks. Saccharin is also favoured in Asia because of its previously mentioned valued role in many traditional Asian pickles and pastes. In China, falling domestic sugar prices in 1999 prompted the government to introduce a set of measures to help support prices, including a declaration to increase efforts to curb production of saccharin. Such goals have been announced before, but have proven difficult to put into practice (see below). Asia is also the world’s largest consumer of cyclamates (around 70% of world use) but cyclamate consumption is very modest compared to saccharin, at around 0.5 million tonnes. Importantly, cyclamates are mostly used in blends with saccharin because blending achieves further cost savings by reducing the quantity of each sweetener to achieve a desired level of sweetness. China has boosted production and exports of cyclamate over the past two years, in part due to the fact that cyclamates are not subject to the same government controls as saccharin. Chapter 5/page 34
Alternative sweeteners Aspartame use in Asia is minimal, reflecting the continuing bias for low-cost saccharin and increasing use of two of the so-called newgeneration sweeteners – stevioside and glycyrrhizin (see Appendix) – which account for the bulk of the remaining high intensity sweeteners use (0.4 million tonnes). These two sweeteners are preferred for use in Asian pickled foodstuffs, pastes and sauces. The technical properties of aspartame often mean that it is not suitable for use in these foodstuffs in any case.
Sugar and saccharin in China Sugar consumption is complicated by an extraordinarily heavy intake of saccharin. Production of saccharin boomed over the 1995–99 period, rising from 10 000 to 30 000 tonnes. The saccharin industry was originally founded by the government in a drive to increase export income. In 1998, around 55% of production was exported, leaving 13 000 tonnes available for domestic use. This volume of saccharin would have displaced between 2.6 and 3.9 million tonnes of domestic sugar consumption, depending on assumptions regarding its sweetening potency (200–300 times as sweet as sugar). When considered in light of China’s annual sugar consumption – around 8 million tonnes wse, the magnitude of the competition between sugar and saccharin is readily visible. Considered another way, if half of saccharin consumption was switched to sugar, then the large domestic stockpile of sugar afflicting the local industry would have been run down within a year. This view, however, needs to be tempered by the fact that there is unlikely to be an immediate substitution of saccharin by sucrose with falling saccharin availability because of the huge difference in the price of the two products to food and beverage manufacturers. China’s government in 1999 issued new regulations in an attempt to circumvent further inroads by saccharin. A licensing system was introduced to manage saccharin production. Production quotas issued in May 1999 limited output to 24 000 tonnes of which only 8000 tonnes were allowed for domestic use, with the remaining 16 000 tonnes to be exported. The government also set out to limit local saccharin consumption by first attempting to increase consumer awareness of the health risks associated with the widespread use of artificial sweeteners in food processing and soft drinks, and also changing food-labelling rules to ensure that the use of artificial sweeteners is clearly marked. Furthermore, procurement of saccharin by food manufacturers is now made through state-approved enterprises, which are monitored by the State Administration of Light Industry. Despite this three-pronged strategy (production cuts, increased exports, and consumption limits), by late 2000 it emerged that only four small saccharin factories had been closed, removing around 3000 Chapter 5/page 35
Sugar Trading Manual tonnes of production capacity. There was also little evidence of lower saccharin consumption, and few food manufacturers appeared to be adhering to the new labelling rules. During 2001, targets were outlined to reduce domestic consumption from around 13 000 tonnes to just 3000 tonnes, with production at no more than 19 550 tonnes. Again, however, production was higher at 22 862 tonnes, of which around 6000 tonnes was consumed domestically. In response, the government in March 2002 formed the State Sweetener Production Investigation Group to enforce the government’s objectives – specifically that production and sale of saccharin is limited to designated factories and that production does not exceed the official target. This was not the first time the Chinese government sought to limit saccharin production and consumption. In 1992 it aimed to limit saccharin output to 12 000 tonnes but the quota system failed. One key factor that undermined the quota plan was that saccharin use proves too tempting to food and beverage manufacturers when it offers such a marked cost advantage relative to sucrose. Europe Europe accounted for around 20% of world HIS use in 1995 (1.9 million tonnes se) but this share had fallen to 16.7% by 2000. The implementation of the EU Sweeteners Directive at the start of 1996 – which harmonized regulatory approval for HIS use – but which also limited the use of all artificial sweeteners, encouraged the blending of sugar with HIS, even in regular (non-diet) products – see later discussion. This has boosted HIS demand in the United Kingdom, which is expected to become a feature of HIS use in other EU countries. After China, the EU is the second largest consumer of saccharin and this sweetener dominates the region’s HIS consumption (67% in 2000, see Fig. 5.14). Recently saccharin has been used in increasing quantities by the soft drinks sector (in sweetener blends), so there is scope for growth in its use over coming years should the practice of blending spread more widely. Elsewhere in Europe, demand for high intensity sweeteners has also risen in countries such as Bulgaria, Romania and Russia. Users have been attracted by low costs and changes in national regulations that now permit the use of HIS.
Intense sweeteners and low calorie bulking agents (poly-ols) Intense sweeteners are unable to replace sugar’s bulk, which has important ramifications on the structure and ‘mouth-feel’ of food products. This limitation of intense sweeteners explains their major use in Chapter 5/page 36
Alternative sweeteners Saccharin Aspartame Cyclamates Others 5%
5%
23%
67%
5.14 Europe’s consumption of HIS, 2000.
the soft drink sector where water provides the bulk otherwise provided by sugar. However, over recent years, low calorie bulking agents have begun to be used in conjunction with intense sweeteners in food applications. In particular to meet growing consumer demand for low calorie (lite) products, a greater quality and range of bulking agents are now available to food manufacturers. The most widely produced bulking agents are polyhydric alcohols (poly-ols). Polyhydric alcohols are bulk sweeteners derived from carbohydrate sources such as starch, sucrose and birch wood. The poly-ol family includes sorbitol, mannitol, lactitol, maltitol, isomalt and xylitol. The sweetening power of poly-ols is less than that of sugar, as described in the Appendix. A major attraction of these bulking agents to food manufacturers, but particularly the confectionery sector, is their non-cariogenic property – that is, they do not contribute to tooth decay. In addition, several impart a cooling sensation in the mouth, which is useful to confectionery manufacturers. However, a drawback of high levels of consumption is flatulence and a laxative effect. Because poly-ols are less sweet than sugar, and typically have characteristics that users perceive as benefiting their products, then this category of sweetener is not really seen as taking market share from sugar directly. Sorbitol has many non-food uses and does not typically involve intensive sweeteners. In contrast, growth in the use of the other poly-ols as bulking agents has arisen from the rising popularity of ‘lite’ confectionery. This is particularly so in the United States and Western Europe. The range of permitted poly-ols open to the EU food industry increased with the adoption of the Sweetener Directive in 1996. Child (1996) argued that poly-ols in general could be likely to enjoy increasing demand in the EU in the years ahead. Importantly, demand is strong Chapter 5/page 37
Sugar Trading Manual because of the wide differential between the support price for EU sugar and the costs of alternative products and because of the quotas applied to production of high fructose syrups.
Prospects for intense sweeteners The factors contributing to general growth in demand for sweeteners (economic development, population and income growth) will underpin future growth in HIS, particularly in parts of Asia, Africa and Eastern Europe, where there is further potential for dynamic rates of growth in the soft drinks sector. In the United States and Europe, any slowing in HIS demand growth arising from the declining share of diet beverages in the total beverage market, evident since the early 1990s, could be offset by increased use of HIS/caloric sweetener blends, suggesting an increasing competitive threat to sugar from HIS over the longer term (and to HFCS in the United States). In sugar equivalent terms, intense sweeteners have been able to undercut sugar prices throughout the past decade. Table 5.10 gives HIS prices in the United States in se terms. Saccharin’s low production costs are well known and its market price has been roughly one US cent/lb se for many years. The price of cyclamates, while not as low as saccharin at roughly 6 to 7 cents/lb se, still remains the second cheapest of the intensive sweeteners. Cyclamates are mainly used in blends with saccharin, which lowers the overall cost of the blend while contributing to an improved sweetness profile to the end product. In the European Union, saccharin–cyclamate sweetened soft drinks have been produced in Germany for many years, and the implementation of the European Sweetener Directive at the beginning of 1996 has opened the entire EU market to cyclamate use.
Table 5.10 US prices for selected high intensity sweeteners Sweetener
Saccharin Aspartame Cyclamates
cents/lb se 1995
1999
<1.00 13.00–14.00 4.00–5.00
<1.00 10.00–11.00 5.00–6.00
Source: Fay, J, 2000, ‘Competition between sugar and alternative sweeteners – future outlook’, Paper prepared for Sugar to the 21st Century, International Sugar Congress 2000, Berlin. Chapter 5/page 38
Alternative sweeteners The ‘newer’ intense sweeteners – aspartame in the 1980s and, more recently, acesulfame-K, sucralose and stevioside – are higher priced but can still be as much as 60% less costly than sugar depending on the level of domestic sugar prices. Importantly, because the other ‘new’ sweeteners compete with aspartame, or are used in blends with aspartame, manufacturers have been obliged to follow aspartame prices. On balance, the expectation is that HIS will continue to have a healthy price advantage over sugar. Sweetener blends
HIS blends Difficulties winning approval for new HIS during the mid-1990s changed the main focus of research efforts from discovering hyperpotent sweeteners to reducing defects associated with existing sugar substitutes. A key potential in this regard was blending and the search for synergisitic effects in sweetener mixes, a practice that had already impacted the HIS market in the European Union and North America in particular since the early 1990s. Synergies from blending HIS with sugar Table 5.11 demonstrates the type of synergies that may be generated from a specific blend of sweeteners. The usual sweetening multiples associated with intense sweeteners (taking one kilo of sugar as one unit of sweetness) are 200 for aspartame (that is, one kilo of aspartame is equivalent to 200 kilos of sugar), 300 for saccharin and 200 for acesulfame-K (see Appendix A for more information on each of the HIS). Therefore a blend of 20 units of sweetness from sugar (i.e. 20 kilos) plus 15 units of sweetness from aspartame (in the form of 75
Table 5.11 Sweetening power of blends Sweetening power
Blend Actual
White sugar equivalent
1 300 200 200
kg 20 0.037 0.075 0.035
Synergy
kg 20 11 15 7 53 47
Total sweetness
100
Sugar Saccharin Aspartame Acesulfame-K
Chapter 5/page 39
Sugar Trading Manual grams of aspartame) plus 7 units of sweetness from acesulfame-K (as 35 grams of acesulfame-K) plus 11 units of sweetness from saccharin (as 37 grams of saccharin) might be expected to impart the sweetening power of [20 + 15 + 7 + 11] 53 kilos of sugar. Yet, this blend actually provides the same sweetness as 100 kilos of sugar. The ‘extra’ 47 units of sweetness represent the synergies and potency gains (based on an analysis by Fry, 1997: Challenges for Sugar from Sweetener Blends in Europe). Sweetener cost savings from blending The costs savings achievable from this blend are expressed in Table 5.12, based upon the EU price of white sugar and guesstimates of costs of EU HIS prices – there simply is no transparent pricing on the EU market. The sugar/HIS blend can be used to substitute 100 kilos of sugar, and therefore has the same economic value as 100 kilos of sugar. This economic value may be divided into the sugar share of this cost, which is 20% plus the aspartame share of the cost (for 75 grams of this sweetener), which is equivalent to the price of 5.1 kilos of sugar plus the acesulfame-K share, which is the cost equivalent of 3.9 kilos of sugar, plus the saccharin contribution, which costs the same amount as only 0.2 kilos of sugar. The ‘missing’ value, which corresponds to the value of 70.6 kilos of sugar, is the full extent of the cost savings from synergies and potency gains. That is a saving of 46.9 for the 100 kg of white sugar equivalent sweetening power. The costs savings from other blends (at EU prices) have been reported as:
Table 5.12 Cost savings from blending
Sugar Saccharin Aspartame Acesulfame-K Sugar/HIS blend White sugar equivalent Savings ø
Blend (kg)
Unit cost €/kgø
Total cost €
Sugar equivalent kg
20 0.037 0.075 0.035
0.665 3.72 46.58 74.97
13.3 0.1 3.5 2.6 19.6 66.5 46.9
20 0.21 5.25 3.95 29.41 100.00 70.59
Indicative prices only. The sugar price is the UK intervention price plus storage levy. The prices for intense sweeteners are guesstimates, based in part on an intensive sweeteners price table cited in USDA/ERS 1997 for Northern Europe.
Chapter 5/page 40
Alternative sweeteners • 100 : 1 sugar to aspartame – 50% • 30 : 10 : 4 cyclamates/aspartame/saccharin blends – 80% • 10 : 1 cyclamates/saccharin blends – 95% From this analysis, there are two key findings: • High intensity sweeteners are cheaper on a sugar equivalent basis in Europe and other markets as against sugar (saccharin stands apart from the other intense sweeteners, and in the United States market was selling at less than 10% of the world white sugar price in 1999). • This price advantage can be considerably magnified through the practice of blending. Powerful market impact in the UK The substitution of intense sweeteners for sugar in soft drinks is now very well established in parts of the European Union, but most notably in the United Kingdom. This is because since 1994 the British government has allowed CSD manufacturers to freely use high intensity sweeteners and any blend of nutritive and intense sweeteners that are permitted under the European Commission’s Sweetener Directive in conventional, non-diet beverages, without any stipulation on the minimum number of calories in the product. Directly as a result of this policy, many CSDs are now sold as regular, non-diet products but which contain very few calories from sugar. (A simple survey of CSD bottle labels in a leading UK supermarket chain confirms this practice.) CocaCola in 1999 adopted the blending of sugar and intense sweeteners in one of its well-known brands. The survey also revealed that it would now seem impossible for consumers to purchase a lemonade soft drink in the UK that does not contain a sugar/saccharin blend. Data are not easily collated for sugar use by sector in the UK, but substitution of such a degree would undoubtedly be seriously impacting sugar offtake by the CSD sector. Analysts estimate that nearly half of all the sweeteners used in the UK beverage sector are now high intensity sweeteners, but the diet products only account for around 20% of the market. The remaining 80% is used in conventional non-diet beverage products. Sugar/HIS blending in other markets Other EU member states are following the UK’s lead. Sufficient information was not available to further delineate the extent of the blending practice outside of the UK, but there seems to be evidence quoted by other analysts to suggest that the incorporation of intensive sweeteners in non-diet beverages is steadily increasing. Chapter 5/page 41
Sugar Trading Manual In the United States, high fructose corn syrup (HFCS) has captured the bulk of the CSD market from sugar, so intense sweeteners compete with that product rather than sugar (see MECAS (98) 23 – Developments in the availability of sugar substitutes: historical review and future prospects – for a full explanation). The economic benefits of blending and a desire on the part of CSD manufacturers to minimize costs is leading to strong interest in the practice in other parts of the world, such as Africa, Eastern Europe and the former republics of the Soviet Union. The practice is being adopted illegally in many instances as legislation in many of these countries still prohibits use of high intensity sweeteners in this way. Saccharin is often the most popular sugar replacement because of its cheapness. Finally, because the economic incentives are so great, there will be interest by other food manufacturers to substitute high intensity sweeteners for sugar where it is technically possible, and permitted by food regulations. Even so, the potential opportunities in other products are circumscribed by the need to find an inexpensive low calorie bulking agent to fill the loss of sugar’s bulking property – see earlier. For confectionery, the use of bulking agents to take the place of sugar tends to raise the ingredient costs. For dairy products too, there is the need to find suitable bulking agents, which adversely impacts the economics of using HIS in blends with sugar. European regulations on blending The original legislation concerning the use of sweeteners in foodstuffs, Directive 94/35/EC (the ‘European Parliament and Council Directive on sweeteners in foodstuffs’, also known as the ‘Sweeteners Directive’), was adopted on 30 June 1994. To keep pace with technological developments in the area of sweeteners, the amending Directive 96/83/EC was adopted on 19 December 1996 and implemented by all fifteen member states by 19 June 1998.
Conclusion Sugar is part of a broader sweetener market. Globally, around 8% of the market has been captured by HFS, and around 10% by high intensity (artificial) sweeteners. More importantly, though, for most of the 1990s, HFCS and HIS use have grown between two and three times as fast as sugar, eroding sugar’s share from 86.3% in 1990 to 82.5% in 2000.
HFCS and sugar Starch sweeteners, specifically HFS, began to make an impact in the world sweeteners market in the mid-1970s when sugar prices boomed Chapter 5/page 42
Alternative sweeteners and new technologies first became available. The share of HFS in world sweetener consumption steadily increased thereafter and is presently around 8%. However, most of this growth has been in the United States where support for sugar prices helped create the required conditions for development of a large HFCS industry. Starch sweeteners attained a 55% share of the total caloric sweetener market in the United States market in 2000 but intensive sweeteners have hardly become ready substitutes for sugar because of constraints in approved uses by the FDA and because of the varying characteristics they possess. HFCS also made significant inroads into Japan which, like the United States, was a large traditional sugar importer and which had high sugar prices relative to world market levels. Here HFCS has taken a 23% share of the combined sugar/HFCS market. Although conditions were ripe for a HFCS industry to flourish in the European Union, the competitive threat to sugar was quickly realized and government policy resulted in a restrictive production quota system being implemented, which restricted output. Reflecting this history of HFCS development, global production and consumption remain concentrated in seven countries – United States, Japan, South Korea, Taiwan, Canada, Argentina and the European Union – although a significant production capacity has also evolved in Poland and Turkey. However, around another 25 countries have small, and often expanding, HFCS sectors. In the short term, competition between HFCS and sugar will remain confined to a small number of countries and primarily in the liquid sweetener sector (particularly beverages). This is because HFCS and sugar will remain imperfect substitutes in some applications. In the confectionery and bakery industries, sugar remains the preferred sweetener because of its unique bulking, texture and browning characteristics. In the United States, the two-decade-old industry has already displaced sugar in many markets. The substitution process is therefore coming to an end and demand will grow more sluggishly than previously. In Europe, production quotas will continue to constrain isoglucose output levels in the enlarged European Union. In Asia, prospects are firm, but growth will be slow because of needed investments in infrastructure. Over the medium to longer terms, additional factors come into play. The market for caloric sweeteners is set to expand generally, but the competitive threat to sugar from HFCS will be heavily determined by developments in national agricultural support policy. In essence, production and consumption of HFCS will continue to grow and be a substitute for sugar, as long as sugar prices remain at levels that induce HFCS expansion. To determine the extent to which HFCS might penetrate individual country sweetener markets over the longer term, the relative levels of Chapter 5/page 43
Sugar Trading Manual HFCS production costs as against the future level of both domestic and world sugar prices is a key determinant. In an environment of likely agricultural policy reform (the WTO process of multilateral negotiations), domestic prices for sugar and starch sources such as corn would increasingly reflect world market developments. In Japan and the United States – where the HFCS industry developed under the protective shield of sugar support policies – over the longer term, reform of sugar policies is likely to hold negative impacts on their respective HFCS sectors. However, because the average level of world sugar prices is expected to increase if agricultural protection (including sugar) diminishes, then there would be greater incentive (on average) for other countries to invest in HFCS production capacity. If the policy reform process proceeds more rapidly for starch sources (cereals) than for sugar, then the price relativity between sugar and starch-based sweeteners will be a key issue. US HFCS production would probably not immediately decline without the US sugar programme. The variable costs of HFCS production are estimated to be below the world price of refined sugar seen during the 1990s and, more generally, production costs are estimated to be lower than the world sugar price except if circumstances force world sugar prices to artificially low levels such as in 2000. But, in the long run, domestic sugar prices closer to world market levels could see contraction of the US sector and sugar regaining some liquid sugar markets. On balance, demand for HFCS in the United States will continue to be chiefly determined by growth rates in the US beverage use and in food products needing liquid sweeteners. It would appear that, if agricultural policy reform and liberalization under the WTO process results in world market sugar prices moving beyond the range of 9–13 cents/lb (raws), then the stimulus to increase HFCS production in other countries will be on average greater than that during the 1990s. But, at the same time, the negative impacts of sugar policy reform on existing large producers of HFCS would be lessened. Even assuming a greater average incentive for HFCS production, the liquid nature of HFCS and the required efficiency in transport will only be achieved in most developing countries at high costs, acting as a disincentive for establishment of a HFCS industry, even with higher world sugar prices. It is also evident from recent history that, although HFCS use spread to countries that are large sugar producers and exporters, such as India, Argentina and Thailand, the HFCS industries have had difficulty expanding.
HIS and sugar Comparatively higher annual growth rates for HIS as against sugar over the past decade reflect not only the generally stable relationship Chapter 5/page 44
Alternative sweeteners between economic growth and sweeteners demand, but also the growing practice of blending of sweeteners and the relative prices which provide the economic incentives for substitution of HIS for sugar in blends. Over the medium to longer terms, the competitive threat to sugar from HIS will increase through this practice of blending sugar and HIS in non-diet products. This particular factor working in favour of increased HIS use will be compounded by the factors contributing to general growth in demand for sweeteners (economic development, population and income growth), which will underpin future growth in HIS in Asia. Another factor also working towards a greater share of HIS in world sweeteners consumption is the release of new HIS, such as Neotame which will further enforce the economic gains for sugar substitution. Consequently, there is every prospect that the share of intense sweeteners in the global sweeteners market will continue to increase, possibly breaching 10% market share before 2005. The only factor possibly working against HIS over the medium term is the expectation that China’s government will effectively reduce the use of saccharin, thereby boosting sugar consumption in that country. Such is the scale of China’s sugar and saccharin sectors that a switch away from saccharin towards sugar would be sufficient to impact the global sugar consumption and HIS growth rates.
Appendix: Characteristics of high intensity sweeteners and polyhydric alcohols Acesulfame-K (acesulfame potassium) has a clean, quickly perceptible sweet taste that does not linger or leave an aftertaste. It is a very stable sweetener, including at high temperature and over a broad acidity range, providing the sweetener with a potential use in many products. It is 100–200 times sweeter than sugar. It has approval for use in 90 countries where it is used in beverages, bakery, dairy, confectionery products and as a tabletop sweetener. It is sold under the brand name SunettTM by Nutrinova, a Hoechst subsidiary. Alitame is another powerful sweetener at around 2000 times the sweetness of sugar. It was discovered and patented by Pfizer in 1983 (with the brand name Aclame). It is an odourless product with desirable taste and good stability at elevated temperatures and over a broad pH range. Like aspartame, it is composed of two naturally occurring amino acids (aspartic acid and alamine). It is very cost competitive with other intensive sweeteners. In the US it is sold under the brand name Litesse. It is frequently used in baking and has an indefinite shelf-life. Chapter 5/page 45
Sugar Trading Manual Alitame is approved for use in a variety of food and beverage products in Australia, New Zealand, Mexico and China. A petition for alitame’s use in a broad range of food and beverages has been filed in the United States. Aspartame is 180–200 times sweeter than sugar and was first introduced in France in 1978, in the USA in 1981 (where it became the first low calorie sweetener to be approved by the FDA in more than 25 years) and in the UK in 1983. Initially, aspartame was made by Nutrasweet, a subsidiary of Monsanto, until the patent expired in 1992. Since that time, competition between producers has seen the price of aspartame fall and an associated rise in its use. Aspartame is used in many applications, but around two-thirds is used in the low calorie soft drink industry, light desserts and tabletop sweeteners (for instance, under the brand name Equal). The sweetener’s taste is close to that of sugar and it does not suffer from aftertaste problems. However, aspartame loses its sweetness gradually in liquid over time, and in response to temperature and acidity. This limits its competitiveness in some sectors. Cyclamate is 20–30 times sweeter than sugar, and was discovered in 1937. It is more typically blended than used on its own. Before it was banned in the US because of fears over its harmful effects in 1970, the diet soft drink industry used it in combination with saccharin. Cyclamate is stable in heat and cold and has a good shelf-life, but it has a citron sour-sweet taste with a bitter aftertaste if used in concentration. Some countries continue to ban the use of cyclamate, while others have reinstated or approved its use. It is approved for use in around 50 countries and in the United States a petition currently stands before the FDA for its reapproval. Glycyrrhizin is made from licorice root and is around 50 times sweeter than sugar. It is mainly used in confectionery while its use in soft drinks is limited by its licorice aftertaste. Isomalt is a disaccharide polyol made from sugar. It is heat resistant and stable in both acid and alkaline environments. A particular asset is its ability to mask the bitter aftertaste of some intensive sweeteners. It has a sweetness relative to sugar of 0.5. Lactitol is derived from lactose and is resistant to both high temperatures and extreme pH values. It is used primarily in the chocolate, bakery, jam and ice cream industries. It has a sweetness relative to sugar of 0.4.
Chapter 5/page 46
Alternative sweeteners Maltitol is obtained from the hydrogenation of maltose and is often used along with sorbitol in clear and hard sugar confectionery. It has a sweetness relative to sugar of 0.9. Mannitol is a monosaccharide polyol produced by hydrogenation of fructose. It is infrequently used in the food industry (low solubility and hygroscopicity), but its heat resistance and fresh/sweet taste has led to widespread use in the chewing-gum industry. It has a sweetness relative to sugar of 0.6. Neohesperidine dihydrochalcon (NHDC) is extracted from citrus fruits and is 1500–2000 times sweeter than sugar. It is a highly heat resistant sweetener and is mostly used in combination with aspartame and acesulfame-K. In Europe it is chiefly used in the animal feed industry. Neotame is derived from Aspartame and has a sweetener power of 8000 times that of sugar. It is a no-calorie sweetener, composed of two elements of protein: the amino acids L-aspartic acid and L-phenylalanine combined with two organic functional groups: one known as an ethyl ester group and the other as a neohexyl group. These components are joined together to form a uniquely sweet ingredient. Neotame entered the regulatory process in the United States late in 1998. The FDA announced in its Federal Register of February 1999 that Monsanto Co. had filed a petition proposing that the food additive regulations be amended to provide for the safe use of Neotame as a general use sweetener. Saccharin is an inexpensive and stable sweetener (low stability impairs use in some liquid products) and was discovered by American chemists in 1897. It is 200–700 times sweeter than sugar but has a bitter, metallic aftertaste. This can be masked if used in blends with other sweeteners but, in some countries, its use has suffered as other intensive sweeteners have been substituted for it, despite higher prices for the alternatives. Saccharin is mostly used in tabletop sweeteners, processed foods and soft drinks. Saccharin is by far the cheapest of all high intensity sweeteners and costs less than US 1 cent/lb (sugar equivalent) in the United States. In the United States, one of its most popular uses is as a tabletop sweetener (Sweet’N’ Low brand name). Sorbitol is produced by the catalytic hydrogenation of glucose. It is a stabilizer and is heat resistant. It is used in many types of products as a humectant for protection against loss of moisture. Its main use is in chewing-gum, toothpaste and as a raw material for the production of
Chapter 5/page 47
Sugar Trading Manual vitamin A. It has many non-food uses and is the most important of the poly-ols. It has a sweetness relative to sugar of 0.6. Stevioside is extracted from the leaves of the Stevia rebaudiana plant, which grows in Paraguay and Brazil and has been planted in Japan, the Republic of Korea, China and Taiwan province. It is 100–300 times as sweet as sugar, is stable, but has a lingering taste. The Stevia Corporation Ltd (London-based) has obtained world rights outside of Japan and is pursuing registration and approval in several countries. In the United States, Stevia Co Inc was set up in 1996 to market the product, following an FDA decision in September 1995, which said that Stevia could be used and consumed as a dietary supplement for nutritional benefits. Sucralose is made from ordinary sugar and is produced as a white crystalline powder. It is 600 times sweeter than sucrose and is stable at high temperatures. Tate & Lyle PLC of the UK and McNeil Specialties Products Company (a subsidiary of the US-based transnational Johnson & Johnson) developed Sucralose (Trichlorogabe Sucrose), which has a range of properties that make it a potential rival to aspartame. The US FDA approved the use of sucralose on 1 April 1998 for use in soft drinks and selected foods (marketed under the brand name Splenda). In Canada, sucralose was the first high intensive sweetener to be given approval for use since the Nutrasweet brand aspartame in the early 1980s. Presently, sucralose is approved for use in 50 countries and is marketed under the Splenda brand name in Australia, Canada, Mexico, Argentina, Brazil, Colombia, Lebanon, Venezuela and New Zealand. Thaumatine (talin) is very sweet – 2000–5000 times sweeter than sugar – and is made from the fruit of the West African katemfe plant. Its sweet taste develops slowly and has a prominent aftertaste. Its market is still small because of its characteristic taste. Approval is limited to only the UK and Japan. Xylitol is produced from xylose, which is derived from fruit and vegetables, corn cobs, almond shells and birch bark. It is mostly used in the chewing-gum industry because of its low solubility and its cooling effect in the mouth. It is also used in pharmaceuticals and oral health products. It has a sweetness relative to sugar of 0.6.
References Buzzanell P, ‘Corn sweeteners: recent developments and future prospects’, USDA/ERS Paper presented to Azucar ’95 Foro Internacional, Guadaiajara, Mexico, October 1995. Chapter 5/page 48
Alternative sweeteners Child N, ‘The place and prospects for non-sucrose sugars in the European Union’, in F.O. Licht’s Sugar Year Book, Ratzeburg, Germany, 1996. F.O. Lichts, ‘World HFS production falls for the first time in history’, F.O. Licht’s International Sugar and Sweetener Report, Vol. 135, No. 18, 17 June 2003. Fry J, ‘The outlook for non-sugar sweeteners in Asia’, Paper presented to the second Asian Sugar Conference, New Delhi, September 1996. Gray F, Buzzanell P and Moore W, US Corn Sweetener Statistical Compendium, USDA/ERS Statistical Bulletin No. 865, Washington DC, 1993. Haley S L, ‘US and world sugar and HFCS production costs 1989/90– 1994/95’, special article in Economic Research Service/USDA, Sugar and Sweeteners Situation and Outlook, May 1998. Haley S, ‘Measuring the effects of imports of sugar containing products on US sugar deliveries’, SSS-237-01, USDA, September 2003. Hannah A, ‘The world sugar market and reform’, in F.O. Licht’s International Sugar and Sweetener Report, Vol. 129, No. 31, October 1997. Lord R, ‘Sugar: background for 1995 farm legislation: an Economic Research Service Report’, USDA/ERS Agricultural Economic Report No. 711, Washington DC, April 1995. Ross B, ‘Analysis and outlook of world starch situation’, Paper presented to Agra-Europe Sugar, Sweeteners and Starch Conference, November 1996. Vuilleumier S, ‘World outlook for High Fructose Syrups to 2002’, in Sugar 2000 Proceedings, ISO, London, November 1997.
Chapter 5/page 49
6 World fuel ethanols – analysis and outlook Dr Christoph Berg F.O. Licht
Some basic concepts Success factors The feedstock issue Political support
Ethanol support schemes – a regional analysis Brazil United States Canada European Union India Thailand China Australia Peru and other Latin America
World ethanol trade flows now . . . . . . and in the future Conclusions
There remains confusion surrounding the production of and trade in ethanol. This is hardly surprising given that there are a variety of feedstocks from which ethanol can be produced, a number of production processes and very different uses for this commodity. While these obstacles to more transparency in the ethanol market may be termed technical, there are economic ones as well. In many countries the production of ethyl alcohol is controlled by one or two companies. As publicly available figures in sensitive areas could provide foreign rivals with a competitive edge, governments often allow statistical data on trade and production to be suppressed. But there is another economic reason for the notorious unreliability of data on alcohol. Usually, beverage alcohol is heavy taxed, which provides an incentive to smuggle or produce it illicitly and can have a significant impact on the overall supply picture.
Some basic concepts There is semantic confusion with regard to the term ethanol. Very often the term is used as a synonym for alcoholic beverages. This is misleading, even though ethanol may be used as a raw material for the production of spirits. In order to avoid misunderstandings, let us define ethanol as a clear, colourless, flammable oxygenated hydrocarbon, with the chemical formula C2H5OH. Even though the definition is fairly straightforward, there are various categories for describing a particular type of ethyl alcohol that are not mutually exclusive: • by feedstock • by composition • by end-use. The feedstocks and therefore the processes by which ethanol can be produced are diverse. Synthetic alcohol may be derived from crude oil or gas and coal: agricultural alcohol may be distilled from grains, molasses, fruit, sugar cane juice, cellulose and numerous other sources. Both products, fermentation and synthetic alcohol are chemically identical. Synthetic alcohol is concentrated in the hands of a couple of mostly multinational companies such as Sasol with operations in South Africa and Germany, SADAF of Saudi Arabia, a 50 : 50 joint venture between Shell of the UK and The Netherlands and the Saudi Arabian Basic Industries Corporation, and BP of the UK as well as Equistar in the US. However, on a global scale synthetic feedstocks play a minor role. In 2002, only 5% of overall output was accounted for by synthetic feedstocks, and 95% came from agricultural crops. Given the strong Chapter 6/page 1
Sugar Trading Manual interest in fuel ethanol production worldwide this share can be expected to grow in the future. Another distinction of importance in the field of ethanol is the one between anhydrous and hydrous alcohol. Anhydrous alcohol is free of water and 99% pure. This ethanol may be used in fuel blends. Hydrous alcohol, on the other hand, contains some water and usually has a purity of 96%. In Brazil, this ethanol is being used as a 100% gasoline substitute in cars with dedicated engines. The distinction between anhydrous and hydrous alcohol is of relevance not only in the fuel sector but may be regarded as the basic quality distinction in the ethanol market. The final distinction necessary in order to understand the dynamics of the world ethanol market is by end-use. Certainly the oldest form of use of alcohol is that of a beverage. The most important market for ethanol as an industrial application is solvents. Solvents are primarily utilized in the production of paints and coatings, pharmaceuticals, adhesives, inks and other products. Ethanol represents one of the most important oxygenated solvents in this category. Production and consumption is concentrated in the industrialized countries in North America, Europe and Asia. It is the only market where synthetic ethanol producers hold a significant market share. The last usage category is fuel alcohol. As mentioned before, fuel alcohol is either used in blends, for example in gasohol or diesohol, or in its pure form. However, at present Brazil is the only country that uses ethanol as a 100% substitute for gasoline. Figure 6.1 shows that the beverage alcohol market is the second smallest of the three. Moreover, it is the one showing the lowest rate of growth. Demand for distilled spirits in most developed countries is stagnating or even declining, owing to increased health awareness. This is unlikely to change in the future. The production and use of industrial alcohol is the smallest segment and not very dynamic either. This category grows more or less in line with the gross domestic product. The history of ethanol as a fuel dates back to the early days of the automobile. However, cheap petrol quickly replaced ethanol as the fuel of choice, and it was not until the early 1980s, when the Brazilian government launched the Proalcool programme, that ethanol made a comeback to the marketplace. It is estimated that fuel ethanol accounts for roughly 70% of world ethyl alcohol production in 2003. As can be seen from Fig. 6.1, this share is forecast to rise to over 80% by the end of the decade. However, this projection only holds if the sometimes ambitious fuel ethanol programmes proposed in the last couple of years come to fruition. Therefore, the figures presented here represent more a potential than a hard forecast. Chapter 6/page 2
World fuel ethanols – analysis and outlook 90 000 80 000
Million litres
70 000 60 000 50 000 40 000 30 000 20 000 10 000 0 1975
1980
1985
1990
Fuel 6.1
1995
Industrial
2000
2005
2010
Beverage
Ethanol production by type.
Ethyl alcohol as an automotive fuel can be used in two ways: first, it replaces gasoline outright in dedicated internal combustion engines and, secondly, it is an effective ‘octane booster’ when mixed with gasoline in blends of 5 to 30%. In this case no engine modifications are required. These blends achieve the same octane boosting or antiknock effect as petroleum-derived aromatics like benzene or metallic additives like lead. Ethanol easily blends with gasoline but not with diesel. If the diesohol blend is to obtain more than 3% ethanol special emulsifiers are needed. The distribution of fuel ethanol poses some difficulties because of its solvency effects and ethanol’s affinity for water. Ethanol is capable of dissolving substances accumulated in pipelines, storage tanks and other components of the distribution system, thus introducing impurities into the fuel. These substances are insoluble in gasoline. Ethanol’s affinity for water can lead to phase separation of blended alcohol gasoline fuels, resulting in engine damage or poor vehicle performance. Phase separation is a function of water content, ethanol content, temperature and properties of the gasoline. Therefore, fuel ethanol in Brazil or the US is mainly transported in rail cars, barges or trucks rather than by pipeline. Blending occurs in the tanker truck at the distribution terminal prior to distribution to service stations.
Success factors Despite these shortcomings fuel ethanol production and use is expected to rise strongly and it will go along with an ever wider geographical spread. Ten years ago, there were only a handful of Chapter 6/page 3
Sugar Trading Manual countries producing ethanol. The largest was Brazil, where ethanol is produced from molasses and sugar cane juice. The US produces mostly corn alcohol and in France sugar beets are being used. In some African countries, sugar cane was processed into fuel alcohol. In 2003, there are some 13 countries spread over all five continents that actually use ethyl alcohol as a fuel component. Looking into the future, the world fuel ethanol map may look like this in ten years’ time: the Americas are likely to be almost completely covered by fuel ethanol programmes. Moreover, the green fuel will likely be firmly established in the European Union as well as in India, Thailand, China, Australia and possibly Japan, to name the largest nations. What are the reasons for the overwhelming success of fuel ethanol? As it is competing with gasoline, a direct comparison between the two products is possible. Because ethanol is invariably more expensive to produce than gasoline, if actual market prices are taken account of, political objectives come into play. Ethanol has been promoted because it has a positive net energy balance, meaning that the energy contained in a tonne of ethanol is greater than the energy required to produce this tonne. Moreover, it has been demonstrated that it has a less severe impact on the environment than conventional gasoline or other petroleum-derived additives. As such it is also less dangerous to health. From a macro-economic point of view, it is thought to be good for the development of disadvantaged rural areas by promoting an industry that creates jobs. Furthermore it can help to reduce the dependence on oil imports and, finally, it may be regarded as a means to promote advances in biotechnology, particularly given all the research that is going on in the biomass-to-ethanol sector. Examining the biofuel programmes that are already in existence, there are two key success factors to be considered: • the abundance and cheapness of feedstocks used for their production, together with the technology involved and • a supportive political framework.
The feedstock issue Taking the feedstocks issue fuel first, according to the F.O. Licht’s 2003 survey, around 61% of world ethanol production is being produced from sugar crops – sugar beet, sugar cane or molasses – while the remainder comes from grains – maize or corn is the dominating feedstock. Feedstocks crucially determine the profitability of fuel ethanol production. There are various ways to look at the issue. In Fig. 6.2, the theoretical per ha ethanol yields of the three major feedstocks currently in use are plotted. In the USA, corn (maize) is the predominant raw material for fuel ethanol production. The ethanol yields per ha are the lowest by comparison. A middle position is held by sugar cane in Brazil but the Chapter 6/page 4
World fuel ethanols – analysis and outlook
USA (corn)
Brazil (cane)
France (beet)
0
1000
2000
3000
4000
5000
6000
7000
Production (litres/ha)
6.2
Ethanol yields per ha.
USA (corn)
Brazil (cane)
France (beet)
0
50
100
150
200
250
300
350
400
Production (litres/tonne)
6.3
Ethanol yields per tonne of feedstock.
highest ethanol yields per ha may be realized with sugar beets, particularly if calculations are based on the rather high yields that may be achieved in the EU’s leading producer, namely France. However, if we look at the factor productivity of the various ingredients (Fig. 6.3), we can see that corn clearly takes the top spot, with almost 400 litres of ethanol produced per tonne of feedstock. Sugar cane has an even lower factor productivity than sugar beet. If we look at the gross feedstock costs per gallon of fuel ethanol produced, sugar cane grown in the Centre-South of Brazil clearly leaves the rest of the competition behind (Fig. 6.4). Note that these are gross feedstock costs, which means we do not take account of the revenue stream from the sale of co-products. These may reduce the costs of feedstocks for ethanol production considerably. Making a preliminary assessment concerning the role of feedstocks in biofuel production, leaving aside biomass as a feedstock, the raw Chapter 6/page 5
Sugar Trading Manual
France (beet )
Brazil (cane)
USA (corn)
0
5
10
15
20
25
30
US cents/litre
6.4
Gross feedstock cost per litre of ethanol.
material accounts for around 70 to 80% of the overall costs of fuel ethanol. Therefore, their relative abundance plays a crucial role in getting the fuel alcohol industry started in a particular country. The highly regulated price of sugar beet in the case of the European Union may have acted as an obstacle to the emergence of a viable largescale ethanol industry there. This may change in the future, not least because of developments in the political sphere.
Political support Critics often ask why biofuels must be supported by the state. If fuel ethanol is such a great product, so they say, then it surely will gain market share without any government help. This argument is very much dependent on the assumption that the energy markets work perfectly. That would means, among other factors, that there are no powerful vested interests, there is no cost associated with market entry and that all consumers immediately understand all relevant product information. In the energy market, and in fact, in almost any market, these conditions are insufficiently met and, therefore, an active policy approach may be justified. There is growing consensus that fuel ethanol may serve a multitude of goals that are socially desirable. At the same time, as a fuel, it is invariably more expensive to produce than, for example, gasoline. Or, seen from another angle, ethanol faces an unfavourable opportunity cost structure. The opportunity cost for ethanol production from, for example, sugar crops like cane or beet, is the return otherwise achievable if these feedstocks were used to produce sugar. So, if policyChapter 6/page 6
World fuel ethanols – analysis and outlook makers decide that ethanol is a desirable good they have to find ways to bridge the gap between the cost of ethanol and that of gasoline, and they have to make ethanol production more attractive as compared to the manufacture of, say, sugar. There are various ways to achieve that. It may be useful to distinguish between the various stages in the production and marketing process where subsidization may occur. For this end one can distinguish between input subsidies and output subsidies. Under the former category, one may include measures like feedstock price support (which results in prices below the going market rate), capital cost support (in the form of cheap loans and debt cancellations) and income tax concessions. On the output side the most widely employed forms of support are excise tax concessions, which make the product cheaper than would have been the case otherwise, so-called captive or mandated markets, which ensure sufficient demand for the product, price guarantees and direct price support measures.
Ethanol support schemes – a regional analysis To fill these rather theoretical concepts with some substance, let us review the effects of the various support schemes employed in the major ethanol producing countries, starting with Brazil, the worldwide leader in both production and consumption.
Brazil In the mid-1970s, the government of Brazil launched the National Fuel Alcohol Program or Proalcool, which aimed at increasing the share of domestically produced fuels in the country’s fuel pool. Employing various forms of support, the program proved to be spectacularly successful. By 1980, ethanol had a larger market share in the transportation sector than gasoline (Fig. 6.5). Even though the lead has been lost since then, ethanol has managed to keep a significant market share in this segment until today. In fact, owing to the high gasoline prices in 2001 and 2002, the market share of ethanol has increased further and is likely to continue to do so in 2003. Over the period from 1975 to 2002, fuel ethanol use helped to replace around 210 bn litres of gasoline, saving the country around $52 bn. With the liberalization of hydrous alcohol prices in 1999, government intervention largely stopped. Today, authorities regulate the market through changes in the blending rate for anhydrous alcohol and occasional purchases for or sales from strategic reserves. At the same time, ethanol enjoys a tax advantage over gasoline. However, these may be regarded as very minor interventions only. Chapter 6/page 7
Sugar Trading Manual 100 80
%
60 40 20 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Ethanol
6.5
Gasoline
Ethanol vs gasoline market shares in Brazil.
70 60
%
50 40 30 20 1998 1999
2000
2001
2002
2003
Price advantage of alcohol over gasoline
6.6
Brazil: ethanol vs gasoline economics.
There are calculations that put the average cost of fuel ethanol production in Brazil at around 50 cents per gallon, making the product highly competitive against gasoline. This competitiveness may be gleaned from Fig. 6.6. Since the liberalization of the ethanol markets, fuel alcohol had a price advantage over gasoline of at least 33%. The attractive price of ethanol from Brazil has resulted in the country becoming the largest exporter of this commodity. In 2002 exports at over 700 million litres were the second highest result in the history of the country, and they are forecast to reach a similar level in 2003. At present, exports are mostly in the form of beverage and industrial alcohol. However, the country expected to ship the first consignments of fuel ethanol for trials to Japan in 2003. Chapter 6/page 8
World fuel ethanols – analysis and outlook 2500
Million litres
2000 1500 1000 500 0 –500 –1000 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Imports
6.7
Exports
Brazil’s ethanol/methanol trade.
What is also obvious from Fig. 6.7 is that Brazil’s export performance has been erratic in the past. Particularly in the 1990s, Brazil was the world’s largest importer of ethanol. At the time the mills in Brazil preferred to produce sugar for export rather than ethanol for the domestic market. In order to compensate for the production shortfall, Brazil imported record quantities of ethanol and methanol from countries such as the European Union, the US and South Africa. In other words, during most of the 1990s the opportunity costs of ethanol production were too high. This prompted millers to concentrate on sugar instead. There are at least two reasons why ethanol production in Brazil is volatile. The first, of course, is the weather. The country’s cane growing region in the Centre-South may be subject to the El Niño and La Niña phenomena, which usually go along with drought and below average sugar cane yields. The last time that a serious drought occurred in the region was in 2000/01 when cane production fell by around 15%. The second reason is the fact that sugar cane serves as a raw material in two different markets. In this context, fluctuations in the production of ethanol may very well be explained with the concept of opportunity costs. To illustrate this consider the value of cane for various uses as shown in Fig. 6.8. The continuous line shows the value of cane per kg of total recoverable sugars where this cane has been processed into sugar for the domestic market. The dotted line shows the value of cane for anhydrous alcohol. For most of the time until early 2003 sugar for the domestic market was only marginally more profitable than anhydrous alcohol. That changed in late 2002, when prices on the domestic sugar market took off and thus lifted the value for sugar cane in this category. The prices of anhydrous alcohol also rose at the end of 2002, but not by the same margin. The situation eased in the first months of 2003. Given this opportunity cost structure a miller would have, for most of the time, preferred sugar production for the domestic market over anhydrous alcohol distilling. Chapter 6/page 9
BRL/kg of total recoverable sugars
Sugar Trading Manual 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 1999
2000
2001 Sugar domestic
BRL/kg of total recoverable sugars
6.8
2002
2003
Anhydrous alcohol
Brazil: ethanol vs domestic sugar economics.
0.35 0.3 0.25 0.2 0.15 0.1 0.05 1999
2000
2001 Sugar exports (VHP)
6.9
2002
2003
Anhydrous alcohol (AAC)
Brazil: ethanol vs exported sugar economics.
However, there is a second market against which anhydrous alcohol has to compete. In Fig. 6.9, the continuous line depicts the value of cane used in the production of sugar for the export market. For most of 1999 and 2000, anhydrous alcohol production has been more profitable than the production for the world sugar market. However, in 2002, the price rise on the world sugar market as well as the repeated devaluation of the Brazilian real turned the situation around so that sugar exports were more profitable than anhydrous alcohol. The returning weakness on the world sugar market towards the end of 2002 and the increasing tightness on the domestic ethanol market reversed the situation again and anhydrous alcohol production was more profitable than sugar exports. Chapter 6/page 10
World fuel ethanols – analysis and outlook Diagrams like these are being constantly monitored by the milling industry in Brazil, and cane is usually allocated to the most profitable end-use. Such a policy ensures that supply deficits in the various markets are being covered relatively quickly. After all, price signals are directly being translated into higher production of the commodity that is in deficit. On the other hand, it may well be that such a flexibility is an obstacle on the way to building a reputation as a reliable and consistent supplier of ethanol. Of course, there are remedies for both factors that influence the level of production. The weather factor can be minimized by spreading sugar cane plantations all over the country. This is being done right now. Brazil is a vast country. Production shortfalls in one part can usually be compensated for by increases in other. The structural volatility factor may be contained by decoupling ethanol from sugar production. This could be facilitated by the construction of dedicated plants that produce ethanol for export. Another way of ensuring sufficient supplies for the export market would be long-term contracts for large volumes, which allow for significant economies of scale at the plant. This, in turn, could compensate for a possibly lower profitability when compared with sugar.
United States The second largest exporter of ethanol in 2002 was the United States. Ethanol producers in the US distilled a record quantity of more than 8 bn litres in 2002, mostly derived from corn (see Fig. 6.10). This record
60
20 000
40 California 30
10 000
20
Clean Air Act 5 000
10 0
0 1980 1984 1988 1992 1996 2000 2004 2008 2012 1978 1982 1986 1990 1994 1998 2002 2006 2010 Tax incentive (Y2)
Output (Y1)
6.10 Timeline for US ethanol. Chapter 6/page 11
Cents/gallon
Million litres
50
RFS
15 000
Sugar Trading Manual is likely to be broken in 2003, when the total may reach 10 bn litres. At the federal level there is a tax incentive in place that aims to promote fuel ethanol production. Additionally, a number of ethanol producing states have introduced incentives of their own. The various tax incentives have certainly helped the ethanol industry in the US get off the ground. However, the real boost came with the introduction of mandated or captive markets in the early 1990s. The Clean Air Act mandated the use of cleaner-burning fuels in the dirtiest US cities. In order to achieve this the legislation enforces the addition of oxygen to gasoline. For a long time petrol-derived MTBE has been the oxygenate of choice but this is likely to change now and explains the amazing growth in recent years. Starting in January 2004, California, the largest US state, has banned MTBE from its fuel pool, opening the way for ethanol. Corn industry groups estimate that it will take about 2.2 bn litres of ethanol to meet California’s demand in 2003, rising to around 3.5 bn litres in 2004. This is more than 15% of world fuel ethanol production. There are several US states that plan to follow the Californian example by banning MTBE. However, policy-makers and industry representatives increasingly come to the conclusion that the reformulated gasoline programme enacted under US clean air legislation is not sustainable in the long run. For example: • The petroleum industry can meet clean air standards without oxygen so there actually is no need for oxygenates like ethanol any longer. • After the ban of MTBE, ethanol would have a monopoly position, which many refiners fiercely oppose. • Moreover, as mentioned before, there are several logistical problems attached to ethanol that could increase the price of fuel. • And finally, advances in auto technology devalue oxygenates. Modern car engines are producing less and less pollution. All these concerns have resulted in the creation of the Renewable Fuels Standard (RFS). Under this piece of legislation, renewable fuels are to grow to almost 20 bn litres by 2012. The policy allows refiners to meet requirements through a credit and trading programme. At the same time the oxygen requirements of the federal reformulated gasoline programme would be abolished and MTBE would be banned. In order to put ethanol on a broader feedstock base there are special promotion programmes for biomass ethanol. Much of the increase in capacity in recent years has been in expectation of both the Californian market and the Renewable Fuels Standard. In case the RFS goes through it is unlikely that the US will become a major exporter of ethanol to the world market. On the contrary, it could require significant amounts to supplement domestic supChapter 6/page 12
World fuel ethanols – analysis and outlook plies, particularly as logistical constraints could drive up the cost of ethanol in the major consuming centres on the coasts. However, it may not be excluded that temporary surpluses could be dumped on the world market.
Canada The prospects for the ethanol industry in Canada improved substantially after the government in Ottawa pledged financial support to the tune of CAD$100 million for the sector in the framework of its Kyoto commitments. Under the plan, E-10 blends are to achieve a 35% market penetration by 2010, a figure that in 2003 terms represents 1.33 bn litres per year. With a CO2 reduction of 40% for grain ethanol, this equates to the replacement of 532 million litres of gasoline or 1.33 megatonnes of CO2, just over one-half of 1% of the 240 megatonnes of GHGs Canada is committed to achieve. At present, Ontario is the only sizeable fuel ethanol producing province in the country, but this could soon change. Following the 15 July 2002 passage of Saskatchewan’s Ethanol Fuel Act mandating the use of ethanol, the government in Regina announced in October a set of phased-in, ethanol-blending rules for gasoline distributors. Phase one of the government’s new blending regulations is set to come into force on 1 July 2004. At that time, a 2.5% minimum bulk average of ethanol will have to be maintained across a distributor’s entire provincial gasoline network. Three months later, the provincial average rises to 5% and on 1 April 2005, it rises to 7.5%. The ethanol mandate has sparked an investment boom and by late 2003 plans for a total of 400 million litres of new capacity had been announced. Besides the mandate the provincial government has granted a CAD0.15 per litre tax break for ethanol manufactured in Saskatchewan. Moreover, distributors are required to source up to 30% of their ethanol from small producers, defined as under 25 million litres per year. Manitoba is also looking at ethanol, considering a mandate for E-10 blends. A subsidy of CAD0.025 per litre could cost the province CAD30 million a year. So far projects for up to 100 million litres are on the drawing board. Manitoba is home to the country’s first fuel ethanol plant: Husky Energy (formerly Mohawk Oil) has been producing green fuels at its 12.5 million litre distillery for the last 25 years.
European Union Fuel ethanol production in the European Union has not really taken off yet. However, it may do so in the next couple of years. The main drivers will be two biofuel directives by the European Commission. The first directive, which is promotional in nature, was approved in May 2003. Chapter 6/page 13
Sugar Trading Manual 4500 4000 3500 000 hl
3000 2500 2000 1500 1000 500 0 1991
1993
1995
France
1997
Spain
1999
2001
2003
Sweden
6.11 EU ethanol production.
Member states will now have to try to achieve a 2% share of renewables by the end of 2005 and a 5.75% share by end-2010. As a basis for reference, the energy content of all gasoline for transport placed on the market will be used. The second directive relevant for biofuels is the one on taxation of energy products. This one will most likely be adopted before the end of 2003. Under this directive member states will be able to exempt biofuels, such as ethanol, from the tax on mineral oil products. As shown in Fig. 6.11, presently there are three fuel ethanol producers in the EU, namely Sweden, Spain and France. France has for a long time dominated the market but Spain now produces somewhat more. Nevertheless, if we compare the status quo with what must be achieved under the directive it is obvious that member states must undertake tremendous efforts to reach the set goals (see Fig. 6.12). However, under the current directives there are several loopholes. Therefore, this figure shows the maximum potential and not what is likely to be achieved. However, the Commission has the authority to change the ‘indicative’ targets into ‘mandatory’ ones if it regards the reason brought forward for non-compliance as not sufficient. Finally, it is possible that the European Union will require some imports in order to sustain the programme. In the past the EU has been a net exporter, mostly of wine alcohol, which was processed in the Caribbean and then used as motor fuel in the United States. However, this wine alcohol is now increasingly being used on the domestic market in biofuel applications. Therefore, the EU’s surplus will disappear in the future and the Community is likely to become a net importer. Chapter 6/page 14
World fuel ethanols – analysis and outlook 120 000 100 000
000 hl
80 000 60 000 40 000 20 000 0 1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
EU total
6.12 European Union: target ethanol production to 2010.
India India’s transport sector is growing rapidly and presently accounts for over half of the country’s oil consumption, while the country has to import a large part of its oil needs. Hastening interest in an ethanol programme was the country’s sugar glut (part of which the industry is now exporting to the world market) and burgeoning supplies of molasses. The Indian sugar industry had lobbied the government to embrace a bio-ethanol programme for several years, emphasizing that producing fuel ethanol would absorb the sugar surplus and help the country’s distillery sector, presently burdened with huge overcapacity, and also allow value-adding to by-products, particularly molasses. In December 2001 India’s Minister for Petroleum and Natural Gas gave his approval to a proposal to launch pilot projects to test the feasibility of blending ethanol with gasoline. In mid-March 2002 the government decided to allow the sale of E-5 across the country. On 13 September 2002, India’s government mandated nine states and four federally ruled areas to sell E-5 by law from 1 January 2003. In response India’s sugar producers reportedly planned to build 20 ethanol plants before the end of 2003 in addition to 10 plants already constructed. Most of the plants were being constructed in Uttar Pradesh, Maharashtra and Tamil Nadu, the key sugar producing states, and will chiefly use cane sugar molasses as a feedstock. Estimated annual ethanol needs for a E-5 blend is 0.37 bn litres. A 10% blend increases the need to 0.72 bn litres. This is against installed annual production capacity of 2.7 bn litres/year and annual consumption of 1.5 bn litres. These figures have to be treated with some caution. The chemical industry, fearing higher ethanol prices as a result of the Chapter 6/page 15
Sugar Trading Manual fuel alcohol programme, usually estimates the surplus to be much lower or even non-existent. The sugar industry, on the other hand, estimates capacity at 3.2 bn litres, inflating the surplus. The success of ethanol in India will depend to a significant degree on pricing. The sugar industry originally claimed that it could provide ethanol at 19 rupees per litre ($0.38/litre), which is at a lower cost than the product it would substitute, MTBE, which costs Rs 24–26 per litre ($0.49–0.53/litre). The oil industry, however, is seeking parity between ethanol and the price of gasoline on an ex-refinery or import basis. In April 2002 the government announced a Rs 0.75 excise duty exemption. Implementation of the excise duty for ethanol, however, was delayed until February 2003, because the chemical industry opposed it, fearing higher prices and shortages of alcohol. However, pricing appears to becoming a stumbling block, and in June 2003 India’s Petroleum Ministry announced that it would appoint a Tariff Commission to fix an appropriate price for ethanol sourced from sugar mills. Ethanol pricing in India is also complicated by differences in excise duty and sales tax across states, and the central government is trying to rationalize ethanol sales tax across the country. More significantly, perhaps, there are still substantial differences in the profitability of potable alcohol as against fuel alcohol and in several states. Consequently, insufficient fuel alcohol is being produced to meet demand. Other states have yet to set up sufficient production capacity. Analysts suggest there is a deficit of around 150 million litres under the current geographic base to the fuel ethanol programme, a deficit that will grow once the mandated blending requirement is extended to all states in India. Consequently, there may be a short-term market for imported Brazilian ethanol.
Thailand Thailand’s interest in establishing a large-scale bio-ethanol industry using feedstock such as cassava, sugar cane and rice was manifested in September 2000, and reflects the nation’s rising import bill for oil (the country is 90% reliant on imports) and high energy prices, which were adversely impacting the economy at that time. At the same time low prices for commodities such as sugar and cassava were a matter of concern for the government. The Thai government moved swiftly in supporting the ethanol opportunity with an oil import bill as the decisive reason for pursuing the bio-ethanol programme. More recently, the role of ethanol in replacing MTBE has been offered as another justification for the ethanol programme. The National Ethanol Development Committee has estimated that if 10% ethanol were blended with petrol or diesel, to
Chapter 6/page 16
World fuel ethanols – analysis and outlook replace MTBE, about 2 million litres of ethanol would be required on a daily basis. In order to encourage Thai manufacturers to develop and market gasohol the Finance Ministry will waive the excise tax on gasohol as well as contributions to the State Oil Fund and Energy Conservation Fund. Furthermore, to encourage investment in new capacity, promotion privileges are to be given by the Board of Investment. Tax privileges will be granted, including duty exemptions on machinery imports and an eight-year corporate tax holiday. The Ministry of Industry calculates the gasoline/ethanol blend would be 0.7–1.0 Baht/litre (US$0.01–0.02/litre) cheaper than conventional gasoline. Late in 2001, eight private companies were granted licences by Thailand’s Ministry of Industry to build ethanol production plants. The plants had a capacity to produce 1.5 million litres of ethanol a day, or an annual capacity of around 0.495 bn litres. Four plants would use molasses as a feedstock and the others would use cavassa (tapioca). Five of the plants were expected to start production late in 2002 with a combined annual output of 114 million litres. However, progress in constructing the plants faltered, and by mid-2003, only one distillery had advanced to construction stage and many had not submitted feasibility plans.
China China is now home to the world’s largest fuel ethanol plant. The Jilin Tianhe Ethanol Distillery has an initial capacity of 600 000 tonnes a year or 2.5 million litres per day. Potential final capacity can be raised to 800 000 tonnes per year. Ground-breaking took place in September 2001 and by late 2003 the first trials had started. In November 2002 construction on a plant designed to produce 300 000 tonnes of fuel ethanol annually started in Nanyang, Henan province. The project, built by the Tianguan Ethanol Chemical Group Co Ltd (TICG), is expected to cost $155 million and take two years to complete. Combined with the company’s existing facility, TICG’s total fuel ethanol capacity would reach 500 000 tonnes a year. Fuel ethanol has already been in trial use in China for some time. From 2001, Zhengzhou, Luoyang and Nanyang in Henan as well as Harbin and Zhaodong in Heilongjiang province have been experimenting with ethanol as a vehicle fuel. China is promoting ethanol-based fuel on a pilot basis in five cities in its central and north-eastern regions, a move designed to create a new market for its surplus grain and to reduce oil consumption. The promotion of ethanol as a fuel has been approved by the State Planning and Trade Commission and the State Development and Planning Commission.
Chapter 6/page 17
Sugar Trading Manual Australia The sugar industry in Australia first identified development of a canebased fuel ethanol sector in the year 2000 at a time of significant financial hardship. The production of fuel ethanol was identified within some sections of the industry as one potential course to broaden the financial base and improve the sector’s financial returns. The proponents argued that a fuel ethanol industry could be established without building a new infrastructure, as distilleries could be annexed to existing sugar mills. Calls for assistance to plan a viable and sustainable ethanol industry heightened in 2002 following the return to low international prices for sugar. The Federal Government early in 2000 moved to exempt ethanol from fuel excise of around AUD0.38/litre (US$0.21). Moreover, it set an objective that fuel ethanol and biodiesel produced in Australia from renewable sources would contribute at least 350 million litres (or one per cent) of the total fuel supply by 2010 (progress towards the objective will be reviewed in 2006), as against 40 million litres of mostly grain-based ethanol produced presently. It also supported two ethanol projects (via capital subsidies) in the context of its policy response to curbing greenhouse gas emissions (the Greenhouse Gas Abatement Programme). One is based at a sugar mill in north Queensland, which intends to use molasses and sweet sorghum as feedstocks. The other was an ethanol blending facility in Brisbane at BP’s Bulwer Island refinery, which, from May 2002, produced a 10% ethanol/gasoline blend. However, the company ceased producing the blend (February 2003) because of consumer fears over the possible danger to car engines. Even so, another oil major, Caltex Australia, started a six-month ethanol blend trail (E-10) in May 2003 in the city of Cairns, using ethanol from sugar cane, to test the extent to which consumers would shift to the blend. In September 2002, the government altered the way it was supporting the nation’s ethanol industry. The fuel excise exemption (amounting to around AUD0.38/litre) was ended and in its place an ethanol production subsidy at the same rate for ethanol used in petrol was implemented for one year. Importantly, the change in support policy raises the cost of importing ethanol, thereby strengthening the level of assistance to the local industry. In May 2003, the government acted to extend the subsidy for ethanol producers to 30 June 2008. At the same time it set a 10% limit on the blending of ethanol with petrol in conjunction with mandatory labelling of ethanol blends. Together with the six-year continuation of the ethanol subsidy, a AUD50 million support package approved in August 2003 has considerably brightened the prospects for the establishment of a substantial cane-based fuel ethanol industry in Australia. Chapter 6/page 18
World fuel ethanols – analysis and outlook Peru and other Latin America In summer 2002, the Peruvian government announced the country’s plans to become a leading ethanol exporter. Under the so-called Megaproject the country proposes to construct a pipeline from the central jungle in the north of Peru to the port of Bajovar. Under the project up to 20 distilleries will be built, which all plan to use sugar cane juice as a raw material. The overall investment costs are estimated at around $200 million. Peru is planning that by December 2004 it will begin exporting the first lots of ethanol to California. Under the first stage of the project, some 100 million litres will be exported by 2005, rising to 1.2 bn by 2010 (see Fig. 6.13). In order to sustain the project, the country plans to introduce up to 240 000 ha of sugar cane in jungle areas, now home to the production of much of Peru’s coca leaf. This is used to make cocaine of which Peru is the world’s second biggest producer. The government hopes that coca farmers will see that sugar cane growing is a much more profitable enterprise. In September 2001, the Colombian government approved a law that will make mandatory from 2006 the use of 10% ethanol in fuel in cities with populations larger than 500 000 inhabitants. According to the Ministry of Agriculture, this programme will require the cultivation of an additional 150 000 ha of sugar cane. This compares with the present area under cane for sugar production of around 200 000 ha. Another 230 000 ha under cane are used for the production of non-centrifugal sugar, in Colombia’s case panela. In order to supply the domestic market nine new ethanol plants have to be built from scratch to achieve the required production capacity of around 1 bn litres a year. In order to attract sufficient investment, the country will completely exempt 0
000 litres
–200 000 –400 000 –600 000 –800 000 –1 000 000 –1 200 000 –1 400 000 2004
2005
2006
2007
2008
2009
2010
Exports
6.13 Peru: export potential under the Mega-project. Chapter 6/page 19
Sugar Trading Manual ethanol from the tax on gasoline, which would result in a significant price advantage for the green fuel. At present it is difficult to gauge whether the investment drive in Colombia will result in any surplus capacity. The Association of Central American Countries is also looking at the possibility of producing fuel alcohol. Total output by 2010 is expected to reach around 500 million litres, which would allow for a 10% ethanol blend in gasoline. However, the association is also considering diversifying its export markets. At the moment, Costa Rica, Jamaica and El Salvador are exporting fuel ethanol to the United States under the Caribbean Basin Economic Recovery Act. Under this scheme these countries may import raw alcohol and re-export it duty-free to the US.
World ethanol trade flows now . . . How will all this translate into world ethanol trade flows? It may be useful to summarize the last 15 years of fuel ethanol trade in order to be able to assess the fundamental change that might be expected in the future. Fuel ethanol trade in the 1990s and in the early years of the new millennium was a rather minimalistic affair. There was a regular trade flow of wine alcohol from the European Union to the countries of the Caribbean, where this product was refined and then shipped on to the United States as motor fuel. The second trade flow, which lasted for a couple of years only in the mid-1990s, consisted of synthetic alcohol and methanol from South Africa to Brazil. Moreover, Brazil imported considerable amounts of corn alcohol from the US to bolster its domestic supplies. As mentioned earlier, in the mid-1990s the Brazilian sugar millers found the economics of sugar production much more profitable than that of ethanol. As a result, they had to import large quantities of alcohol to cover domestic needs.
. . . and in the future How could the world trade in fuel ethanol look in the future? Starting with the Americas, Latin America is likely to continue to lead the world in fuel ethanol production. This may be explained by the high yields in sugar cane production and the fact that many of these economies are agriculturally based. A number of projects in Latin America, such as in Peru, Colombia or the Central American states, have already been mentioned. We may see large trade flows from South America to North America in general, and California in particular. Another trade flow may be directed at the Asian/Pacific region, and here Japan and possibly South Korea could take a leading position. Moreover, there is the possibility of a developing an export flow from South America to the
Chapter 6/page 20
World fuel ethanols – analysis and outlook European Union. As mentioned earlier, the European Union could develop into a net importing country if the Commission’s directives are implemented. Several countries in Latin America enjoy duty-fee access to the European market, and they would be in a prime position to act as suppliers. A third trade flow in the Americas will consist of raw alcohol from Brazil to the Caribbean and onwards to the US. This sort of trade is likely to continue as long as Brazil does not enjoy duty-free access to the US under the Free Trade Area of the Americas. Southern Africa is another potential supplier to the world market, also because of relatively high sugar cane yields and some underutilized areas. Several South African countries also enjoy duty-free access to the European Union and, therefore, some quantities may go there. Another potential export market for distillers in sub-Saharan Africa could be the Far East. In Asia, India, Thailand and Australia may emerge as smaller to medium-sized exporters, with South Korea and Japan on the importing side. It has to be emphasized that this is a future scenario, and it cannot be expected that this structure would emerge before the end of this decade. However, if all the ambitious goals formulated in the various biofuel programmes around the world are implemented, there is tremendous scope for growth, not only on the domestic market but also in export markets. In Fig. 6.14 the growth in fuel ethanol trade under very optimistic assumptions is forecast. Most optimistic seems to be that Japan would indeed source all its ethanol requirements from the world market first in order to produce E-5 and, at the end of the Kyoto period, even
10 000
Million litres
8 000 6 000 4 000 2 000 0 2005 Other
2006
2007 Japan
2008
2009 USA
2010
2011
2012
Europe
6.14 Projected ethanol imports by country (optimistic scenario).
Chapter 6/page 21
Sugar Trading Manual 10 000
Million litres
8 000 6 000 4 000 2 000 0 2005
2006
2007
2008
Fuel ethanol
2009
2010
2011
2012
Other
6.15 Projected ethanol imports vs beverage and industrial ethanol trade (3% growth).
E-10. For the US we assumed that the RFS would go through and that the country would source about 5% of its demand from overseas. The strong growth in requirements in Europe would mean that nations there would have to source at least 5% of their requirements from imports. Other countries that might need fuel ethanol from the world market comprise, among others, China, South Korea and Taiwan. To put this development into perspective it might be useful to compare it with what would have normally been traded on the world ethanol market assuming an optimistic rate of growth of 3% (see Fig. 6.15). It is obvious that with the emergence of fuel ethanol on the market the total would immediately be equivalent to a third of world ethanol trade. By 2009, it would be double the trade volume in industrial and beverage applications. This is quite a task even if we assume that the complete volume may not be reached. However, as a possibility this forecast provides a benchmark against which strategies in the exporting countries as well as in the importing nations will have to be matched. Of course, such a strong increase in import requirements would have to be preceded by an increase in output. Indeed, there are several projects under way that could facilitate such a development. From Fig. 6.16 it may be gleaned that most of the growth will occur in the United States under the Renewable Fuels Standard. Growth would also be strong in Brazil, mostly because of promise in the export market. The EU will be the third largest producer of fuel ethanol by 2005, with rates of growth considerably above those seen in Brazil and the United States. Chapter 6/page 22
World fuel ethanols – analysis and outlook 60 000
Million litres
50 000 40 000 30 000 20 000 10 000 0 1975
1980
1985
1990
1995
EU
Australia
India
Thailand
China
Colombia
Peru
Central America
Canada
USA (fuel)
Brazil (fuel)
2000
2005
6.16 Projected ethanol production by country.
Conclusions Fuel ethanol will not go away in the foreseeable future. On the contrary, world production is set to continue to grow vigorously at least up to 2012. There are various fuel ethanol projects in the pipeline around the world and, even though their implementation may be delayed, there is enough momentum in the political arena to push them through. Political support is there, and in many instances the industry and the authorities are very close to reaching an agreement over a viable framework of support for fuel ethanol. World trade is likely to grow as well but the rate of growth will depend on several factors. First is the economics of sugar and alcohol, as has been illustrated in the case of Brazil. Unless the strong link between sugar and alcohol production can be severed an additional element of volatility will be present in the equation. The same applies to the corn and corn products market in the United States, even though this relationship is not very obvious at present because of the depressed state of the corn sweeteners market. Before significant increases in ethanol exports can be expected, new investments in the originating nations will have to be made. It cannot be expected that the sugar and alcohol producers will be able to make these investments by themselves. Instead, a new partnership between the producers and the importers will have to be created in order to provide the significant funds required to facilitate this growth. Moreover, a viable trading system would have to be established. A futures market in particular would be required to provide the possibility of hedging against price fluctuations. There can be little doubt that Chapter 6/page 23
2010
Sugar Trading Manual the big futures markets in London or New York would be willing to create such a contract provided there were assurances of sufficient liquidity in the market to make it sustainable. Finally, the problem of subsidized production and exports would have to be resolved. At the moment, the fact that fuel ethanol is being subsidized almost anywhere in the world provides a powerful justification for high import tariffs in order to neutralize these subsidies. In fact, potential producers in the European Union argue strongly in favour of high import tariffs so that the fledgling industry in the Community can establish itself. However, if this notion forms the basis for future policymaking there is every reason to be pessimistic about the prospective development of world trade. Without an effective system of international exchange fuel ethanol supplies are bound to be volatile, resulting in fluctuating prices and consumer uncertainty. Despite these controversies the outlook for fuel ethanol is bright, and strong rates of growth in both production and trade can be expected for the next several years.
Chapter 6/page 24
Part 3 Physicals
7 Sugar pricing Robin Shaw Samer Darwiche Cargill International SA, Geneva
The futures component (Robin Shaw) Leaving it to chance Sellers’ executable orders (SEOs) Against actuals (AA) Options on futures
Physical premiums or discounts (Samer Darwiche) The basis Delivery rules Importers/exporters grouped by region Finding the fair basis for each origin of sugar Trading opportunities Conclusion
The price of all world market sugars can be related to the futures markets. This means that the price of any particular world market sugar, at any time, for any shipment period, is composed of two elements: the price of the related futures and the premium or discount of that sugar to that futures price. A producer may say to himself that he wants to sell 10 000 tonnes of his sugar at $300.00 per tonne for example, but what he is really saying is that he wants to sell that sugar when the futures price and the differential of his physical sugar to the futures price reach $300.00 per tonne. If, when he decides that he wants to sell his sugar (say, EEC whites fobs Northern Europe, for March shipment), the futures price of March London is $290.00 per tonne and the premium for EEC whites over March London is $5.00, then he is saying that he needs the futures and/or the premium to go up by $5.00 per tonne. The futures price and the differential move separately; indeed they tend to move in opposite directions. When futures prices are high, premiums tend to be low and vice versa. It is therefore usually desirable to fix these two elements, the futures component and the differential component, separately. We will look firstly at the futures component and, secondly, at the premium or discount. However, for any importer – or indeed any exporter that sells to their customers on ‘a cost and freight basis’ – the other component of price is the freight. This is a market in its own right with its own supply and demand that depend as much on the movements of other commodities, such as coal and steel, as they do on sugar flows. Similarly, the price of the sugar will also depend on its quality. We will look at both these components in Chapter 8, Freight, and Chapter 12, Sugar quality.
The futures component The futures component is, usually, both the largest component of the total price and the most volatile. It is the element which therefore most deserves attention. In the example cited above (a producer who has EEC white sugar for March shipment to sell), the seller may be content with the current premium ($5.00). He could then sell his 10 000 tonnes, usually to a trade house, at a premium of $5.00 per tonne over March London futures. How will he then fix the futures component? There are several solutions:
Leaving it to chance A seller (or a buyer) may not wish to be the one who makes the decision as to when to sell (buy) the futures: he may fear criticism if he is wrong, or he may wish to be seen to be selling strictly ‘at the market’, without any element of decision-making. In that situation the seller Chapter 7/page 1
Sugar Trading Manual could, having made the sale as above, agree with his buyer that the futures element will be the average of the March London closing prices on or around the date of shipment, or any other date, to which average price will be added the agreed premium (in our example $5.00). If that average price is say $295.00, then his sale price will be $295.00 + $5.00 = $300, etc. However, this non-decision-making method is rare and usually restricted to government organizations. More usually the seller (or buyer) wishes to follow the market and choose himself when he fixes the futures. The basis of all methods of price-fixing is that at some stage the seller will sell futures or cause futures to be sold, and (possibly at a later stage) transfer this sale of futures to his buyer. To look at each method in turn:
Sellers’ executable orders (SEOs) Still following the above example, the seller, having agreed a sale of 10 000 tonnes EEC white sugar, for March shipment, at a premium of $5.00 over March London futures, would then follow the market, and when the price reaches a level which is acceptable to him, the seller, he will give orders to his buyer (the trade house) to sell futures at that level. Say that level is $295.00: obviously the trade house cannot sell March futures at $295.00 if the market is below. But if March futures trade at $295.10 or higher during the validity of the seller’s order, then the trade house is obliged to still execute the order. Say the seller’s order is to sell 20 lots (1000 tons) at $295.00 if, on that day, March trades at $295.10, then the trade house will sell those 20 lots at $295.00. It is worth noting that the trade house will sell these lots for his (the trade house’s) account. The trade house will confirm the execution to the seller and, at that stage, the price for 1000 tons out of the 10 000 tons contract has been fixed at $295.00. The seller continues to follow the market, giving orders to the trade house and, before the expiry of the futures contract, the total tonnage of futures will have been sold. The weighted average price of these sales, to which is added the agreed physical differential, will constitute the contract price, e.g., if the average futures executions is $297.50, then the contract price will be $302.50. This method is simple for the seller since he does not have to carry a futures position (with the deposits and margins which that would entail). He is free to follow the market and judge for himself when to fix (sell) the futures component of his contract. He is assured of a fair execution since he can insist on an execution if the market trades above his price level. Exactly the same principle applies, in reverse, for a buyer of physical sugar: he agrees the premium with the trade house and then gives Chapter 7/page 2
Sugar pricing orders to that trade house to buy futures. The resulting average purchases of futures, plus or minus the differential, determines the contractual price of his purchase of sugar. Various complications have developed which are designed to give the seller more flexibility: for example, it might be agreed that the seller has the right, having fixed (sold) some tonnage, to be able to instruct the trade house to buy it back. Usually this would only be allowed if the futures price is showing a profit. Also, the trade house would usually insist on some remuneration for itself, since it is allowing the seller (or buyer) to ‘play the market’, whereas the trade house is carrying the margins/deposits etc. It is reasonable to have the flexibility to sell and buy back since, if it was a good idea to sell at a certain level, it may be a good idea not to have sold at a lower level, in other words to buy back with the intention of selling again. Any repurchases obviously cancel the previous sale and the same tonnage has to be resold. Of course the market may not go back up again and the seller, having taken a small profit, may be forced to sell at a lower price and his final level may be worse. It is worth noting what happens from the trade house’s point of view: the trade house, still following the above example, would have sold, for its own account, the 200 lots (10 000 metric tonnes) at the price of $297.50 per tonne and will automatically and simultaneously have fixed the price of its purchase of the physical sugar at $302.50. The trade house will therefore have put into effect what was agreed, namely a sale by the producer to the trade house, at March plus $5.00. The trade house is hedged, meaning it is short of futures and long of physicals. When the trade house comes to sell that physical sugar, say it sells at a fixed price of $310.00 per tonne fobs, when the March futures are at $306.00, it would then buy the futures at $304.00, and its operation will be complete – bought physicals at $302.50, sold physicals at $310, profit $7.50, sold futures $297.50, bought futures $304.00, loss $6.50, to give a net profit on the operation of $1.00 per tonne. It is clear from the above that, to the trade house, it is indifferent if the producer (or, of course, mutatis mutandis, a physical buyer) prices high or low. The trade house is therefore free to attempt to give sincere advice to its counter-party. It has in fact an interest in its seller selling high and its buyer buying low, since this would mean that it, the trade house, holds positive margins which will only be paid out when the sugar comes to be shipped.
Against actuals (AA) Since trade houses often trade physical sugar between themselves, and since they usually do not wish to mix physical trading with speculation, a method has evolved whereby one trade house can sell Chapter 7/page 3
Sugar Trading Manual physical sugar to another one at an agreed differential, while both sides keep perfectly hedged. Put simply, the seller of the physical sugar buys futures from the buyer of the physical sugar. An example makes this clear: following the same example as above, say Trader A sells to Trader B 10 000 tonnes EEC white sugar for March shipment at March futures plus a premium of $5.00 per tonne. At a time agreed when making the contract, this deal will be made effective by Trader A buying from Trader B 10 000 tonnes of March London futures at a given price and that price, plus $5.00, fixes the price of the sale by Trader A to Trader B of the physical sugar. This exchange of futures is called an against actuals transaction or ‘AA’. In a sense the price of the futures is indifferent but, to avoid either side having a margin exposure, the price is usually agreed to be the ruling market price at the time of shipment or at the expiry of the futures month in question, whichever comes first. Say this price is $297.50, then Trader A will have bought from Trader B 10 000 tonnes March futures at $297.50 per tonne and Trader A will have sold to trader B the 10 000 tonnes of physicals at $302.50 per tonne. Both parties are perfectly hedged. The principle of all price-fixing methods is to separate the ‘futures component’ from the ‘differential’ (premium or discount) component. Each party is therefore free to fix the futures component when he chooses to. This leaves buyer and seller free to concentrate on agreeing all terms (quality, shipment, etc) without having to look over their shoulders to see if the underlying futures price is going up or down.
Options on futures Options have become more widely used in the futures markets and options can be used as a method of price-fixing. The principle is exactly the same as for executable orders except that, instead of the producer (or importer) instructing the trade house to sell (buy) futures, it instructs the trade house to sell options. For example, say March New York futures today are at 10.00 cents per lb (c/lb) and a producer of raw sugar may be waiting (hoping) for March to rise to 10.50 c/lb. That producer could, rather than wait passively in the hope of the market rising, instruct the trade house, instead of selling futures, to sell ‘call’ options: for example he might, in the above situation, decide to sell March call options with a ‘strike price’ of 10.50 c/lb. For these options the producer might receive a premium: say, in this example, the premium is 0.30 c/lb. As the reader will see in Chapter 13, Futures and options, this would mean that if, at the expiry of the March options (in the first half of February) March futures are above 10.50 c/lb then these options will be exercised and the producer (or to be exact the trade house who is carrying the executable orders position on Chapter 7/page 4
Sugar pricing behalf of the producer) will have sold the futures at 10.50 c/lb. In that case the same principle as for normal executable orders applies and the physical price will be fixed on the basis of 10.50 c/lb, plus/minus the agreed differential. The producer will retain the 0.30 c/lb premium. If, at the options expiry, March is below 10.50 c/lb, then the options will be abandoned and the producer will not have ‘priced’ and will have to instruct the trade house to sell futures at the market price. The producer will still retain the premium of 0.30 c/lb. The principle is exactly the same as for normal pricing contracts. The decision as to whether it is better to price by options or by ‘straight’ futures is discussed in Chapter 13 concerning options (basically it is a question of whether the premium to be received compensates the producer for losing his ‘freedom’ to price and ‘unprice’ during the life of the option). Naturally exactly the same principle applies to importers, who, in the above example, might be waiting/hoping for the market to go down to 9.50 c/lb and could instruct the trade house to sell 9.50 c/lb ‘put’ options. In that case, at the options expiry, either the put options will be exercised, meaning the importer will have priced (bought futures) or abandoned, meaning the importer would still have to instruct the trade house to buy futures (fix). In both cases the importer retains the option premium. Producers/importers can buy options as a safeguard to a pricing strategy: for example, in a market trading at 10.00 c/lb, a producer might buy 9.00 c/lb put options for a small premium as an ‘insurance’ policy against the danger of the market going below 9.00 c/lb. Similarly, an importer could buy, say, 11.00 c/lb call options as a protection against the market going above his expectations. In both cases the producer/importer would be free, having bought his option protection, to price when he feels that it is right to do so with the ‘safety net’ of being protected at a certain level. One aspect of pricing strategies which are based on ‘buying option protection’ is that it leaves the pricer free to ‘play the market’ more aggressively. An example makes this clear: say an importer buys 10 000 tonnes raw sugar for March shipment, pricing against March New York futures plus/minus the differential, say also that the March shipment at the time is 10.00 c/lb, and say finally that the importer decides at the outset to buy (instruct the trade house to buy) 10 000 tonnes of March 11.00 c/lb call options for a premium of 0.15 c/lb. The importer can then fix (buy futures for trade house’s account) and, if the futures go up, he would be free to resell and take a profit, safe in the knowledge that he is protected at 11.00 c/lb. This is an advantage: as we saw in the first paragraph, an importer reselling without option protection might find himself, having bought at 10.00 c/lb and sold at 11.00 c/lb, having to refix (buy) at 11.50 c/lb. But protection has a price. Chapter 7/page 5
Sugar Trading Manual Another permutation is that an importer might say to a trade house (again when, for instance, the futures are at 10.00 c/lb) that he is happy to fix the price anywhere between 9.00 c/lb and 11.00 c/lb, but he does not want to pay more than 11.00 c/lb. The trade house might then propose a minimum/maximum pricing scheme whereby the trade house guarantees that the price will not be above 11.00 c/lb and, conversely, the importer accepts that the price will not be below 9.00 c/lb. In theory this would mean that the trade house would have granted to the importer a call option at 11.00 c/lb and the importer would have granted to the trade house a put option at 9.00 c/lb. The important point to remember is that all price-fixing methods leave each party free to determine their strategy. However, it is important to have a strategy. As we said at the beginning, the ‘futures element’ of the price is the most important and the most volatile and this vital element can be looked at in isolation from the other components (the differential, which will take into account quality, shipment period, etc). An importer or a producer who simply leaves it to luck and judgement is making a mistake. He should look closely at the futures market. In the writer’s experience it is fatal for growers or consumers to become ‘amateur’ futures traders. However, they must become sufficiently familiar with the principles of trading to understand what can and cannot be done. They can trust the trade house since it actually has an interest in helping them to price their sugar successfully. Price fixing means that trade house and producer/importer effectively become partners rather than adversaries.
Physical premiums or discounts The basis The premium or discount a commodity commands over its futures market is commonly referred to as the basis. Physical commodity merchants and cash traders find it easier to quote commodity prices in terms of basis rather than quoting fixed prices. A white sugar merchant might quote the price of Antwerp white sugar for March shipment at March London white sugar futures plus $5.0 per tonne rather than quote the price at $300 per tonne while London futures were trading at $295.00 tonne. One reason commodity merchants usually quote the basis, rather than a fixed price of a commodity, is because futures prices fluctuate more than the basis over a given period of time. To any newcomer in the business, quoting commodity prices in relation to the reference futures market might seem bizarre. However the concept is not very different, say, from a car dealer who might offer to exchange an old car plus $10 000 for a new car! The car dealer uses Chapter 7/page 6
Sugar pricing the old car’s value as a reference while a commodity trader will use a relevant future as a reference. The advantage of using a future price as a reference is that future prices are transparent and readily available to all market participants. To study the basis one must have a basic understanding of futures markets in general and understand the pertinent rules of the relevant futures market. Such rules are published by the exchange that regulates the futures market (and are dealt with in greater detail in Chapter 14: The exchanges). The majority of commodity futures markets call for a physical delivery mechanism. One noticeable example of a commodity contract which does not call for physical delivery is the Brent future in London. This market is cash settled using published price data for spot deals on a given day. Futures markets calling for physical delivery of a commodity are less prone to price manipulation than futures markets that are cash settled. The possibility of making and taking delivery of the physical commodity helps to ensure the effectiveness of the futures market as a price discovery mechanism. The London white sugar and New York raw sugar futures markets call for ‘free on board stowed’ physical deliveries in the main sugar exporting countries. Unlike the grain futures markets – where the deliverer must provide a warehouse receipt for any tonnage of grain being delivered – the deliverer of sugar can deliver sugar in a port where he does not physically have sugar on the day of delivery. This mechanism makes the sugar futures markets less prone to ‘squeezes’ by receivers trying to take delivery of more sugar than is available at time of delivery. Future prices and price relationships between different delivery months and different related futures (for example, white and raw sugar) summarize the market participants’ forecast for all futures prices and futures price relationships. These forecasts are based on the market participants’ perception of all currently available information. These forecasts will change rapidly as changes occur in the way information is perceived and analyzed or as new supply–demand information emerges. Futures prices and price relationships are affected by the way producers, refiners, traders and consumers react to current market prices and price relationships. For example, should producers consider the future prices of a commodity high, they could increase production, thereby changing the equilibrium of supply and demand. Futures prices and supply and demand are in a dynamic equilibrium; as one element in the equation changes, the other elements adjust to re-establish a new equilibrium. Future prices and price relationships provide a valuable tool for producers, refiners, warehouse operators, traders, lift operators and consumers in making forward plans concerning production, storage and marketing. Market participants use the futures market to Chapter 7/page 7
Sugar Trading Manual establish prices for future delivery and/or to lock in price relationships to minimize the risk of future adverse changes in those prices.
Delivery rules In both the New York and London futures exchanges the deliverer declares the origin(s)/load port(s) in which he wishes to deliver. The deliverer declares the load port(s) after the expiration of the futures contract and the receiver is notified on the first business day after the expiration of the contract of the load port(s) that have been delivered. New York CSCE No. 11 futures: Commodity: Raw cane sugar Delivery points: FOB in any port in the country of origin with minimum 30 feet draft Origins: Australia, Colombia, Brazil, Guatemala, South Africa, Thailand (this is a non-exhaustive list) Packing: In bulk Delivery months: January, March, May, July, October Shipment: Two and a half months starting from the first day of the delivery month Load rate: Basis 1500 long ton (3000 long ton as of May 2003) per weather working day Delivery price: All ports of a deliverable origin are deliverable at the futures price basis 96 degrees polarization London LIFFE white sugar futures: Commodity: Refined white sugar Specifications: Maximum 45 ICUMSA, minimum 99.8 polarization Delivery points: FOBS in a deliverable port in the following regions/countries: European Union, Brazil, Thailand, Guatemala, South Korea, Dubai (this is a non-exhaustive list) Packing: In 50 kg polypropylene or polyjute bags with or without marking at deliverer’s option Delivery months: December, March, May, August, October Shipment: Two months starting from the first day of the delivery month Load rate: Basis 1000 metric ton per weather day Delivery price: The futures price is basis a polyjute bag delivery in a European Union port Under London rules, non-European Union load ports are deliverable at the futures price minus a freight differential. This freight differential is fixed by a freight committee prior to the expiry of the futures month. It Chapter 7/page 8
Sugar pricing is based on a 14 000 tonne vessel freight and is defined as the freight from the deliverable load port to Alexandria minus the freight from Antwerp to Alexandria. Polypropylene bags are deliverable at a discount to the futures price. The polypropylene discount is determined by the exchange prior to the expiry of each future. Since both New York and London futures contracts require the deliverer to declare the origin(s)/load port(s), the futures prices will usually reflect the price of the cheapest readily deliverable origin(s)/load port(s). The deliverer will always want to deliver the cheapest available sugar. This implies that the point of delivery (origin(s)/load port(s)) in the different months may differ. Therefore, when trading sugar time spreads (the relationship between different delivery months) one is automatically trading the relationships between different origins/load ports and the relationships between different qualities/packing/actual load rates in case the different load ports are exporting sugars with different qualities/packing/actual load rates. Below is an example that illustrates the concepts used for trading the basis. In order to help the reader’s understanding of the basis we shall make a few assumptions regarding raw sugar. (These assumptions are unrealistic and serve only for illustration.) The following are the key points of the physical market: 1 There are only two exporters of raw sugar in the world: Thailand and Brazil. 2 There are only three importers of raw sugar in the world: Morocco, Russia and Indonesia. 3 Import duties are identical for all origins of sugars. 4 Importers are totally indifferent as regards to the origin of the sugar they import. The only element that drives the importer’s choice of origin is the cheapest price (i.e. other concerns such as quality play no role). 5 Freight from Thailand to Indonesia is $15 per tonne, to Russia it is $25 per tonne and to Morocco it is $30 per tonne. 6 Freight from Brazil to Morocco is $10 per tonne, to Russia is $24 per tonne and to Indonesia is $25 per tonne. 7 The actual load rate at all origins and the sailing time from all origins to all destinations is identical. For the purpose of this example we will take the last traded prices for New York futures on January/March No. 11 New York at $155 per tonne and May No. 11 New York at $150 per tonne. Similarly we will take the last traded prices on 15 January as quoted by our favourite physical broker: Thai raw sugar for 15 March/May shipment at March New York plus $4.00 per tonne and Brazil raw sugar for 15 March/May shipment March New York plus $1.0 per tonne. We will assume that export availability and import requirements for Chapter 7/page 9
Sugar Trading Manual shipments during 15 March/May 2000 raw sugar as follows for 15 January at current market prices. (Different market participants will use different export/import requirements. The hardest part of physical trading is getting the figures right.)
Export availability
Import requirements
Brazil Thailand
1200 tonnes 200 tonnes
Total
1400 tonnes
Indonesia Morocco Russia Total
300 tonnes 200 tonnes 700 tonnes 1200 tonnes
This leaves us with a world surplus of 200 tonnes. In order to determine the ‘fair’ value of the basis, we assume that importers will pay the same cost and freight price for all origins. We also need to identify where the surpluses and deficits are located and also the freight spreads between the different origins to the different destinations. If the ‘fair’ basis values we determine happen to be different from the current market prices of the basis, then we have spotted a possible trading opportunity. As regards freight spreads Thailand has the following freight advantages versus Brazil: to Indonesia, $10.0 per tonne. Brazil has the following freight advantage versus Thailand: to Morocco, $20.0 per tonne, to Russia, $1.0 per tonne.
Importers/exporters grouped by region We shall group importers with the origins that have the most competitive freight. This will allow us to identify the surplus or deficit in each region. In view of above freight spreads our groups will be as follows: Group 1: The Far East Export availability Thailand Total
Import requirements 200 tonnes 200 tonnes
Indonesia Total
300 tonnes 300 tonnes
The total Far East deficit is 100 tonnes. With these figures, the Far East has a deficit of 100 tonnes in this period. This unbalance between supply and demand within the Far East can be solved by a combination of changing market prices and/or an inflow of sugar from the Western hemisphere. Chapter 7/page 10
Sugar pricing Group 2: The Western hemisphere Export availability
Import requirements
Brazil
1200 tonnes
Total
1200 tonnes
Morocco Russia Total
200 tonnes 700 tonnes 900 tonnes
The total Western hemisphere surplus is 300 tonnes. Given these figures, the Western hemisphere has a surplus of 300 tonnes. The unbalance between supply and demand in the Western hemisphere may be solved by a flow of sugar out of this hemisphere into the Far East and/or changing prices.
Finding the fair basis for each origin of sugar Thailand and Brazilian sugars are both deliverable to New York raw sugar futures. Therefore the minimum fob price for both these deliverable origins for 15 March/May shipment will be March New York No. 11 with no premium of discount. Since the Western hemisphere is in surplus the fair value for 15 March/May Brazilian sugar will be March New York sugar futures plus zero (minimum possible price). The Far East has a deficit of 100 tonnes which can be filled by importing sugar from Brazil. The cost and freight price of Brazil sugar to Indonesia will be March New York futures plus zero (fob basis for Brazil sugar) plus $25.00 per tonne (the freight from Brazil to Indonesia). Indonesia will pay the same cost and freight price for Brazil or Thailand sugar. Since the Far East is in deficit, Thailand sugar will trade at the highest possible price before Brazil sugar becomes competitive. Therefore the fair value of Thailand sugar will be March New York plus $25 per tonne (the price Indonesia needs to pay to fill the Far East deficit) minus $15 per tonne (the freight from Thailand to Indonesia). This gives a fob Thailand fair value of March New York plus $10 per tonne ($25 minus $15).
Trading opportunities We had earlier assumed that the market price for Thailand origin raw sugar was March New York futures plus $4.0 per tonne. Our analysis leads us to believe, however, that the fair value of this sugar is March New York plus $10.0 per tonne. As a result, we will consider buying Thailand sugar at March New York plus $4.0 per tonne. This trade will have a downside of $4.0 per tonne if our analysis is wrong and the Far East is in surplus and an upside of $6.0 per tonne if our analysis is correct and the Far East is in deficit. Chapter 7/page 11
Sugar Trading Manual Looking at the other side of the coin, our analysis has led us to believe that the Western hemisphere is in surplus. However, selling Brazilian sugar at March New York plus $1.0 per tonne is a trade with poor risk/reward potential. A better trade would be to sell March New York futures at a $5.0 per tonne premium to May New York futures (this is called a time spread). The raison d’être for the trade is our belief that the world will have a 200 tonnes surplus from Brazil. As a consequence, we expect the price of March futures to go to a discount large enough to persuade the market participants to carry this Brazilian sugar from March to May.
Conclusion Basis trading is ‘what physical traders do’. Taking large speculative positions on the futures is more glamorous but also more risky. An exhaustive and detailed study of statistics, coupled with a thorough understanding of the freight markets, provide trading opportunities with better risk/reward ratios. For a producer or consumer, buying or selling sugar basis seller’s executable orders (SEOs) or buyer’s executable orders (BEOs) can spread the risk or provide valuable trading opportunities.
Chapter 7/page 12
8 Freight Stephan Baldey O. P. Secretan
Liner or tramp Liners Tramping
Voyage or timecharter Voyage charter Timecharter
Voyage estimate: dry cargo Charter party Owners and description of vessel Position of the vessel Loading area Discharging area Agents Taxes Freight payment Notices and cancelling date Stevedores and fiost Mate’s receipts and bills of lading General protectives Loading and discharging laytime Deviation Demurrage and despatch Waiting Extra insurance General average Time bar Arbitration Sub let Satellite tracking Certificates
Breaking up Rider Commission Additional clauses
Trends
Sugar is required in countries where it is not grown in sufficient quantities to satisfy the domestic market. It can also be moved for political or aid purposes and, consequently, there is a need for transportation. This transportation has a financial implication as a charge is made by the carrier to move the sugar from one point to another. Transportation can be made in a number of ways: railways, aircraft, ships, barges and lorries. For sugar, rail and lorry transport tends to be for delivery to and from seaports and for cross-border deliveries. The value of sugar does not normally justify the high costs involved using aircraft, and the largest movement of the international sugar trade is by sea. It is this method of transport with which this chapter deals. The shipping of sugar involves a payment of freight to the ship owner or operator. The freight element is an integral part of the overall pricing of the sugar sale. It is often not possible to prearrange the freight price prior to securing the sugar sale and, consequently, it is very important that an accurate estimation of the freight price is made in advance. The trading of freight is much the same as the trading of sugar in as much as it goes back to basic economics – supply and demand. An oversupply of ships means that the freight rates will fall, and an undersupply will push the freight rate higher. Like sugar, the freight market can move up and down very quickly – a 20% movement within one week is not uncommon. The freight element of a sugar sale varies depending on the distance travelled but averages between 10 and 30% of the overall contract price. Thus whether a trader makes a loss instead of a profit on a sale can be attributable to whether his freight element is correctly determined in advance. This is not always easy, particularly when sugar is traded far in advance of delivery. Furthermore, a trader often has a choice as to whether he buys (or sells) fob (free on board) or cif (cost, insurance and freight). If the trader’s knowledge or advice from his broker is better than that of his buyer (or seller), this knowledge can be used to his advantage. The following pages will deal with the various principals of freight and the tools used.
Liner or tramp Ship owners can be divided into two categories – those who employ their ships in the liner trades and those who tramp their vessels.
Liners Liner services run on an advertised route back and forth between various ports. For example, there are various liner companies serving Chapter 8/page 1
Sugar Trading Manual the Red Sea ports from the continent. A typical schedule could be a vessel calling at Hamburg and Antwerp and then calling at Jeddah, Hodeidah and Aden. After completion of discharge in Aden the vessel would pick up what she could for her return leg to the continent – perhaps empty containers or agricultural products. The freight from the continent to the Red Sea should be sufficient to cover most of the costs of the round voyage. Liner companies carry sugar parcels when the vessel has sufficient space left after their various contract cargoes are accommodated and when the load and discharge ports fit into their pattern of trade. The lines have arrangements at their regular ports of call, often with their own agency company (or an agency company that they have given exclusivity to) organizing the load and discharge of the goods. Their freight rates are likely to be competitive because of their knowledge of costs and infrastructure at the ports. As they are running an advertised service for their customers, they cannot afford for delays to develop. Their high freight-paying liner cargoes are of utmost importance for the profitability of the line. Conventional sugar cargoes will be booked if the vessel has space left and sufficient time. It would not be in the lines’ interests if, having booked the sugar parcel, the cargo was not ready to load, for example, for one week after the vessel’s arrival at the load port. Some liner companies only carry containers but, until recently, sugar has rarely moved in substantial quantities in containers. The little that has been moved in containers has been limited to specialized high-value sugars. The container companies have been able to command much higher per ton freight rates, making them uncompetitive with the rates offered by the conventional carriers. However, the container trades have followed the conventional shipping market in suffering from ‘over-tonnaging’, which has forced rates down. The economic downturn in South East Asia in 1998 meant that the continent to Far East container lines have been offering very low rates eastwards. This may be short term – if the movement of manufactured goods by container increases again, it is unlikely that the lines will remain as competitive. There are some advantages of using containers, such as reduction in shortage claims and less chance of pilferage, cargo damage and demurrage at the discharge port. As the liner companies have their own infrastructure at the ports of loading and discharging, the cargoes are booked in on ‘liner terms’ basis. This means that the owner pays for the cost of loading, generally from the quayside into the ship’s hold and the cost of discharging, from hold to quay. Liner terms can vary from port to port, and thus liner loading could include cost from warehouse or truck to ships holds. The agreement is drawn up on a ‘liner booking note’. Chapter 8/page 2
Freight Tramping Ship owners who tramp their vessels on the market constitute the major percentage of world tonnage. The vessel will normally not pay for the cost of loading or discharging and is fixed on a ‘fios’ (free in and out and stowed) or ‘fiot’ (free in and out and trimmed) basis. Effectively a tramp vessel will go wherever the freight returns are the greatest, but the owners will always have in mind what employment opportunities are likely to be available for the vessel after the voyage that is currently being negotiated. If the cargo flow is all in one direction, e.g. the Atlantic to the Indian Ocean, then the freight rates will reflect this imbalance and the tonnage will demand sufficient freight on the outward leg to pay for the ballast (sailing empty) back to the Atlantic again. A good example of this was in 1995 when India imported approximately 2 million tons of white refined sugar, mostly from Brazil over a period of a few months. There was little for the vessels to carry from the Indian Ocean and many vessels ‘ballasted’ back to Brazil for further cargo. There were some rice cargoes to West Africa from the Indian Ocean, but this would have led to possible delays in discharge, which might have meant the owner missing further high freight opportunities from Brazil. Tramp owners acknowledge these factors when calculating the freight they require. They also constantly watch the freight market for any signs of movement, either up or down. There is substantial liaison between ship owners and brokers, particularly in Greece, and also some between charterers. The charterers’ agents and owners brokers continually collate all the information they can glean in order to advise their principals accordingly. A tramp owner often sends his vessel to a port or country that he has not traded to before, and this can lead to unexpected items such as hidden costs or overlong delays. This is a major difference from the liner owners who are unlikely to have such surprises. The tramp owners will generally investigate as much as possible about any particular port with their contacts and port agents. The port agents, however, may be optimistic in their estimation of port expenses and time that a vessel will spend in port. The problems generally arise when a charterer has not sold his cargo and needs to charter a vessel with a range of discharge ports. In this situation an owner is unlikely to be knowledgeable about, or be able to check, costs at all possible discharge ports. It is not uncommon for a vessel to be fixed with worldwide options, for example, a cargo of bagged sugar from Brazil to the Baltic, the Mediterranean, the Black Sea, West Africa, East Africa, the Red Sea, the Arabian Gulf, India, Sri Lanka, Bangladesh or Indonesia. There are some limitations in the trading patterns of tramp vessels owing to political reasons. For example, a vessel that calls at Israeli Chapter 8/page 3
Sugar Trading Manual ports will not be able to call at some Arab countries, and a vessel loading in Cuba will not be able to enter a port in the USA for six months after sailing from Cuba. Of course, political circumstances are constantly changing and wars between countries further complicate matters. The International Transport Workers Federation (ITF) is an organization that tries to ensure that all ships crew are paid in accordance with the wage scales prescribed by the trade union of their country. If a vessel calls at ports in Scandinavia or Australia, for example (where the ITF is particularly powerful), the ITF will arrest the vessel if it is alerted to the fact that the crew are not being correctly paid.
Voyage or timecharter When a charterer wishes to charter a vessel to lift a cargo that he has sold cif, he has two alternatives: to fix a vessel on a voyage charter or on a timecharter basis.
Voyage charter The voyage charter is the most common form in the sugar trade, paying an owner a freight rate on a per ton basis from A to B. The trader’s other major financial liability is for demurrage, although he is often able to recoup this from his seller or buyer on a back to back basis. The ship owner pays for the port costs, fuel (bunker) costs and general running expenses. The charterer therefore has a fairly clear idea of the financial cost of moving the cargo. If the charterer has sold several cargoes to the same destination, he may choose to investigate the possibility of arranging a contract of affreightment with one ship owner. Before doing so, he would need to ensure that the owner was going to perform satisfactorily, nominating vessels for loading on the dates that the charterer wanted. If a charterer suspects or receives information that freight rates are likely to rise, a contract of affreightment has the advantage of locking in the freight rate at a certain level. Conversely, the charterer will be worse off if the freight market falls further after the contract of affreightment has been concluded.
Timecharter The other method of chartering a vessel is to take it for a period of time. The charterer pays the daily hire, port costs and the bunkers consumed and the vessel trades under the instructions of the charterer. This is called a timecharter. The most important difference between a voyage charter and a timecharter is that the onus of risk passes from the owner Chapter 8/page 4
Freight to the charterer. With a voyage charter there are many issues that the owner has to cover (and therefore there are no financial implications for the charterers); for example, excluded from the time counting are weekends and holidays during which a vessel is in port, and time wasted during strikes and bad weather. These are all points that an owner has to take into account when calculating the voyage rate that he will accept. However, if a charterer takes a vessel on a timecharter basis, he is paying the owners a daily hire rate that runs from time of delivery (normally on arrival at the pilot station of the loading port) to the time of redelivery (dropping outward sea pilot station at the discharge port). This means that, while the vessel is in port, he continues to pay the owners daily, irrespective of whether it is raining, or during the weekend, and the time is not counted as part of the voyage charter. There can, however, be advantages for a charterer using the timecharter method. The sugar terms are considered onerous by some owners and consequently can inflate their freight request to compensate for these terms. In a high freight market, the sugar freight market can suffer more than other trades because of these terms. Thus, if a charterer knows the ports involved and has the possibility to speed up load and discharge operations, he may save himself money by taking a vessel on a timecharter basis. A charterer needs to calculate a voyage estimate in order to judge whether it would be worthwhile to do this.
Voyage estimate: dry cargo Voyage estimates allow comparison between one business transaction and another. There are many formats for a voyage calculation, and the layout given in Fig. 8.1 is one example. The basis here is on free in and out (fio) terms and full laytime, which is used for dry cargo business.
Charter party A freight agreement is drawn up as a legal document. There are two types of legal document commonly used: a charter party for conventional chartering or a booking note (see Part 7, Appendix 4), which is normally used in the liner traders. The booking note is a more basic document as the loading and discharging operations and costs are taken over by the carrier, thus not requiring detailed agreement on the various issues covering movement of the goods from the quay to the vessel and vessel to the quay. The majority of sugar movements involve a charter party, and there are several types for the carriage of sugar. The Sugar 1969, revised Chapter 8/page 5
Sugar Trading Manual
Vessel . . . . . . . . . . . Load port(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discharge port(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distance . . . . . . . . Vessel’s speed/consumption . . . . . . . . Expected Bunker Price . . . . . . . . Fuel oil . . . . . . . . . . Diesel . . . . . . . . . . . Days at sea . . . . . . . . . . .Days in port . . . . . . . . . . . Total voyage time Income freight . . . . . . . . . . tonnes at . . . . . . . . . . Less commission . . . . . . . . . . . . . . . . . . . . .% Net freight
..........
Costs
Loading port(s) costs
Bunkering port(s) costs
..........
Discharge port(s) costs
..........
.......... ..........
..........
Fuel oil . . . . . . . . . . days x . . . . . . . . . . . tonnes x . . . . . . . . . . . $ per tonne . . . . . . . . . . . . . Diesel oil . . . . . . . . . . days x . . . . . . . . . . . tonnes x . . . . . . . . . . . $ per tonne . . . . . . . . . . Canal costs . . . . . . . . . . Taxes/dues . . . . . . . . . . Other costs . . . . . . . . . . Gross voyage costs . . . . . . . . . . Net voyage income . . . . . . . . . . (freight less costs) Voyage income . . . . . . . . . . . . . . . . In . . . . . . . . . . . . . . . days = . . . . . . . . . . . . . . . per days Vessels daily running cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit or loss per day (income less costs) . . . . . . . . . . . . . . . .
8.1
Dry cargo voyage calculation form.
1977, was used for over twenty years and this document was last revised to the Sugar 1999. The Sugar Trade Association recommends the use of this document. There are other charter parties that, for historical reasons, are used for specific trades. These mainly involve the importation of raw sugar to the United Kingdom and the United States, i.e. Mauritius sugar charter party, USA bulk sugar, Guyana, etc. This chapter, however, will discuss the Sugar 1999 and will highlight some of the important issues. When negotiating a ship to carry a cargo, all the details of the charter party have to be negotiated and agreed. If the freight market is high, ship owners can be disinclined to agree to all the points desired by the charterer. Failure to have the required terms can cost a trader money, and thus it is important to try to get as close (back to back) as possible to the sale contract. Chapter 8/page 6
Freight Owners and description of vessel How an owner and his vessel performs are critical when achieving arrival dates and the safe delivery of the sugar. It is important to find out as much as possible about an owner and the vessel. Past experience is always useful but, in cases where a trader has not previously dealt with the other party, checking with others who have can be a good indicator.
Position of the vessel Cross-checking the position of the vessel as given by the owner is important. Sugar is bought on delivery dates and a vessel arriving late can be costly.
Loading area If ports are named, then the onus is on the ship owner to ensure that his vessel can enter that port. If the loading area is a safe port in a range of ports (not named) then it is the responsibility of the charterer to nominate a port that is safe for the vessel to enter, load and sail from. The main dimensions of a vessel that determine whether her size is suitable are draft (distance from the waterline to bottom of the keel), length overall and beam.
Discharging area If a trader has not sold the cargo, he may need a multitude of discharging options. Even when the cargo has been sold, additional options may be advisable if there is any doubt as to the buyer’s ability to pay for the goods or if letters of credit are not forthcoming. As at loading, if there are options of various countries with unnamed ports, the onus lies with the charterer to nominate safe ports. One point to remember is that an owner is more likely to give a keen freight rate basis a named destination. If an owner knows that his vessel is going to discharge at a certain port where he has the ability to calculate how long the discharging operations will take, and what the ports will be, he will be able to plan his onward voyage with some certainty. Thus a cargo with many discharge options may demand a higher range of freight rates to compensate the owner for having to wait until nearer the end of the voyage before he plans his next employment.
Agents A good agent should be able to arrange for smooth operations while the vessel is in port. Chapter 8/page 7
Sugar Trading Manual Taxes Taxes and other levies vary from port to port and can be chargeable on the vessel, freight or the cargo. It is customary for taxes on the cargo not to be for the ship owner’s account but paid either by the shippers or the receivers of the cargo. Taxes on freight and the vessel are generally payable by the owners. In a strong market, ship owners may try to push these on to the charterer which, of course, has a financial implication.
Freight payment It is preferable that the charterer avoids being owed money by the ship owner at the end of the voyage. By agreeing to pay 90%, less commissions and estimated loading port despatch, a charterer will normally still be in a position where he owes money to the ship owner after the vessel has completed discharge. A 10% balance should be sufficient to cover any despatch at the discharge port. Bills of lading are normally released marked ‘freight payable as per charter party’. If ‘freight prepaid’ bills of lading are required there is a provision in the ‘rider’ for this wording to be inserted once the provisional freight has been remitted. Alternatively, ship owners will usually allow the bill of lading to be marked ‘freight prepaid’ at the load port and be held by the load port agents until the owners authorize their release, once they have received the provisional freight. If a ship owner releases freight prepaid bills of lading prior to receipt of provisional freight, he has no legal redress should the charterer decide not to pay the freight. Consequently a ship owner will normally insist upon receipt of provisional freight prior to the release of a freight prepaid bill of lading.
Notices and cancelling date These are protective clauses to ensure that the vessel is performing at her described speed and arrives at the load port within the agreed period.
Stevedores and fiost The loading costs are normally at the seller’s expense and discharging costs at the receiver’s expense. Tally men are employed by the owners although they are appointed by the shippers or receivers. Owners will often use the ship’s crew for a secondary tally to check the tally man’s figures. Once the master has signed for a certain number of bags, the ship is responsible for delivering that Chapter 8/page 8
Freight number of bags at the discharge port, and the owners are liable for any shortages.
Mate’s receipts and bills of lading It is essential that master signs ‘clean’ mate’s receipts and bills of lading. This clause ensures that the master rejects any cargo that would preclude him from issuing a clean bill of lading.
General protectives Further clauses protect the charterers’ interests concerning the condition of the ship. It is important that a vessel’s holds do not smell. For example, it is sensible to avoid employing a vessel whose last cargo was fishmeal. It is very difficult to eradicate the smell of fishmeal – burning coffee beans in the holds is one way but takes a long time and could mean uncertainty as to when the vessel will be ready to present for loading. Any tainting of the sugar will cause problems with the receivers. It is normally sufficient for kraft paper to be laid in the hold although, in some ports, wooden dunnage is also required between layers of bags for the fork lift trucks to run over.
Loading and discharging laytime It is important to ensure that the charter party terms reflect the sales contract. In some ports, local labour regulations insist upon work stopping at 1700 hours on Fridays.
Deviation This allows vessels to deviate from the given route between the loading port and discharge port for certain reasons, such as life saving, etc.
Demurrage and despatch When a loading or discharging operation takes longer than the prescribed time (per clauses 19 and 22), the charterer is required to pay a daily demurrage rate. The charterer will, in turn, collect this back from the shipper or receiver, and thus it is important to check in the sales terms that there is no localized minimum demurrage figure prescribed in any country. Conversely, if the loading or discharging operations are quicker than the prescribed speed in the charter party, then the charterer is entitled to a daily despatch payment from the owner (normally the despatch figure is half that of the demurrage figure). Chapter 8/page 9
Sugar Trading Manual Waiting There are occasions when a charterer will wish a vessel not to enter the discharge port owing to the fact that the goods have not been paid for, or the cargo has not yet been sold. This clause gives the charterer the opportunity to order the vessel to wait in international waters while payment for the goods is arranged (or a buyer for the goods is found) and the owner would be paid a daily detention rate. The significance of international waters is as follows: in certain ports of the world a vessel could be ordered by the local port authority to enter the port and discharge even if the charterer did not wish this to happen. By staying in international waters, the vessel is outside the jurisdiction of the country in question.
Extra insurance A vessel becomes overage in insurance terms when she reaches her sixteenth year. Most insurance is worked out using the Lloyds scale, which is staged in five-yearly intervals of 16–20 years, 21–25 years and 26–30 years old. The insurance premium approximately doubles after each stage and is based on the owner’s fleet insurance history and the value of the sugar. Extra insurance has become a problem of increasing financial significance as the average age of ships suitable for the carriage of sugar goes up. The insurance element can be as much as 10% of the overall freight cost, and although a charterer will try, when negotiating to charter a vessel, to claim this back from the ship owner, he will rarely achieve a total redress.
General average General average is one of the oldest and most fundamental of maritime principals, the basic tenets of which have been in existence for thousands of years. However, since 1890, the York–Antwerp Rules have been used to define and ‘settle’ general average and bring all countries into conformity. The rules are regularly updated – the most recent revision being in 1990 – and form a voluntary code that is accepted by most ship owners. The idea of general average is that a voyage is a joint venture and all parties involved in a marine adventure, for example, cargo owners and ship owners, share a proportion of any extra expenditure incurred by owners during a marine accident when the owner has saved the vessel and cargo. General average is only deemed to have occurred in specific situations. These are well documented, as follows: Chapter 8/page 10
Freight 1 During the marine ‘peril’ the danger must be ‘real’ and imminent’ and not an assumption by the master that danger lies ahead. 2 The general average act must be intentional and not inevitable. 3 The act must be reasonable and prudent. 4 The loss must be extraordinary. 5 The object of the loss must be the safety and preservation of the whole venture, not individual parts. 6 The venture must be saved. 7 The loss must be directly caused by the general average act, and consequential losses are not acceptable. Once a general average act has occurred, and before the cargo is discharged to the receivers, the ship owner must ensure that all the parties pay their general average contributions into the common ‘pot’. This generally is achieved by the cargo interests paying a general average deposit (actual money) or an average bond (often a guarantee from Lloyds). As mentioned above, the complicated procedures used to adjust the general average contributions are carried out according to the York–Antwerp Rules by an average adjuster.
Time bar It sometimes takes a long time to obtain documentation from ports owing to the inefficiency of the port agents. This can be a problem for both the charterer and the owner, and it is important to pursue agents for the quick despatch of documents in order to avoid any chance of being time barred.
Arbitration Arbitration in London and English law applies. Attention should be drawn to the addition of the small claims procedure, which allows for an economical settlement of disputes of small amounts (normally under $50 000).
Sub let A charterer is entitled to sub let the charter party to another party, but the charterer remains responsible to the owners for the payment of freight and due fulfilment of the terms of the charter party.
Satellite tracking Unfortunately there have been examples of vessels deviating from the route, sometimes for fraudulent reasons. This clause gives the Chapter 8/page 11
Sugar Trading Manual charterer the ability to place a satellite tracking device on board the vessel to ensure that she is where she is meant to be. The charterer also has the advantage of being able to check that the vessel is sailing at her described speed.
Certificates Most sugar sales have some requirements concerning certificates. It is advisable to ask the owners to supply these as soon as the charterer knows what is required as delays in issuance often occur. The Shipowner Protection and Indemnity Club (P and I) and classification societies vary in their willingness to assist in these matters.
Breaking up With the ongoing age problem of the world tonnage, it is advisable to avoid chartering vessels that are on their last voyage prior to being scrapped. Not only is the condition of the vessel likely to be suspect but also the owners may not exist after the sale of the vessel. This could lead to problems if any monies are left outstanding to the charterer.
Rider The agreed freight rates are inserted here. This should include any extra freight if second or third ports are involved at either end. Where various discharge port ranges are involved, it is important to be clear whether the ranges are combinable. For example, if a vessel is fixed from Brazil to one to two safe ports in East Africa or, in the charterer’s option one to two safe ports in the Red Sea or, in the charterer’s option one to two safe ports in India, does the charterer want the option to discharge at one port in East Africa plus one port in the Red Sea or India? If so, this must be specified, along with the freight payable. The rider is a separate document, which the charterer may choose not to attach to the charter party. The charter party is likely to be sent to other parties, some of whom the charterer may not wish to know the agreed freight rates.
Commission It is customary for the charterer to take an address commission, which is a method of reducing his overall cost. The address commission is normally shared with the shipbroker involved in negotiating the fixture. Most traders enter the freight market with a commission of 6.25%, which includes their freight broker. A trader entering the market with a Chapter 8/page 12
Freight lower address commission will rarely get the full benefit of a lower freight rate to compensate as ship owners will generally take an overall view of the current market freight levels.
Additional clauses Most charterers have some additional clauses that they have included previously in the charter parties or that are necessary for a specific trade. For example, owners of bulk carriers are required, since July 1998, to confirm that their vessels and their company comply with the requirements of the International Safety Management (ISM) code. There would normally be a specific clause ensuring that the owners comply with the code. The ISM code has hastened the scrapping of some older vessels where compliance with the code would have involved too high an expense for the owners. These additional clauses are typed separately and attached to the charter party, and mention is made after clause 38 that they are incorporated into the terms of the charter party.
Trends The carriage of sugar has seen a considerable change over the last 30 years. The market has had to change in order to accommodate the tonnage available. Fifty years ago there was little option for traders except to use general purpose ‘liberty’ type tweendecker ships of 10 000 tons deadweight. During the Second World War over 2800 ‘liberty’ types were built as the workhorse of the shipping industry. The 1950s saw the arrival of the bulk carrier, a vessel more suited to the bulk trades such as coal, ore, grain and bulk raw sugar. As the bulk carrier has one deck, there is less superstructure to get in the way of loading and discharge equipment. Loading bulk cargo in a tweendecker (two decks or more) involves more movement of the cargo into the centre of the holds to facilitate discharge by grabs. In the 1960s as the liberty types were coming to the end of their serviceable life, liberty replacement types were built. Like the liberties, they were built in large production runs, and economies of scale enabled the shipyards to produce the ships for reasonable prices. The most common of these vessels were the ‘freedom’ type and the SD14. For over the last 30 years these tweendeckers have been the workhorse of the sugar trade, carrying both bagged and bulk sugar. Now, however, these vessels are also coming to the end of their serviceable use. Many have already been scrapped and the rest are mostly well over 20 years old, meaning that they are not suitable for certain trades where 20 years old is the limit of allowable tonnage. There are no replacements for these liberty replacement types. Chapter 8/page 13
Sugar Trading Manual So what happens now? There have been various developments. First, there has been a trend to move sugar in larger quantities than the 14 000 ton sizes. Raw sugar has, for some time, been shipped in 20 000–30 000 ton sizes. However, it is now common for 40 000– 50 000 ton cargoes to be moved. Refineries have recently opened in Dubai, Jeddah, Nigeria and Algeria. Some of these refineries can take 40 000 ton cargoes of raws, which are then refined. Previously these markets would have been fed by 14 000 ton cargoes of refined sugar. Some ports are restricted and are unable to accommodate bulk carriers. Some restricted ports are being enlarged to enable larger vessels to call but, in other ports, smaller ships are likely to take the place of the 14 000 tonner. There is no shortage of tonnage in the 2000–6000 ton size. Most of these vessels tend to trade in more localized coastal trades, for example in the continent, the Baltic, the Mediterranean or the Caribbean or South East Asia. It is likely that more of these vessels will enlarge their trading limits to include South Atlantic carrying cargoes to the smaller West African ports. Another trend has been the increase in movements by containers. As discussed earlier, the continent to the Far East has already seen an increase in container movement. There are now several vessels trading that are able to carry white refined sugar in bulk with a bagging plant on board, enabling the sugar to be bagged during discharging operations – so called ‘bulk in bagged out’ (bibo). However, these are expensive vessels to build and it is uncertain whether more will be built. The sugar trade has adapted to the changing availability of tonnage and, through necessity, will continue to adapt. Cargoes of 14 000 tons are likely to be phased out, with a more flexible approach being taken by buyers and sellers.
Chapter 8/page 14
9 Statistical analysis Rod Boltjes Cargill Inc, USA
The quarterly ‘S & D’ format Sources of information Quality conversions Other conversions How to use the database Relationships Net of production minus consumption versus flat price Ending stocks as a percentage of consumption versus flat price Net raws trade versus flat price Net whites trade versus whites premium Cash premium analysis Other uses of the database
Significance of the fundamental range Conclusion
Sugar is produced in over a hundred countries, over all 12 months of the year. Nearly a third of this production is found in the Southern hemisphere; however, it is significant that the Southern hemisphere accounts for about 60% of the world’s raw exports. Every country (currently exceeding 160) is a consumer of sugar. As a result of the northern/ southern hemisphere split, one cannot analyze sugar in the more typical ‘crop year’ fashion with neat beginning and ending stocks. A more apt description is a flow analysis where sugar is produced, consumed and traded 12 months out of the year. The easiest way to accommodate this flow analysis is to break the year into quarters. (Monthly would probably be better, but in reality this is not very practical.) This chapter looks at how to construct a world sugar supply and demand, which is the essential requirement, the starting point, of any fundamental analysis. The basic elements of the supply and demand are as follows: 1 2 3 4 5 6
Beginning stocks. Production. Consumption. Exports. Imports. Ending stocks.
The quarterly ‘S & D’ format A further refinement that is useful is to split the export and import statistics into white sugar and raw sugar. Table 9.1 is an example of a hypothetical country’s 2002/03 supply and demand. With a little extra effort, it is also possible to split the white trade statistics further between high quality 45 ICUMSA sugar and lower quality 100+ ICUMSA. This can provide useful information on the quality spreads explained later. In order to do the job correctly, one should construct the S and D, as shown in Table 9.1, historically back to the early 1980s. This is important because it gives you the history of at least two of the six- to eight-year crop cycles found in the world sugar industry. It is also important because it will supply enough observations to give statistically significant results when correlation is made to price. The crop cycle is long in sugar because of the repeated ratooning of a cane crop before it is replanted. In ratooning, after the sugar cane is cut, it is allowed to regrow to be harvested again the following year. This is normally done between three and five times before the roots are torn up and replanted, and yields tend to decline somewhat with each ratoon. The price spike that occurs every six to eight years encourages the overplanting of cane. A few years of low prices, often below the Chapter 9/page 1
Sugar Trading Manual Table 9.1 Quarterly sugar supply and demand for a hypothetical country 2002/03 OND
JFM
AMJ
JAS
Oct/Sep
Beg. stocks
235
444
254
156
235
Production Consumption
101 315
3 315
0 325
0 325
104 1280
White exports Raw exports Total exports raw value
9 0 10
6 0 7
1 0 1
4 0 4
20 0 22
White imports Raw imports Total imports raw value
4 429 433
6 122 129
7 220 228
7 270 278
24 1041 1067
End stocks
444
254
156
104
104
cost of production, are then needed to discourage replanting when the yields begin to drop in subsequent ratoons. By going back a couple of cycles, one will have the necessary fundamental history to compare to the historical price activity. This will be necessary when it is time to make the price projections. It is also best to construct the above history for every country in the world. It is possible to simplify the process and only concentrate on the major producers and consumers, or exporters and importers; however, this approach always leaves you with the problem of estimating the ‘other’ group. To guess at the other can be very misleading, but to add the others properly is almost as big a job as doing each individually. For those who choose the short cut, you can account for about 70% of the world production by concentrating on the top ten producers. The top ten consumers will account for about 65% of world consumption. Once the history is completed, the job of forecasting begins. It is really only prudent to forecast forward one crop year. To forecast farther than this requires one to know where you are in the six- to eight-year sugar cycle. Weather reports, crop reports and industry sources, often reported by the news services, are the basis for the production estimates. Timing of the quarterly production estimates can be made on the basis of the historical ‘norm’, then adjusted for early or late crops. Consumption is usually rather stable, increasing in line with population growth, in addition to -1% to +2%, depending on the local economy and prices to consumers. Chapter 9/page 2
Statistical analysis The trade statistics are more difficult to forecast. Some countries, which have the opportunity, will vary the ratio of whites to raws depending on the white’s premium and their desire to maximize refiner use. Estimating the timing of exports is also difficult. History is helpful here, but sometimes exporters will ship early or late depending on price spreads, stocks situations or need for money. The total export or import figures are a function of the production, consumption and required ending stocks. Most countries will not draw down stocks below 10 to 12% of consumption, or a little over one month’s use.
Sources of information The primary sources for historical information are F. O. Licht and the ISO. These two sources provide the bulk of the information needed. For those countries not covered, it is necessary to estimate the quarterly breakdown of their production, consumption and trade statistics. An estimate of the quarterly production can be made with a little knowledge of the harvest periods. Consumption is fairly stable across quarters, with consumption usually a little higher during the warmer summer months. Forecasting the timing of trade statistics is difficult. If the information is not available, you can check the trading partners to see when they are shipping or receiving sugars. A historical database can be constructed fairly accurately from these sources. Other sources can, of course, be used to supplement the above. The US Department of Agriculture (USDA) attaché reports, port and vessel line-up data and individual association data are often available for individual countries, which will help refine the historical data. Forecasting the upcoming crop year is more of an art than a science. One important assumption underlying all forecasts should be mentioned. You should assume that ‘current prices’ prevail for all forecasts. In other words, given current prices, how much will be exported, imported, produced or consumed? If prices change a month from now, you will probably be forced to change some of the forecasts as the players will respond to those changes. The historical database is helpful to identify trends and timing in individual countries. One must be opportunistic when identifying sources for this part of the exercise. Any information you can get, closer to the source, is better. Weather developments are, of course, critical to the production. Internal economic conditions in the consuming countries will be important in forecasting consumption. Trade statistics are really little more than an educated guess. A good relationship with the internal country players is extremely helpful. Frequent updating and changing of the forecast is required as data becomes available. The best solution for those really hard-to-predict countries is simply to revise the estimates more often. A series of small corrections is better than an occasional large revision. Chapter 9/page 3
Sugar Trading Manual
Quality conversions The industry standard conversion of 96 polarization raws to whites is to multiply the raws by 0.92. The formula as provided by the ISO is (2P - 100)/0.92, where P equals the degree of polarization as tested by polariscope. Refined sugar is about 99.9 polarization, and the industries that report to the ISO are supposed to convert their sugar to a raw value of 96 polarization. In reality, the majority of raw sugar is not 96 polarization but ranges between 97 and 99.5 for most countries. When the polarization is not known, it is often reported as ‘tel quel’, which literally means ‘as is’. This whole area of conversions leads to enormous confusion in the industry. Many mistakes are made in reporting, which result in figures reported as ‘raws 96 polarization’ but in fact probably are something quite different. The result is that, when you add up all the countries in the world exports and the world imports, you consistently show more exports than imports, obviously impossible. Most analysts just subtract one to 1.5 million tonnes as a ‘statistical adjustment’ and ignore the confusion. This works as long as you apply the adjustment to historical and forecasted figures alike. Another decision must be made on the definition of raws and whites. One rule is to consider anything that is shipped in bulk as raws and anything bagged as whites. The raws should be converted to 96 polarization and the whites converted to 99.9 polarization. This means that low quality whites shipped from Brazil in bulk are considered for statistical purposes as raws. Importing countries have their own rules when they classify sugar as whites or raws. Many countries have different taxes on sugar over 99.5 polarization, so it is in the interest of all concerned to avoid the higher tax if possible. The result is that an export from Brazil reported as a low quality white may well be called a raw sugar in the importing country. Beet sugar is also converted to a raw value using the same formula, but this is rather artificial as it is rare for anyone to produce a raw beet sugar. The process of making sugar from beets is done in one plant and there is no reason to interrupt the process to make a raw sugar. The economics of this do not make sense.
Other conversions Most countries report figures in metric tonnes. In the USA the short ton is still used for the internal supply and demand. The short ton is 2000 lbs and the metric tonne is 2204.6 lbs. So, in order to change short tons to metric tonnes, you simply divide by 0.907 (or multiply by 1.1023). Some countries will report in quintals. A quintal is 100 kilos or 220.46 lbs. A quintal that is multiplied by ten equals a metric tonne. Chapter 9/page 4
Statistical analysis Australia will often report in 94 net titer. To convert this to raw value, you must divide by an average conversion factor of 1.0252 to get actual metric tonnes. If the average polarization of Australian sugar is 98.5, you can convert to raw value by using the formula mentioned earlier, i.e. (2 ¥ 98.5)/0.92 equals 1.054. For example: a 4.0 mil net titer crop, divided by 1.0252 and multiplied by 1.054, equals 4.112 crop in metric tonne raw value. When a country reports in tel quel, the conversion will vary depending on the situation in the country. In Central and Southern Brazil a rule of thumb is to use 0.95. In Northern and North Eastern Brazil use 0.935 and in Mexico use 0.965. These are the countries that commonly report in tel quel and the above conversions will currently suffice. Some of these conversions will change from year to year as the mix between raws and whites production changes. Another measure often used is yield per hectare – one hectare equals 2.47 acres.
How to use the database Once the quarterly database is finished with the quarterly history going back to the early 1980s and has been forecasted one year forward, you are almost ready to begin the analysis. You do need some price history, however, to have something with which to compare your fundamental data. The basics include: 1 Quarterly average price on the nearby New York and London whites futures. 2 Quarterly highs and lows of the nearby New York futures. 3 Quarterly average of the nearby whites premium. 4 Quarterly highs and lows of the nearby whites premium. 5 Quarterly average of the Far East (Thai) premium. The futures prices are readily available from many services but the cash prices are more difficult as few people seem to record these on a regular basis. These are less important, however, for most people who are probably more interested in flat price projections.
Relationships The database lends itself to different ways of looking at the market, limited only by the imagination. The following are a few of the more obvious relationships.
Net of production minus consumption versus flat price If world production exceeds consumption, stocks are built up and prices should trend lower. If consumption exceeds production, stocks are Chapter 9/page 5
Sugar Trading Manual diminished and prices should trend higher. This is rather crude, but the relationship does exist and it works well in predicting the long-term trend of the market. As it is done quarterly, one can get a fairly good indication of the timing of a move.
Ending stocks as a percentage of consumption versus flat price
Monthly avg px cents/lb
This is one of the best predictors of flat price commonly used by most analysts. Calculating the world S and D on a quarterly basis allows you to predict better the timing of fundamental moves. But even the best can really only predict a quarterly average price within a range that exceeds three cents. If one compares the end stocks as percentage consumption to the historical price extremes, then the expected tradable range exceeds five cents. This is referred to as the fundamental range within which the market will be expected to trade during the specific quarter, projected one year forward. Figure 9.1 shows the example of the October/November/December (OND) quarter. The OND (actually 31 December) ending stocks are adjusted for the trade discrepancy. The nearby average price is the average of the nearby future for the OND quarter. Note that 1983, 1989 and 1997 all seem to fall above the expected range. In other words, prices were higher than one would have expected given the world stocks situation. It is interesting to note that, in all of these years, the
18 17 16 15 89 94 14 81 13 12 95 11 10 9 8 7 6 5 4 0.4 0.42
9.1
97 96 90
93 91
88 92
83 87 98
82 86 85 84
0.44 0.46 0.48 0.5 End stocks as % annual consumption
0.52
0.54
Adjusted October/November/December stocks as a percentage of total world consumption versus quarterly average closing price of the nearest world futures contract in New York.
Chapter 9/page 6
Statistical analysis market fell sharply the following quarter, so it was really a timing problem more than a missed estimate.
Net raws trade versus flat price Intuitively, it seems that if you know how much the exporting countries want to export, and you have estimated how much the importing countries want to import, the net should correlate quite well with the flat price. Unfortunately this is not always the case. Part of the problem is the polarity adjustments mentioned earlier and the resulting statistical adjustment that is required. The other problem is the distortion often noted at delivery time when a futures contract expires. The worldwide raws trade net becomes less of a factor. Exactly who holds the surplus (is it deliverable?) and who has the homes (the sales on the books) becomes more critical, in the short term, than the world raws net. The raws net is worth watching, however, and can also be helpful in predicting nearby/deferred spreads.
Net whites trade versus whites premium The whites premium is simply the New York future converted to metric tonnes, subtracted from the similar month London future. By comparing the historical whites trade net series to the historical whites premium, one can get some indication as to the future direction of the whites premium using the quarterly projected whites net from the database. The word ‘indication’ is used because these do not correlate very well. The nearby flat price also seems to have an impact that distorts the analysis.
Cash premium analysis By combining selected countries in a region one can create regional S and Ds that are useful in analyzing cash premiums. For example, by combining the quarterly supply and demand series from the Far East countries, one can correlate the resulting raws net or the Far East stocks as percentage consumption to the Thai premium. Again, other factors will come into play, especially freight rates, but it does give you some fundamental ideas on where the Thai premium should trade.
Other uses of the database Documenting production and consumption trends is simple with this database. As an added feature it is easy to include a series on population of the individual countries, enabling calculation of per capita consumption in each country. By manipulating the quarters, you can Chapter 9/page 7
Sugar Trading Manual easily compare your estimates to other published estimates. Some organizations use all October/September crop years, some use calendar years and others split their estimates according to the individual crop years. The quarterly database makes duplicating others’ formats much easier for comparisons.
Significance of the fundamental range This should give the reader the basics in constructing a world sugar supply and demand. Even the best, most accurate, forecasts, however, will still only get you within a three or four US cent fundamental range. This can still be useful information, however, especially when you are near the extremes of the fundamental range. It will answer the question, ‘how high is too high and how low is too low?’ To fine-tune the projections within the fundamental range, the most effective tool is technical analysis, covered in the first section of Chapter 15, Technical trading.
Conclusion A good thorough fundamental database is basic to understanding the sugar market. It gives a historical perspective to events and the price activity resulting from these events. It opens the door to a broad range of possible analytical approaches. Opinions based on historical fact, not instinct, can be made for flat prices and spreads. A sound fundamental approach improves the confidence needed for managing risk so prevalent in the commodity businesses.
Chapter 9/page 8
10 The Sugar Association of London (SAL) and The Refined Sugar Association (RSA) Derek Moon SAL and RSA
Why do trade associations exist? How are the two sugar associations managed? The regulatory organizations for the international trading of physical raw cane and beet sugar and physical refined white sugar How does the arbitration system work? Supervision of raw sugar cargoes delivered to the UK by The Sugar Association of London Why is supervision necessary?
Other services to the trade
Why do trade associations exist? Over the years commodity trades have established their own individual trade associations which work on behalf of their own particular industry with the object of promoting and protecting the interests of its members and the framing of rules and regulations for the conduct of trade, including forms of contracts. The Sugar Association of London (formed in 1882) and The Refined Sugar Association (formed in 1891) were both established with these objectives in mind but, in relation to many other similar commodity associations, their aims and activities go a little further.
How are the two sugar associations managed? Membership of The Sugar Association of London consists of companies which have a continuing interest in trading in raw cane and beet sugar, and members of The Refined Sugar Association must have a continuing interest in trading in white sugar. A company which applies for membership of the associations must provide two references from current members to confirm that the applicant has satisfactorily concluded business with them over a period of at least two years and that it is a reliable, responsible and reputable company. Council members make their own investigations into the applicant’s background before they meet to consider the application and this rigorous vetting procedure ensures that only suitable candidates are elected as members. On occasions the council has waived the necessity for a company to apply for membership strictly in accordance with the rules when the prospective member is known to satisfy all the requirements for election. The two associations are managed by separate councils consisting of representatives of member companies. Council members, who give their time freely to the associations, are elected to serve based on their experience and expertise in trading sugar and give the necessary orders for the day-to-day running of the associations. The secretary is responsible for the day-to-day management of the two associations and he regularly reports to both councils. Individuals who are employees of member companies and have extensive experience in trading sugar may be elected by the councils to act as arbitrators. Council members also act as arbitrators.
Chapter 10/page 1
Sugar Trading Manual
The regulatory organizations for the international trading of physical raw cane and beet sugar and physical refined white sugar The rules and contract conditions which the associations frame for the international raw sugar trade and white sugar trade have evolved over many years and are constantly monitored and updated by their councils to ensure that they conform with current trading requirements and both United Kingdom and European legislation. The contract conditions are used by the majority of the world’s sugar trading houses and they have become the premier standard under which trade is conducted. Most trading houses insist that business is conducted under either The Sugar Association of London or The Refined Sugar Association contract rules and, more recently, make it a requirement that their trading partner is also a member of the relevant sugar association. An important feature of the rules and contract conditions is the settlement of disputes by commercial arbitration. The arbitration procedures adopted by the two associations are as follows: Parties to a raw or white sugar contract which is subject to either association’s rules and contract conditions are recommended to insert in the contract an arbitration clause in the following terms: ‘All disputes arising out of or in connection with this contract shall be referred to [The Sugar Association of London] [The Refined Sugar Association] for settlement in accordance with the rules relating to arbitration. This contract shall be governed by and construed in accordance with English law.’ By inserting this clause in their contract the parties have available to them a dispute resolution system which is speedy, inexpensive and above all impartial. This service is available to any company, regardless of whether or not they are members of the associations.
How does the arbitration system work? When a dispute arises between the contracting parties which cannot be settled amicably the claimant (whether he be the seller or the buyer) must give the respondent seven clear days notice of his intention to refer the matter to the Council of the Association for Arbitration. After the expiry of the seven-day notice, the claimant must make a written request to the secretary for arbitration. This may take the form of a Chapter 10/page 2
SAL and RSA simple letter giving the names of the parties and brief details of the dispute. The claimant is advised by the secretary that his statement of claim and supporting documentary evidence must be forwarded to the association within 30 days from the date of his request for arbitration, together with a non-returnable registration fee and, if required, an advance payment against the association’s fees and costs. Upon receipt of the claim submissions and supporting documentary evidence, a copy is sent to the respondent who is required to submit a defence within 30 days. The respondent’s defence is passed to the claimant for him to comment upon and the exchange of submissions continues until such time as the parties or the council consider that there is sufficient written documentation and evidence available to enable the council to proceed to an award. The council appoints three members from the panel of arbitrators to act on its behalf to determine the dispute and such arbitrators must, of course, have no interest in the subject matter in dispute. The parties’ submissions and documentary evidence is copied to each arbitrator appointed by the council and they meet on an agreed date to consider the parties’ respective arguments and to make their award. Unless both parties notify the council otherwise, the award is issued with the arbitrator’s reasons. The award is final and there is no appeal system save an approach to the courts if the aggrieved party considers that the tribunal has erred on a point of law. The reasoned award is made available to the parties only when the association’s fees and costs have been settled in full. This is, of course, a very brief and simplified explanation of how the associations conduct arbitrations but, in the majority of cases, the procedure is not quite so straightforward as it may appear. In some cases the respondent may argue that a contract was never concluded and that the council has no jurisdiction to determine the dispute. Prior to the Arbitration Act 1996 the council had no power to decide its own jurisdiction and the matter was determined by the courts and the arbitration would be stayed pending a court judgment, which may have taken anything up to a year or even more. Under the new act, the council may decide its own jurisdiction and it is a much speedier and less expensive procedure. The respondent may decide not to answer the claim and the award may be made in the absence of a defence and solely on the statement of case and supporting documentary evidence submitted by the claimant. The respondent must always be given ample opportunity to answer the claim before the council proceeds to an award, but it does not always follow that an undefended claim is successful. One or both parties may request an oral hearing, at which they may be represented by counsel and solicitors, to cross examine witnesses. Chapter 10/page 3
Sugar Trading Manual These forms of hearing are time consuming and expensive and it is fortunate that they happen rarely. An important feature of the two associations’ arbitration rules is the council’s power to notify members when a party to an arbitration neglects or refuses to carry out or abide by an award. The reader may draw his own conclusions about the effect of such a notice. It is impossible, in the limited space available in this manual, to explain every aspect of the association’s arbitration procedure and the law to which it is subject, but the above gives the reader a brief indication of what happens when a contract dispute is referred to the two associations. There are many reference books on arbitration practice available to anyone who may be interested in learning how arbitrations should be conducted under the Arbitration Act 1996. In the Handbook of Arbitration Practice published by Sweet & Maxwell, there is a section specially devoted to commodity trade arbitration and, under the chapter entitled ‘procedure in single tier arbitrations’, the following comment appears: The best modern example of the single tier arbitration system in commodity trade arbitration is that adopted by the two physical sugar associations, The Sugar Association of London for raw sugar and The Refined Sugar Association for refined sugar. . . . They serve as a clear general illustration of the close administration by a trade association of contract disputes.
Supervision of raw sugar cargoes delivered to the UK by The Sugar Association of London The Sugar Association of London’s primary activity is the supervision of the landing, weighing and sampling of all raw sugar cargoes delivered to the United Kingdom. Up to the early 1980s there were also sugar associations of Lancashire and Greenock which were responsible for the supervision of raw sugar delivered to their respective areas. The Lancashire association ceased its activities in 1980 when Tate & Lyle Sugar closed its refinery in Liverpool and, in 1985, the London association assumed responsibility for the Greenock association’s affairs. The closure of Tate & Lyle Sugars’ refinery in Greenock in 1997 left London as the only point of delivery for bulk raw sugar cargoes in the United Kingdom. The association’s supervision service is provided for the benefit of both the seller and the buyer, with each paying Chapter 10/page 4
SAL and RSA one-half of the association’s supervision costs. The association is completely independent and renders an impartial service to both parties.
Why is supervision necessary? Basically, the seller and the buyer rely upon the records of out-turn weights and polarizations produced by the supervisor as the invoice basis upon which the contract price of the cargo is settled. The association’s supervisors are stationed at Tate & Lyle’s refinery in London. As vessels arrive at the unloading point, the association’s supervisor is in attendance to check the condition of the cargo when the hatches are opened, and any anomalies are noted and reported. If the hatches were not secure during the voyage and an ingress of sea water has occurred the supervisor will not allow discharge of the sugar to commence until the damaged quantity has been assessed by the insurer’s surveyor and an agreement has been reached as to who is responsible and what is to be done with the sea-damaged cargo. This kind of occurrence is rare as modern day vessels are adequately equipped to cope with sensitive cargoes such as sugar. When the cargo has been cleared for discharge by the association’s supervisor, the supervisor meets with the captain of the vessel to receive his report on such matters as the loading operations and the weather during the voyage. These are important details for the supervisor to note. As the sugar is unloaded, a supervisor stationed on board the vessel keeps a watchful eye on the manner in which it is discharged and any spillages are estimated and accounted for in the final weight account. Spillages are, however, collected from the ship’s deck or jetty and returned to the system for weighing. The supervisor must not interfere with the unloading procedure unless he is concerned that the interests of the seller and the buyer are not being protected. It is within the supervisor’s power to stop discharge until such time that he is satisfied that any impediments to or any anomalies at unloading have been rectified. The sugar is discharged by a mechanical unloader and by grabs into hoppers and on to conveyor bands to the weighing house. Before the sugar reaches the weighing house, samples of the sugar are automatically dispensed into containers and kept under the control of the supervisor. There are two weighing hoppers, each with a capacity of eight tonnes and sugar from the conveyer band is filled directly into one of these hoppers and the weight is automatically recorded on a computer. Whilst one hopper is weighing, the other is being filled with sugar and the process continues. Once the sugar leaves the weighing hopper it becomes the property of the buyer. The supervisor regularly checks the weighing machines Chapter 10/page 5
Sugar Trading Manual by using test check-weights and any discrepancies are reported and weighing discontinues until the fault is rectified. When unloading has nearly been completed, the supervisor ensures that all the sugar has been cleared from the vessel’s holds and brought to account. The vessel’s crew may be required to sweep sugar from any areas of the holds which cannot be reached by the unloader or grabs. It is the supervisor’s responsibility to ensure that the vessel’s holds are completely cleared of sugar before the vessel sails. During discharge, but before weighing, an automatic sampler dispenses sufficient sugar into containers and a representative sample is taken after every 1000 tonnes discharged. The supervisor fills four glass containers with sugar from the representative sample for each 1000 tonnes. Samples for each 1000 tonnes are sent to the seller’s and the buyer’s chemist for the analysis of polarization. The analytical methods employed for determining the amount of pure sucrose in each sample of raw sugar are those laid down by The International Commission for Uniform Methods of Sugar Analysis (ICUMSA). A small portion of the sample provided to the chemist is dissolved in water, together with an added basic lead acetate solution, and filtered. The mixture is decanted into a polarimeter tube which is then placed into a polarimeter and rotated through 45 degrees. Determination of the polarization is by measurement of the optical rotation of the clarified solution. The results of the seller’s and the buyer’s polarizations are compared and any difference between the two results by 0.15 of a degree or more requires the analysis of a third sample by an independent chemist. The results of the two nearest polarizations are used as the mean average basis for each 1000 tonnes of sugar. The process continues until polarization results are obtained for the complete cargo. A weighted average polarization is arrived at by calculation and this is used by the seller and the buyer as the invoice basis. The association’s rules and regulations provide a scale upon which settlement between the seller and the buyer is completed, based on the polarization results for the whole cargo.
Other services to the trade In addition to the above services to the international sugar trade, the associations – in their long history – have been called upon for many other trade-related matters. At some stage in its history, The Sugar Association of London became responsible for providing the secretariat for The British Sugar Refiners’ Association and The London Sugar Brokers’ Association, both of which ceased to exist in the late 1970s. In the late 1960s, the secretariat was called upon to set up and provide secretarial services to The British Sugar Bureau. The governmental and public attacks on sugar as a risk to the nation’s health, at the time, Chapter 10/page 6
SAL and RSA required professional monitoring and the promotion of sugar as an important part of the nation’s diet. The activities of the bureau increased to the extent that it required larger premises and a full-time secretariat and it is now located at Dolphin Square, London, under the name of the Sugar Bureau. In the late 1960s, when it became clear that Britain would accede to the Treaty of Rome, the commodity trades saw the need for an organization to steer them through the initial stages of decimalization and the joining of the European Common Market. The secretariat of the association was again called upon and The Federation of Commodity Associations was resuscitated for this purpose. The Federation of Commodity Associations had been established in 1948 to reorganize London’s commodity markets which were in disarray at the end of the war. Having completed its task, the federation’s activities were suspended. The Grain and Feed Trade Association now provides secretarial services to The Federation of Commodity Associations and its main purpose is to provide the markets with a direct access to the European Commission in Brussels. The associations also arrange education and training seminars for the benefit of employees of member companies. Speakers chosen from the trade give their time freely to instruct traders about such matters as the calculation of demurrage and despatch, bills of lading, letters of credit, contractual terms and other trade related matters. In 1994 the associations organized and hosted a seminar on arbitration for the benefit of members. Every quarter, The Sugar Association of London arranges a raw cane sugar-testing programme in which over 30 laboratories and analytical chemists worldwide participate. Samples of raw sugar mixed by the association’s supervisor are sent to the laboratories and chemists and the polarization and moisture results are tabulated and distributed to the participants to enable them to compare their results and, if necessary, to check their sampling procedures and polarimeters for any discrepancies. The organization of the London sugar trade bi-annual dinner and annual golf meeting are also just some of the many services that The Sugar Association of London and The Refined Sugar Association provide to the international raw sugar and white trades. For further information about the associations, their rules and regulations and other activities please contact the secretary at: Forum House, 15–18 Lime Street, London EC3M 7AQ (telephone: 020 7626 1745, fax: 020 7283 3831, e-mail:
[email protected]).
Chapter 10/page 7
11 Supervision Robert G. Danvers International Commodity Control Services, Hamburg
Definition Nomination Role of the supervisor Documentation Claims Arbitration/litigation Conclusion
The purpose of this chapter is to focus on the important role of the supervision companies in relation to the supervision rules governed by any specific contract, or as are set out in the rules and regulations of The Refined Sugar Association (RSA) and The Sugar Association of London (SAL), which would normally be adopted by the supervisor in the absence of any other specific supervision rules (see Chapter 10). Very often the supervisor is referred to by names such as the ‘superco’, the ‘controller’, the ‘inspector’, the ‘surveyor’ and some other titles that we cannot print. The correct reference is the ‘supervisor’. The general role of the supervisor is covered throughout this chapter and, where necessary, reference is made to particular supervision rules which may apply.
Definition Often the supervisor must qualify as an internationally recognised superintendence company or first class superintendence company. In the rules and regulations of SAL under the section ‘definition’, it is written: ‘Approved superintendence company – reference to an approved superintendence company means a firm or organisation of international or national repute mutually approved by the seller and the buyer, competent to supervise, as instructed, the loading and/or landing, weighing, taring and sampling of sugar shipments.’ Researching this particular qualification becomes a little difficult and, whilst you may refer to the Sugar Association of London Secretariat which will provide a list of superintendent members of its association, my advice would be to contact the International Federation of Inspection Agencies Ltd (IFIA), based in London, which will provide you with a current list of its superintendent members worldwide.
Nomination It is not obligatory in every case for the buyer and the seller on any particular contract to appoint a supervisor either at time of loading or unloading of the cargo. However, in order to avoid possible disputes, either at loading or at discharge, it is advisable to appoint a supervisor to represent your interest on every shipment. Generally speaking, the party appointing the supervisor shall be responsible for providing the supervisor with full instructions and for payment of the supervisor’s fees. However, increasingly these days we observe that final buyers, either the actual consumer or, in most cases, the government procuring agency, will dictate the supervisor they want to be appointed and paid for by their sellers. In this case, the nominated supervisor of the buyer may well end up to be the sole supervisor attending the shipment. In Chapter 11/page 1
Sugar Trading Manual this situation the supervisor shall act in an impartial manner, taking into account the contractual disciplines that prevail. On some occasions we find that the final buyer – usually the government procuring agency – will appoint and pay for a supervisor to represent their interests exclusively at loading and/or discharging ports. This type of nomination may not necessarily involve an internationally recognised superintendence company, and we often observe that representatives from the country of origin, or other origins, of the government procuring agency are sent out to the different origin ports in order to attend the shipment in question. Usually, in these cases, the seller will appoint another supervisor to represent his interest at his own expense, and indeed it is most advisable that he so does. Supervisors, additionally, may be appointed by the insurance company or bank which have interests in the particular contract involved, whereas the shipowner may also involve his own surveyor, usually supplied by the Shipowner Protection and Indemnity Club (P and I) in the event of need.
Role of the supervisor The role of the supervisor is to perform the following tasks: he should inspect the carrying vessel’s cargo compartments (holds) prior to vessel loading, or the road vehicle and rail wagons in the event that the cargo is shipped by road or rail, ensuring that they are clean, dry, free from odour and fit to receive cargo. In the case of stock monitoring into a warehouse, the supervisor may also be called on to perform a structural survey of the premises intended for use and to evaluate if the premises are acceptable for the storage of sugar, either raw sugar in bulk or bagged white sugars. He should report on the condition of packing – in the case of bagged cargoes – and be satisfied that the packing is in new sound bags suitable for the export and transportation of sugar. He should perform checkweighing and sampling – in the case of bagged cargoes, this task will be performed on a percentage of bags selected at random on a daily basis from each supplier. Weighing facilities are to be provided by seller or buyer and the supervisor must be satisfied that the weighing equipment (scales) used are checked prior to, during and upon completion of loading. In the case of raw sugar in bulk, and in the event of weighbridges (for bulk raw sugars or bagged white sugars) being used, the weighbridges are also tested with certified calibrated counter weights when considered necessary. In all cases, the weighbridges must carry valid calibration certificates issued by the local government weights and measures authorities.
Chapter 11/page 2
Supervision The supervisor may also be called upon to perform an independent tally (counting) of bags. This is usually required only when bagged cargoes are involved, particularly when being delivered or received from road vehicles or rail wagons. Moreover, when the supervisor is appointed to monitor stocks into or out of warehouses, the supervisor must perform a 100% tally upon intake and 100% tally upon redelivery of goods from the warehouse. Occasionally, the supervisor may be requested to provide an independent tally during the loading or unloading of a vessel. The meaning of ‘independent’ in this context, is an additional tally independent of any other tally that may take place on the same cargo by other interested parties, such as port stevedores, ship owners, shippers and receivers. In the event that no acceptable weighing apparatus is available and the cargo is being loaded on to an ocean vessel, coaster, river vessel or barge, the supervisor has the option of performing draught surveys (initial and final) in order to determine the quantity of cargo in the vessel. Draught surveys must be performed prior to the ocean vessel’s commencement of loading cargo (initial) and again upon completion of loading (final) by reading the draught marks on the vessel’s hull. Thereafter, taking into consideration the vessel’s data and density of the water, a calculation is made resulting in the quantity of cargo loaded on board. Samples should be drawn from the product flow – bagged or bulk – at regular intervals by the supervisor and sublot samples should be established. In the absence of any specific rule in this regard, in the case of bulk raw sugars and bagged white sugars sample, sublots shall represent each 1000 metric tonne and/or balance quantity. Sample material shall be placed in sterile airtight containers sealed, representing each sublot and established in several sets, as defined by the governing supervision rules. Thereafter, sealed samples should be submitted to a recognized analytical chemist with instructions to analyse the various quality elements called for under the governing contract. The analysis must be performed in accordance with the methods determined by the International Commission for Uniform Methods of Sugar Analysis (ICUMSA) or another internationally recognised method of sugar analysis. Under some supervision rules, particularly concerning raw sugars, the supervisor may also be required to determine the need for further analysis to be carried out and to calculate the average results or, in some special contracts, actually calculate and submit settlement values on quality to their principal. In the event of damaged cargo, the supervisor must classify the damage as far as possible and any damaged cargo must be separated
Chapter 11/page 3
Sugar Trading Manual from sound cargo. Separate samples must be drawn from the damaged cargo and held for the purpose of having the damage assessed by an analytical chemist. Reserve samples shall be retained by the supervisor for a period of at least two months after the completion of loading and/or discharge. In all of the above tasks the supervisors in attendance, representing the seller and the buyer, should perform these tasks jointly and, in the case of sampling operations, final/contractual samples should be jointly sealed by sellers’ and buyers’ representatives. In the event of any dispute or objection arising from the above tasks raised by any of the attending supervisors (concerning the cleanliness of the cargo compartment of the carrying vessel, packing, weight and/or quality or sampling procedures of the cargo), then all objections shall be immediately advised to the opposing supervisor and to the supervisor’s principal (both verbally and in writing), in order that the dispute may be resolved quickly by the contractual parties. In the event that appointed supervisors representing seller and buyer refuse to co-operate on any of the above tasks, the supervisor who has no objections may call in an independent third party supervisor, duly qualified, to stand in on the various tasks that are to be performed and he will be invited to jointly seal any contractual samples that may be required. It should be emphasized that, prior to invoking this procedure, the supervisor must obtain the permission from his principal who, in turn, should discuss matters with his contractual partners in an attempt to rectify and avoid this kind of dispute. Moreover, it should be realized that additional expenses will be involved which may be difficult to recover and also that this act may prejudice the ‘rights under claims’ rules of any particular contract. However, this can only be judged on the merits of the particular reasoning for the dispute at the time.
Documentation Upon completion of the supervision assignment, whether it concerns shipment or reception of cargo, the supervisor will be required to establish either a report of loading or discharge or, in the event that a documentary letter of credit is involved, the supervisor must structure various certificates which are ultimately presented to a bank, along with other documents against which payment is effected. In the case of warehouse supervision and stock monitoring, the supervisor will be required to issue warehouse receipts covering the quantity of goods received or, in the case of collateral management, the supervisor may be required to issue warehouse warrants which may become negotiable documents in terms of title to the goods. Similarly, when the goods are released from warehouse, the superChapter 11/page 4
Supervision visor will be required to issue or to cite the release order in his stock reports – issued either weekly or monthly or both – to his principal. Precise documentary instructions must be given to the supervisor by his principal, thus enabling the supervisor to act promptly in establishing all documents that may be required. In a normal shipment of sugar (bulk raws or bagged whites) by whatever means of transportation, or in the event of warehouse stock monitoring or collateral management, or documents required under letter of credit payments, the following is a typical list of documents the supervisor may be required to establish: 1 A report of loading or discharge. 2 A draught survey report, in the event that a draught survey is undertaken. 3 A tally report, in the event that tally services are provided. 4 A warehouse receipt or warrant. 5 A delivery order or release document. 6 A certificate of the hold’s cleanliness, in the event sugar is transported by ocean vessel, or a certificate of cleanliness covering any other means of transportation. 7 A certificate of weight and quality. 8 A packing list, in the event of bagged cargoes.
Claims The supervisor may be called upon to participate in the settlement of claims, for example under the RSA rules relating to contract, claims clause No. 6. In the event that the buyer invokes the claims clause, samples shall be obtained by the buyer in triplicate. These shall be sealed average samples, drawn at the buyer’s expense, ‘by an internationally recognized superintendence company’. The samples shall be drawn from not less than 5% of the bags involved, and packed into suitable sterile airtight containers, sealed and marked accordingly.
Arbitration/litigation Similarly, the supervisor may become a material witness in the event of arbitration and/or litigation taking place on the shipment or consignment of sugar that the supervisor was involved with, either on behalf of seller or buyer. Alternatively, the supervisor may be called upon to give an ‘expert opinion’ on any particular dispute which may arise. In this case, the supervisor may not necessarily have been involved with the shipment in question and may be requested to investigate the matter and/or to apply his considered opinion on the dispute being contested in the form Chapter 11/page 5
Sugar Trading Manual of a formal written statement. This may also lead to a personal appearance at the court of arbitration or litigation and the possibility of an oral cross examination.
Conclusion In conclusion, I would like to stress that the contents of this chapter are not intended in any way to overrule any rules and regulations relating to any specific contracts under which the sugars are traded and, where applicable, those specific rules and regulations concerning supervision must be adhered to strictly.
Chapter 11/page 6
12 Sugar quality Tom McNeill Sugar InSite Pty Ltd
Quality aspects of raw and refined cane sugars The refining process Affination Melting Clarification Filtration Decolourization Crystallization Centrifuging Drying and grading Other processes Recovery boilings
Critical steps in refining sugar Affination Clarification Carbonatation Phosphatation Filtration Decolourization Bone char Activated carbon lon exchange resins Crystallization Further processing
Utilization of sugar in food manufacturing Grades of raw sugar
Quality aspects of raw and refined cane sugars In any manufacturing process, the quality of the raw material inputs will be a critical factor in the efficiency of the process and in the quality of the final products. In the manufacture of refined white cane sugar, the quality of the raw sugar used in the process is crucially important since the refining process is one of transforming the input into a purer form. In this chapter we examine the various quality aspects of both raw and refined cane sugar, and discuss their technical and commercial significance. Initially, though, it is essential to gain an understanding of the refining process to see why various quality aspects of raw sugar matter to the refiner. In order to keep this section brief, there is only a limited discussion of technical detail.
The refining process Essentially raw and refined sugars are variations on a theme – as we work our way from cane to raw sugar to high grade white sugar, we lower the unwanted components (colour, reducing sugars, ash, etc) for the one component required (sucrose, measured by its polarization). The sugar refining process, in its simplest form, is designed to purify or refine the input raw sugar to give near-pure white sugar. There are a number of options in the process for producing white sugar. Many sugar mills are capable of processing raw cane sugar up to a ‘mill-white’ standard. Full-scale refineries may also be annexed to mills, processing raw sugar up to a refined grade and utilizing mill energy to defray the processing costs. These annexed plants are common in Central and South America, Thailand and India, but are also found in other countries including Australia and South Africa. Annexed refineries process the raw sugar from the attached mill. Ideally, the mill and refinery will be integrated so that low grade refinery syrups can be returned to the mill for further processing. Stand-alone refineries, commonly located at ports and close to major population bases, commonly import raw sugars for processing into a range of refined sugar products. Such refineries are common in the USA, Canada, Europe, Asia, Middle East and (decreasingly so) Australia. The refining process replicates several manufacturing steps seen in the raw sugar milling process, but it also adds other steps that enable the majority of raw sugar colour to be removed. In order to understand why various facets of raw sugar quality are important, one must first
Chapter 12/page 1
Sugar Trading Manual understand the general process of refining raw sugar. Although there are several variations in the way refining is performed around the world, there are a number of basic steps common to all processes. The steps in the refining process are: 1 2 3 4 5 6 7 8 9 10
Affination. Melting. Clarification. Filtration. Decolourization. Crystallization. Centrifuging. Drying and grading. Other processes. Recovery boilings.
Reference may also be made to the diagrammatic representation of a refinery shown in Fig. 12.1. We will discuss each of these steps in turn.
Affination The objective of affination is to divert the raw sugar molasses film before it enters the refining process – the more efficient the affination step, the cleaner the material entering the refining process proper. Raw sugar is first mixed with hot concentrated syrup that has been recycled from a later stage in the process. This dissolves the outer molasses layer of the crystals, but not the crystals themselves. This massecuite or heavy syrup is then sent to centrifugals to spin off the molasses, which leaves behind a moist, low colour sugar. The molasses syrup that has been spun off is then sent to the recovery stream for further processing.
Melting The moist low colour sugar is then dissolved in hot water and put through a coarse primary filter. The liquor is then transferred to the clarification stage.
Clarification The high purity syrup is then subjected to clarification, which may take on a number of forms. The objective of clarification is to remove more of the remaining impurities from the syrup. The two processes commonly used throughout the world are carbonatation and phosphatation. Chapter 12/page 2
Chapter 12/page 3
12.1
Clarification
4
The refining process.
Affination
3
1
Raw sugar shed 2
Mingling
5 Filtration
6
Decolourization
Centrifuging
8
7
Crystallization
Dryer
9
Outloading
11
10
Storage
Sugar Trading Manual A carbonatation refinery pumps carbon dioxide gas through the syrup, which has had lime added. This process forms a precipitate of calcium carbonate, which traps much of the impurity load. The precipitate is then removed by filtration. In the phosphatation process lime is also added to the affination syrup but phosphoric acid is added to yield a precipitate. Air is then added so the precipitate floats to the surface as a scum and is removed from the process.
Filtration The clarified liquor is then filtered to produce a clear, pale, strawcoloured liquid. There are a number of filtration options in both carbonatation and phosphatation operations.
Decolourization Following clarification and filtration, the majority of impurities will have been removed but colour is still present in the liquor. Decolourization is the process of removing most of the remaining colour, usually by adsorption on to a suitable solid. Again several options are available – bone char, activated carbon or ion exchange resins are all substances capable of removing colour from the syrup. Some decolourizing agents also remove ash and other impurities. With almost all the colour removed by decolourization, the resultant liquor appears virtually clear.
Crystallization This is the final purification step in the refining process. With most of the impurities and colour removed, the liquor is ready to be made into a crystal form. The clear liquor is concentrated by boiling in a vacuum pan. It is then seeded with fine sugar crystals, which are grown to the required size by adding further liquor with continued evaporation of water. When the crystals in the slurry are sufficiently large, they are discharged from the pan.
Centrifuging The mixture of crystals and syrup (called massecuite) is spun in centrifuges to separate the syrup from the crystals. The first strike crystals are the refinery’s best product – they will have the highest polarization, the lowest colour and the lowest impurity level. The separated syrup is boiled again and more crystal sugar is extracted from it. This can happen several times with the resultant sugar being of a slightly lower grade after each boiling. Chapter 12/page 4
Sugar quality Drying and grading The crystal sugar is then tumbled through a stream of air to dry it and then it is graded according to required crystal sizes.
Other processes Some of the syrup and molasses streams may be utilized for other sugar products. Soft brown sugars, treacle, cooking syrups and molasses all originate from syrup streams that are rejected from the main refined sugar stream.
Recovery boilings The recovery system used by a refinery will depend on whether it is annexed to a raw sugar mill. In an annexed refinery, syrups can be returned to the mill while the crop is being processed. A raw sugar mill will process the refinery syrups more efficiently than a refinery. In a stand-alone refinery the recovery of sugar from refinery syrups is done in the recovery house. Syrups sent to the recovery house include affination syrups and syrups spun from the final centrifuging of white sugars. The simplest refinery boiling system results in two products – high purity sugar, which can re-enter the refinery process after the affination step, and refinery final molasses. The final molasses will not be processed further and is commonly sold as a by-product of the refining process.
Critical steps in refining sugar Each of the refinery steps has its own sensitivities to the input raw material. Different steps are sensitive to different raw sugar quality criteria, and a combination of several deficiencies in raw sugar quality can substantially affect both the processing rate and the economics of refining the sugar. It is important to understand why various raw sugar quality criteria are treated with caution by refiners and why the processing may suffer from poor quality raw sugar. Table 12.1 shows in broad detail the raw sugar quality aspects that impact on the various stages of the refining process.
Affination Since affination is the initial refining step that determines the colour and impurity load for the whole refining process, it is a key step for the refiner. The two most important quality factors in raw sugar for affination are polarization and crystal size distribution. Chapter 12/page 5
Sugar Trading Manual Table 12.1 Refinery process sensitivities to raw sugar quality Refinery process
Major quality impact
Other quality impact
Affination
Crystal size, size distribution and shape, polarization
Total impurities, lumps, foreign matter
Starch Total impurities Filtrability, insoluble impurities Colour Colour, dextran, ash
Total impurities
Clarification Carbonatation Phosphatation Filtration Decolourization Crystallization
Total impurities Ash, other impurities
For a raw sugar to process well through affination, it is important for it to have large uniform crystals without a significant proportion of smaller crystals or dust (fine grain). Uniformly large crystals allow the molasses layer to be easily dissolved and spun off in the affination process. If there is a broad distribution of crystal sizes, the sugar will pack more tightly in the affination centrifugals and this will inhibit molasses removal. Additionally, elongated crystals, commonly seen when significant dextran levels are present in raw sugar, will reduce affination rates. The total impurity load will also affect the efficiency of the affination process. A high polarization results in a reduced impurity load for the affination station and for the refinery as a whole. A lower polarization sugar with a high proportion of impurities compared to sucrose will place a higher workload on affination (and the whole refining process). Lumps of crystals or massecuite also impede the affination step as it is difficult to remove the molasses from a tightly packed lump. Foreign matter can block centrifugal screens and cause damage to centrifugals and other equipment. As well as being present in the molasses film around the crystal, some colour and impurities are included inside the crystal. These impurities cannot be removed in affination and will have to be removed in clarification and/or decolourization. Thus the proportion of colour and other impurities in the molasses layer compared to the crystal is also an important quality criterion.
Clarification Carbonatation The carbonatation step, in refineries using the process, utilizes a carbon dioxide gas that is pumped through limed juice to precipitate Chapter 12/page 6
Sugar quality impurities. Essential to this process is the chemical reaction that results in the calcium carbonate precipitate. This precipitate is removed by filtration. Starch causes severe distortion of crystals of calcium carbonate. With the shape of crystals distorted, and an increase in the ‘bunching’ of crystals, such precipitates filter very slowly. High starch levels can impact heavily on the rate of filtration in the refinery and reduce factory throughput levels. The level of total impurities in the raw sugar will also impact on the clarification step because the higher the impurity load, the harder the clarification step must work to remove them. Phosphatation As with carbonatation, the phosphatation process is impacted upon by the overall level of impurities in the raw sugar. The higher the total impurity load, the slower the clarification process. Clarification by the phosphatation process is not sensitive to the level of starch in raw sugar unless the levels are very high.
Filtration There is substantial variation in the ability of different raw sugars to be filtered in a refinery. A raw sugar’s ‘filtrability’ is one measure used to determine how the sugar will perform in the refinery’s filtration process. In phosphatation, refining filtration is usually determined by the efficiency of the phosphatation process. The filtration step is a critical ratedetermining step in the refinery. Impurities, and particularly insoluble impurities, in raw sugar can slow the filtration step considerably. The impurities most commonly encountered are starch, dextran, soluble phosphates, wax, gums, silica and polysaccharides. This slowing of filtration will reduce the overall refinery throughput, and a raw sugar that will filter easily is valuable in a refinery’s overall economics.
Decolourization The major visible difference between raw sugar and refined sugar is colour. The process by which colour is removed from the raw sugar input to the refinery is the major determinant of the final refined sugar quality. Often the only quality factor mentioned with regard to the quality of sugar is its colour – most often measured in ICUMSA colour units. The lower the measure of colour, the higher the grade, from a high grade sparkling white sugar of 20 to 60 ICUMSA units down to the next two common grades of 100 ICUMSA and 250 ICUMSA units. These Chapter 12/page 7
Sugar Trading Manual lower grades may have a light grey or light brown colouration indicating that all the colour components of the original raw sugar have not been removed. Not only is the absolute level of colour of the raw sugar coming into the refinery important, but the actual composition of the colour components can determine their ease of removal. Raw sugar colour normally varies from around 800 to 5000 ICUMSA units, from a light brown right through to a very dark brown. There are many factors influencing the raw sugar colour level including: 1 Cane variety, age and condition when harvested. 2 The amount of leaf, soil and other material entering the sugar mill. 3 Whether the cane was burnt and the elapsed time between burning and harvest. 4 Mill processing, including process temperatures and process control. 5 The efficiency of impurity removal in the sugar mill. 6 The duration of storage and storage conditions. Chen’s Cane Sugar Handbook1 lists the important sources of raw sugar colour as: 1 Plant pigments from the sugar cane. 2 Melanoidin-type materials resulting from the reaction of amino acids with reducing sugars. 3 Caramel-type materials resulting from the thermal breakdown of sucrose. It is obvious that there are a number of sources of raw sugar colour from the farm through harvesting, to milling and storage. From a refining perspective, the ICUMSA colour measurement is only part of the colour story. Much of the raw sugar colour is contained in the molasses layer surrounding the crystal. In the refining process this molasses layer is mostly removed in the initial affination process, from which a low colour sugar results. The residual colour after affination and clarification is mostly the colour that was included in the raw sugar crystal. This colour can be difficult to remove and high levels of included colour can have a significant impact on the efficiency of the decolourization step in the refining process. Refineries typically use one of the following processes in the decolourization step: 1 Bone char. 2 Activated carbon. 3 Ion exchange resins. 1
Carpenter FG in Chen JCP, Cane Sugar Handbook, 1985, p 571.
Chapter 12/page 8
Sugar quality Bone char Char filters absorb colour and some ash on contact, and there is typically a bank of such filters in a refinery using char. The char is recycled by drying and regenerated in a kiln before being reused. Activated carbon Carbon may take the form of either granulated or powdered carbon, both of which are highly porous and adsorbent materials. Carbons are less able to be regenerated in the refining process – granular carbon can only be reused 20 to 30 times compared to bone char, which can be reused hundreds of times. A high colour liquor may require higher residence times and this will slow the refining process. Alternatively, higher colour sugars may require more frequent regeneration of the decolourizing agent. Ion exchange resins The usage of resins for decolourization was developed much later than char or activated carbon. Resins may be used alone but are also used in combination with either char or activated carbon, and the combination is likely to result in more effective colour removal. Simplistically, the resins operate by swapping small colourless molecules on the resin for coloured molecules and ash components in process. A clear liquor should result from this processing. Ion exchange resins can be regenerated by washing with a brine (salt) solution or an acidic brine solution. Besides the actual colour load entering the decolourization step, the ash level of the raw sugar is important to any decolourizing system, particularly an ion exchange system. Ash is the inorganic component of raw sugar typically consisting of sodium, calcium and potassium cations and chloride, silicate, sulphate and phosphate anions. While some ash is removed in earlier processes, ion exchange is one step that will effectively deal with a certain level of ash in the refinery. Excessive ash levels can result in high levels of ash further in the process and may force the remelting of sugar that would otherwise have met refined sugar quality standards.
Crystallization The final important step in the refining process consists of boiling the liquor to concentrate it, seeding and growing the crystals before centrifuging and drying the refined product. A number of raw sugar quality factors will have an impact on the final refined sugar quality, dependChapter 12/page 9
Sugar Trading Manual ing on the efficiency of the refining process to that point. For example, incomplete decolourization may result in higher than acceptable colour levels in refined sugar. Dextran is the major raw sugar quality factor that can affect the crystallization process in the refinery. As in the raw sugar factory, dextran will reduce crystal growth rates and cause elongation of the sugar crystal during the crystallization step in the refinery. Centrifuging sugars with distorted crystal shapes results in difficulties in removing the molasses film from the crystal surface. The crystallization/centrifuging stage results in high quality refined product and separated molasses and syrup streams. These streams may either be reprocessed or utilized for speciality sugars – the amount of ash and colour is also important in determining the ease with which such sugars can be produced.
Further processing Once the white sugar has been removed from the refinery syrups, further products may be produced from the remaining syrups. Such products include brown sugars, golden syrups and treacle. Much of the dextran in raw sugar will end up in the recovery streams in the refinery. When products such as brown sugar are extracted, the dextran present will cause even greater distortion in crystal formation than in the white sugars extracted. High ash levels also contribute to high sugar loss levels in final molasses.
Utilization of sugar in food manufacturing As a result of refining, sugar gains a number of important characteristics that improve its suitability as an ingredient in food preparation. These characteristics, which are important to the commercial food manufacturer, include: 1 Providing sweetness without any undesirable aftertaste. 2 Acting as a natural preservative by inhibiting the growth of bacteria, yeast and mould in a wide range of products. 3 Helping to maintain water content, delaying staleness in breads, cakes, biscuits and other products, permitting a longer shelf-life. 4 Delaying the coagulation of protein, contributing to the smooth texture of products such as baked custard. 5 Giving body to foods, contributing to the bulk of most cakes and confectionery. Chapter 12/page 10
Sugar quality Table 12.2 Comparative quality parameters Country/sugar
Pol
Ash
Colour
Starch
Dextran
Australian VHP Australian BR 1 Australian JA Brazil Cristal Brazil VHP Brazil raw South Africa VHP Thailand high pol Thailand standard Guatemala Colombia El Salvador Cuba
99.30 98.90 97.85 99.80 99.48 98.49 99.40 98.99 98.51 99.00 98.46 98.71 98.04
0.19 0.26 0.47 0.10 0.12 0.26 0.14 0.17 0.20 0.21 0.34 0.21 0.40
1250 1800 3529 250 880 2600 1936 2381 3692 1991 2324 2478 4238
40 67 79 138 168 124 55 184 238 105 175 62 280
18 29 30 200 220 140 120 10 10 25 65 300 430
Note: Analyses are averages over 1996–99, on selected shipment cargoes – not production specifications.
6 Acting as a food for yeast in bread making by accelerating the fermentation of yeast to raise and lighten the dough. 7 Contributing to the texture and grain of baked goods. 8 Caramelizing on being heated to produce a distinctive colour and flavour in baked goods such as bread and biscuits. 9 Stabilizing egg white foams in meringue and sponge making. Refineries produce a range of products from raw sugar that have different characteristics, particularly particle size, colour and flavour.
Grades of raw sugar There are various grades of raw sugar either sold directly to refiners or traded around the world – too many to detail specifically. Table 12.2 shows only selected raw sugar grades from a number of major exporters for comparison purposes.
Chapter 12/page 11
Part 4 Futures
13 Futures and options James Cassidy and Michael McDougall Fimat, USA
History and background Market participants Non-commercials Funds Locals Commercials Trade houses Banks and other financial institutions Producers Brazil Australia Thailand Guatemala, Colombia and Mexico European producers Industry Others
Option strategies Conclusion
History and background Futures trading has been an integral part of world commodity trading since the mid-1800s. The original concept of futures trading probably began as far back as Roman times although it was not until the 1600s in Japan that futures trading became official. The USA first officially traded futures when the Chicago Board of Trade opened its doors on 13 March 1851. Today’s present home of the Coffee, Sugar and Cocoa Exchange (now known as the New York Board of Trade) began operation in 1882. The need for futures trading and an exchange to conduct business was just the natural evolution of commodity trading. What had initially begun as physical commodity trading on a spot basis gradually evolved to forward transactions and then the establishment of futures trading on a year-round basis. Despite public backlash at times and accusations that futures exchanges are nothing more than organized casinos, the trading of most major commodities throughout the world is inexorably linked to the trading done on futures exchanges. In fact the average citizen probably pays less for his daily goods because the risk of price changes can actually be offset on the exchange; hence the costs of production, marketing and processing are reduced. We will now examine the trading of a specific commodity on the exchanges, who are the participants and what strategies they use to trade one of the oldest commodities in the world, sugar. The production of sugar most likely began from cane grown on the banks of the River Nile in Egypt sometime around the beginning of the Christian era. Sugar cane was introduced to North America by the arrival of Christopher Columbus but cane production only began in earnest in 1794 after the British began taxing molasses in 1764. The first sugar beet factory was established in California in 1838. The trading of established sugar futures began a good deal later, in 1914 to be exact, on the Coffee Exchange. The name of the exchange would be changed only two years later to the New York Coffee and Sugar Exchange, Inc. The exchange was later united with the separate Cocoa Exchange in 1979, becoming known as the Coffee, Sugar and Cocoa Exchange, Inc. or CSCE. Only recently did the exchange merge with another notable commodity exchange, the Cotton and Orange Juice Exchange, and was renamed the New York Board of Trade, emulating its more famous Chicago brother. The No. 11 or world contract (see Part 7, Appendix 1) was founded in New York in 1914 to take the place of the traditional raw sugar markets of London and Hamburg that were disrupted by the outbreak of the First World War. The contract itself is 112 000 pounds or 50 long tons of cane sugar, stored in bulk, fob from any of 28 foreign countries
Chapter 13/page 1
Sugar Trading Manual of origin and the USA, and deliverable at any port in country of origin or berth or anchorage in the customary port of export. The less known sugar contract on the New York exchange is the No. 14 or domestic sugar contract. It is the same size as the No. 11 and it is also cane sugar but it is cif duty paid and deliverable in New York, Baltimore, Galveston, New Orleans and Savannah. It is interesting to note that the No. 14 contract actually traded more contracts on an annual basis than the No. 11 over several different years, but the last time that happened was in 1961. Since then, the world contract volume has far and away surpassed the domestic contract. The reason for the greater liquidity is obvious as the greater restriction on free trade on the domestic contract has limited the necessity or desire to hedge and reduced the opportunity to speculate. Eventually if the domestic sugar market’s trading barriers are reduced or even eradicated then there will be less need for differentiated markets. For now, though, the reduction of internal protection is still being debated and it most probably will only occur over a gradual basis, not from one day to the next. The New York Board of Trade is not the only established sugar futures contract in the world though it is undeniably the most active. The London International Financial Futures Exchange (LIFFE) has a refined white sugar contract known as the No. 5 (see Part 7, Appendix 2). The main difference between the London and two New York contracts other than quality of the sugar traded is the fact that the New York contract is an open outcry contract and the London contract is electronically traded. The relative drawbacks or benefits of electronic trading have been debated extensively but the relative daily trading volume and open interest present on the London No. 5 contract is much less than the No. 11 New York contract. This is despite the fact that a large amount of daily volume traded on both the contracts is arbitrage related and therefore the two contracts are dependent upon one another to some degree. There have been attempts by other countries to institute sugar future contracts but none has met with much success. The most notable has been the French MATIF exchange’s own version of the No. 5 contract. For a time the liquidity on the exchange was quite good but the competition from the London contract has effectively led the MATIF contract to be suspended. Another contract of interest is traded on the Brazilian exchange, the Bolsa Mercadorias de Futuros, or BMF. The local crystal sugar contract is geared toward the internal sugar market and, to that end, the specification of the contract calls for bagged sugar but, unfortunately, despite the change from an index to physical delivery, physical delivery remains difficult, and there is also some concern by exchange officials that they might have to cope logistically with the type of delivery that appeared against New York in May 1995. That was when a Chapter 13/page 2
Futures and options single Brazilian sugar mill made delivery through a US trade house of 560 000 tons of sugar against the New York exchange. The liquidity of the BMF contract has never been great but, owing to the ever increasing importance of Brazil on the world sugar market, the price discovery provided by the contract is closely watched by most world sugar traders. One other contract of note is the sugar contract traded in Japan on the Tokyo Commodity Exchange. The awkward hours and the yenbased quote have made it of more interest for Asian traders but there are times when westerners show an interest in the contract. In March 1999, in fact, Cuban sugar was delivered against the contract mainly because the relative strength in the contract made freight differentials attractive and also Cuban sugar cannot be delivered against the New York exchange.
Market participants Futures market trading is a big mystery to the general public. Any novice who has ever witnessed futures trading through the visitor’s gallery will probably be awestruck and even intimidated by the mayhem that seems to be taking place in the pits. Despite the chaos shown on the floor, the floor only represents the focal point of a wide diversity of companies and individuals that participate in futures trading. Keeping watch over the activity is the job of the Commodity Futures Trading Commission (CFTC), a federal government agency that was formed to foster competition in the marketplace and protect people who participate in the markets from fraud, deceit and abusive practices. One of the services provided by the CFTC on a weekly basis is the bi-weekly report on the position of traders or ‘commitment of traders’. The report, which is closely scrutinized by traders, shows the breakdown of traders’ positions in several broad categories: noncommercials or funds, commercials or trade, spread positions, and non-reportable or small traders. By observing the commitment of traders, in conjunction with recent volume and open interest figures, traders try to discern if any particular group is in a strong or weak position with regard to recent market activity. Particular attention is always noted on the fund position as it is perceived to be the single group most apt to change position rapidly, whether it be long or short. The trade or commercial position is considered more ponderous as a large percentage of its position is a hedge against the physical sugar. Therefore what it may be losing on the hedge is usually offset by the actual commodity and, on a net basis, it is not going to be forced out of a position financially (theoretically). The CFTC obtains the traders’ positions from information the traders themselves provide. Once they reach a certain number of contracts Chapter 13/page 3
Sugar Trading Manual (200 for sugar), they are required by law to identify themselves. The traders that do not reach the position limit are lumped into the nonreporting group and, even though this group is labeled ‘small traders’, the combined position can reach a substantial size. Since the CFTC only has jurisdiction over US markets, similar commitments information is not readily available for foreign markets. This means that the London white sugar market, the Tokyo raw or Brazilian crystal sugar market has no clear-cut information available on traders’ positions and one can only guess at the breakdown of hedgers and speculators. Even though we are talking about similar sugar contracts, it does not necessarily follow that the speculators or hedgers in London will have the same bias as that of New York. Within the broad grouping that the CFTC provides there can be a wide diversity of traders and trading styles. Since its inception, the market has been in a gradual and constant evolution, and we will attempt to give a glimpse at what goes on behind the scenes and what changes have taken and are taking place with regard to the breakdown of traders or their trading styles.
Non-commercials Funds The non-commercial position, or ‘funds’ as everyone refers to it, is the speculative side of the futures coin. As much as many people complain about speculative money or the influence it has on the markets, without speculators the futures markets would not function as efficiently and in fact might not function at all. The speculator is only interested in one thing, making money. He is usually not interested in receiving or delivering the commodity with which he has a position. The non-commercial position revealed by the CFTC is those speculators who have sufficient size to reach reporting limits. Speculators are also present in the non-reportable traders. The main difference between the speculators in the two categories besides the relative size is the duration of their trades. The larger speculator or fund will normally carry a position over several days, weeks or even months. This compares with the smaller traders who might only carry a position for a short duration, maybe even changing position several times during the same day. The tremendous growth of managed money has changed the composition of the non-commercial category over the last 15–20 years. The amount of money managed for institutions and individuals has grown from about $500 million in 1983 to nearly $30 billion in 1997 and $50 billion in 2001. The money is managed by professional commodity trading advisors (CTAs). Their licensing and subsequent monitoring is accomplished under the auspices of the National Futures Association Chapter 13/page 4
Futures and options or NFA. The NFA’s existence was authorized by the CFTC but is funded by exchange member dues, and is therefore a self-regulatory board. The rapid growth and increased liquidity in futures markets in general has helped attract increased fund interest and allowed them to increase the amount of money that they can invest. However, they normally impose limits to their futures markets exposure. The limit is usually a certain percentage of the total contract open interest. The limit would seem to apply not only to a gross long or short position but also to a percentage of the combined position. The gross short or long position is generally limited to a maximum percentage of 35% of the open interest. The total position, combined long and short, rarely goes above 25%. The reasoning behind this self-imposed limit is that the CTAs are interested only in making a return on investment. They do not concern themselves with offsetting a physical position so they do not have any reason to hold a position if it goes against them. Therefore a quick entry or exit is very important, especially if a position is turning sour or they see a possible new trading opportunity. If the size of the position is too big, the entry or exit will be more difficult or disruptive to prices. The Exchange (New York Board of Trade) also imposes limits on speculators’ positions. A noticeable trend that has occurred has shown that managed money has much more of a willingness to hold larger percentage short positions. Historically the fund’s long position has been almost double that of the short position on a numerical basis. This can be explained by the fact that most traders have a positive bias to markets probably owing to the inflationary environment that most people have experienced during most of their grown life. Recently the word that seems to be more on people’s minds is deflation. The increase in commodity production and surprise reduction in demand as a result of the Asian meltdown has caused commodity prices to drop to inflationadjusted historical lows since 1998. The result has been that funds have put on record-sized short positions in almost every commodity. There was a brief time in fact that funds were short in virtually every major commodity. It is only since the end of 1999 that we have seen some profit-taking and even reversal of positions in a few commodity markets, but the threat of a deflationary trend will continue. Recently, however, there has been a renewed interest in fund positions, particularly on the long side. This is related to several factors. One is the poor performance of the world’s stockmarkets. The boom years of the 1990s are past and investors are looking for alternative investments. The increased investment capital flowing to hedge funds is trickling to commodities. Another reason for commodity interest is the slowly weakening dollar. The fund’s rapid reaction time is often conceived by many to mean that the CTAs are all trading with the same trading systems or working Chapter 13/page 5
Sugar Trading Manual in conjunction with one another. The truth of the matter is that, even though the term ‘funds’ seems to designate a single category, in reality the trading system or approach of each individual trading manager may differ substantially. Some may trade using systems with entry and exit controlled by a computer program or ‘black box’ but others may be more ‘seat of the pants’ traders just trying to find relative value or distortions within or between markets. The difference in trading styles can result in varying degrees of risk tolerance and balance of positions. We can still experience blow-off days when important technical levels are breached, fund stops are triggered and positions can be radically altered or changed, but that is not to say that funds are completely responsible. A good deal of market distortion can actually be attributed to another group – the locals. Locals The locals are not listed as a separate category by the CFTC commitment report but they constitute a significant group in any case. Grouping them is not difficult because they are just pure speculators, but their relative size may vary from insignificant to massive. Therefore they could easily fall into the non-commercial or the non-reportable category with the same facility. They operate from the floor for their own accounts, generally on a short-term basis, in and out of the market as quickly as possible. Some of them prefer to work off the order flow, reacting to large-scale order size more quickly than the screen-based trader. These are the locals who will suffer the most if the New York exchange ever changes completely to electronic trading. The chance of a local ever sitting in an office screen-trading is remote. One of the many advantages that the floor-based trader has is the ability to find or discover where the large fund stops may be located. This is one of the reasons that, when the funds are actively participating in the market, the daily volume is always much larger than normal. The locals know when the funds are buying and selling aggressively and they know that normally the funds will be present for the entire day if important technical levels are broken, concentrating activity at the beginning of the session and at the end. The locals then generally ride the wave of fund orders, getting in and out of the market several times during the day. Sometimes, when the market is particularly agitated, you can even detect locals migrating over from other markets such as cocoa or coffee. A good analogy would be like scavengers hovering around the lion’s kill. Having said that, the function of the locals is very important for the day-to-day liquidity of the market. Even on some days when the market is showing very little ‘paper’ or trade and commission house orders, the volume trade by the end of the day can still turn out to be rather sizeable. A good part of the daily Chapter 13/page 6
Futures and options volume is in fact local-generated. Some traders estimate that locals contribute to anywhere from 30% to 60% of the daily volume, depending upon the day. Not all locals are short-term flow oriented; some prefer to take advantage of market distortions, particularly option trading locals. They essentially perform a market-making function that is vital to efficient option trading activity. In fact, without locals, option trading would be much more of a sporadic activity similar to the over-the-counter option trading that is seen with exotic option trading. The size of some of the option locals can be extremely large, and they not only influence option trading liquidity but also futures trading, especially when they delta hedge their option positions or offset them against futures. By necessity the option trading locals tend to be more sophisticated than their future trading brethren. They have to follow several parameters at once, such as different trading months, different option strikes, option volatility and whether they are dealing with a put or a call. They also have to follow all the Greek ingredients that go into option pricing such as the delta, gamma, vega and even time decay. Option trading in sugar has grown substantially over the last few years and one of the contributing factors has been the willingness of the option locals to provide liquidity. (For further details of options trading strategies see page 17 of this chapter.) Despite the success of electronic screen-based trading experienced particularly in Europe, a comparison of liquidity between the London market and the New York market should be enough to ward off a desire for a quick change to electronic trading by the New York Board of Trade. Daily average future volumes in New York are in the region of 20 000. London has not even half that. If you take into consideration the option volume then there is no direct comparison. Option volume in New York has exceeded 20 000 contracts in one day. London, on the other hand, is lucky to manage that volume in one month. A great deal of the difference in volume, particularly in options, is owing to the presence of locals on the floor of the New York exchange. Granted, annual trading volume in raw sugar far exceeds that of white sugar but the difference is not completely explained away by that. The locals definitely provide a useful service to the New York sugar market.
Commercials The commercial is the flip side of the futures coin. It utilizes futures trading not to take on risk but to protect against it. It is the hedger. Futures trading was originally developed by hedgers to protect inventory especially during the peak harvest period when inventories would seasonally grow. Gradually the simple task of protecting inventory from Chapter 13/page 7
Sugar Trading Manual adverse price movement began to evolve into the dynamic concept of risk management that not only minimized risk but also tried to maximize profit potential. To be categorized as a commercial has come to mean a great many things in the sugar market today as it can mean any company that wishes to hedge against risk. This can include the well-known international trade houses, the exporter from the source country, the producer or even the company that utilizes sugar in its final product. We will now discuss in a little more detail the different types of hedgers that deal in the sugar futures market. Trade houses The predominant force in the sugar market is the trade house. Trade houses make up the largest percentage of open interest in the sugar contract as they participate in the bulk of the world physical sugar trade, estimated at some 43 million tons a year. The first trade houses were descended from the trading companies that spanned the globe two hundred years ago. They generally ran barter operations with the use of a large shipping fleet and contacts throughout the world. They were able to take advantage of the lack of communication between countries and also a lack of a readily available commodity price source. Gradually the telecommunications revolution and growth of commodity exchanges has brought a wealth of information to countries throughout the world. The same information that the trade house used to guard so religiously is now available for everyone. This has had the effect of narrowing profit margins throughout the world commodity markets with the result that many inefficient trade houses have fallen by the wayside. Many trade houses that trade sugar today are not even descended from the old sugar trade at all but have more experience with grain trading. This gives them a better understanding of logistics, vertical integration and economies of scale. They are also generally of a much greater size than the trade house that just specializes in sugar and can therefore draw on a greater accessibility to global financing. Today the ability to prefinance sugar purchases from producer countries is one of the prerequisites of global trade. This is especially true today with the recent credit crunch experienced by many emerging or developing countries. The access to enormous amounts of capital is one of the principal ways the multinational trade company can still maintain a competitive advantage in the world trade market. Another means of staying ahead in the world trade is to deal with countries that are not characterized as triple A by the international community. This can mean they do not meet financial criteria or they
Chapter 13/page 8
Futures and options do not provide sufficient freedoms to their citizens. This list can include such notable countries such as Cuba, Iraq, Libya, Kosovo and Iran or smaller, lesser known countries such as Sierra Leone. When trade companies deal with human rights offenders they run the risk of incurring the wrath of the USA or other countries. The recent backpedalling that many companies and banks had to do in Cuba after US pressure is a well-known example. Other risks that trade houses have to tackle concern countries that are not financially sound. This can be either company risk in the case of a financially strapped exporter or actually country risk in the case of unexpected currency changes, debt default or even import/export tariff changes. The trade house assumes many of the above risks in the hope of a better profit margin. Some of the risk can be offset by the judicious use of futures and options, but in some cases losses are unavoidable, especially when a buyer or seller defaults. The default of physical sugar, whether it be the purchase or delivery, can sometimes be made worse by the default on the accompanying futures position held in the trade house’s account. The trade house, as part of its service, will offer the exporter or importer the use of the trade house’s future account for its hedging. The access of futures or option trading for the buyer or seller of the sugar has a number of advantages for the trade house. For one it can better track the hedging position of the client, making sure he is operating judiciously and not leaving his price fixation open when the market is volatile. In that way the trade house should have a better idea of the financial position of its client so as to avoid any unpleasant surprises later on. The use of the trade house’s future account is more often than not a case of financial necessity for the client as he usually does not want to utilize his precious cash flow to margin future accounts. Since the client is also in touch with the trade house on a day-to-day basis it becomes a question of ease of operation as everything is kept in the same centralized location. The one disadvantage that the trade house client must recognize when he has the futures position and physical position in the same location is that the trade house will have almost complete access to the client’s entire position. He will know how much each client has fixed, how much he still has to fix and exactly where he is going to fix. This provides a great deal of information to the trade house and leaves the hedging book of the client completely transparent. Many a trade house has used that knowledge to its advantage. Trade houses will continue to look for competitive advantages in this increasingly complex world but, observing the recent trend, it is more likely that tomorrow’s trade house will actually be more like a multinational super food-processing group. The concentration within the industry seen over the last 20 years has been tremendous and it looks likely
Chapter 13/page 9
Sugar Trading Manual to continue. The traditional trade houses are fast growing in size and the original smaller specialized trade houses are fast disappearing. With the world sugar market reaching an estimated 143 million tons of production in 2002/03 and production and consumption spread throughout the world, the need for a large organization with a massive amount of capital is almost fundamental. Increasingly the trade houses are facing competition, particularly in the financing aspect of the business. Multinational and local banks in particular are playing a larger role in providing financing to sugar exporters and importers. Banks and other financial institutions Banks have always been involved in sugar financing deals, whether they be export or inventory related, and almost always as an intermediary between the buyer and the seller. In this way they are theoretically reducing their risk of non-compliance or default by either party. However, with the recent turmoil in the emerging markets the banks have found themselves at times ‘holding the bag’ so to speak. This has forced them to follow the futures market activity of the client or clients to the point where they ‘suggest’ the level of fixation that must be done. Some banks have a very close arrangement with futures brokers or they actually own their own futures broker. It would seem that the time is fast approaching when the banks might become directly involved in the deal-making process or actual trade of physical sugar and thus the order transmission of futures orders. In some case this might be forced upon them by the financial difficulty that some mills might be suffering, but it is also a natural evolution process where the amount of capital involved in sugar financing deals requires closer monitoring and greater control. This is going against the trend demonstrated by the recent merger activity between investment banks that were involved in commodity trading and the more traditional commercial banks. In recent cases the acquiring financial institution has had more of a tendency to close down or spin off any non-financial trading activity, but this has been more of a case of lack of successful commodity trading by the acquired firm. Many locally established emerging market banks are also becoming at least more involved in the study of sugar futures and options to provide hedging for the local clientele. The lack of a sufficiently liquid local futures exchange is a main reason that the banks are looking at the large New York and London sugar exchanges. Many banks receive commodities as payment-in-kind or help arrange barter deals, and so have a direct interest in following the futures markets for price information. This is more common with soybean or coffee, but many banks are getting more into commodity management and not just pure finance. This type of trend can only increase as the world globalization Chapter 13/page 10
Futures and options process continues and information and efficient telecommunications become available to more countries. Only in 1998 did Indian government officials allow Indian companies to hedge officially through outside futures markets, and it was not too long ago that the Brazilian Central Bank authorized unrestricted hedging without direct government monitoring. This allows a Brazilian company to hedge on the New York Board of Trade and discount any hedging losses against its profit internally. Many other countries do not have official rules and regulations regarding outside hedging or they prohibit it altogether. It is only natural that, as the local clients express a need or desire to hedge their production, the banks or local futures brokers will offer the service.
Producers Sugar producers are widely scattered all over the world but they all focus their attention on the New York and London futures exchanges. Brazil has supplanted India as the world’s largest producer and is by far the world’s largest exporter. Its economies of scale, geographic advantages, improved logistical structure and recent currency weakness are extremely threatening to the other world producers. The Australians have been most vocal in their concern but any and all marginal producers should be worried. The unexpected weakness in Asian demand over 1998 hurt both Australia and Thailand but, surprisingly, the Thai production in 1999 showed a recovery from 1998, despite a weak demand and premium structure. Unfortunately, many producing countries still do not use futures or options as a hedging tool but only as a pricing mechanism. This means that they have a very short-term view of things and will only fix their price close to the shipment date of the physical sugar. Many countries, such as Thailand, have another difficulty in using futures – the government strictly controls the transfer of foreign exchange out of the country. This makes it very hard for a large company to take care of margin payments or adjustments. Many are content to run their futures books through trade houses. Producing countries have been courted by the trade houses for hundreds of years. The trade house, however, is interested principally in the physical sugar. The pricing of the sugar is important but today’s trade house usually has a small, efficient staff of traders and has to deal with a large number of different sugar mills. The amount of attention that can be paid to each client is, at times, lacking. The trade house, as mentioned before, likes to be able to follow the producing country’s fixing strategy for obvious reasons but the amount of time and attention it can spend in helping the producer to work on more complex hedging strategies is limited. Chapter 13/page 11
Sugar Trading Manual Brazil Brazil in particular is a case in point on trade house control. Brazil’s production and exports have grown tremendously in the last ten years and the Central-South region of Brazil is now the dominant source of deliverable sugar for the May, July and October months of the New York No. 11 contract. At one time the trade houses controlled the delivery of sugar during the above months so they were used to battling among themselves. However, since 1995 the Brazilian mills and mill organizations have begun the process of becoming more independent, increasingly removing their futures price fixation from trade house control. The futures trade activity separation from the physical trade is a natural process of evolution, and the sheer size of some of the groups justifies that they begin operating almost as trade houses themselves. One of the largest of the mill groups crushes more cane for sugar and alcohol than the entire country of Cuba. The world pays most attention to Brazilian exports, which could reach 13 million tons in 2003, but the internal market consumes another 10 million tons and the alcohol production utilizes a tremendous amount of cane. If ever the alcohol production were completely switched to sugar production (which is only fantasy) there would be the possibility to produce another 40 million tons of sugar. Brazilian mills’ independent sugar futures use has been on a steady rise since 1997. Previously most independent activity was limited to small lots of speculation more than likely by the mill owner. The use of futures, and particularly options, has become more professional as the mills adapt to the more competitive world. For them it is not just a fad, it is more a question of survival. Some Brazilian mills even study the possibility of delivering their own sugar against the New York exchange, particularly as an alternative to weak physical export markets. The most recent example of this was in the May 1997 contract expiry when a Brazilian mill group delivered 260 000 tons or 5200 contracts on the exchange to a large multinational trade house. The timing of the delivery took the trade house by surprise as it thought that such a large delivery could not be made so soon in the Brazilian sugar season. Brazilian sugar can be delivered year round, as the March 1999 expiry showed. The threat of Brazilian sugar delivery will at least keep the spread structure from reaching the extreme premium levels that we were used to seeing in the past. Not only will the spread structure of the New York market be negatively affected by Brazilian sugar but also the London white sugar premium. Owing to recent contract modifications Brazilian sugar can be delivered against London in the same polypropylene bags that the Brazilian traders use and not just the poly-jute bags that were standard use before. So far, London delivery made directly by Brazilian mills has Chapter 13/page 12
Futures and options only been in small quantities but the possibility exists of much larger deliveries if the premium justifies itself. The relative size of Brazil and its importance in the world sugar market is at such a point that the French exchange, the MATIF, even tried to introduce a lower quality white contract, a 100 ICUMSA contract that was delivered as a worldwide contract but really targeted Brazil. Unfortunately, the trade houses did not fully embrace the contract as they all have a vested interest in keeping the London No. 5 contract liquid, and the Brazilian mills were unable to help the contract along by themselves. When one talks about the influence of Brazil on the futures markets one has to pay special attention not only to actual futures trading but also to options trading. Options trading has in fact been the main focus of a large percentage of the Brazilian mills that have decided to trade independently from the trade houses. The main consideration in trading options is the lower cost of trading options as opposed to futures. When interest rates are above 40% annually and international banks are cutting back emerging market credit lines, the cost of a hedging operation is very much on the minds of the traders. Another benefit is the flexibility or the ability to tailor a position to either a particular trading range or a different opinion on the market other than up or down. Options use is in fact substituting futures use to a large degree except when the options become futures close to the delivery date of the contract. The option trading by Brazil has had several effects; for one it has led to a volume increase in options and consequently in futures as the option trades are delta-hedged off by the option locals. It has also led to a greater awareness of option trading strategies that is increasingly being implemented by other Brazilian sugar mills. However, not only Brazilian traders are imitating the success but also, it is noted increasingly, some of the other producer countries are copying the option strategies for their own purposes. This is not to say that the option strategies are new or revolutionary, it is just that their widespread usage and application for producing countries had been rather limited until now. It is interesting to note that option trading volume is only now beginning to recover to the levels traded back at the end of the 1980s and early 1990s. A greater explanation of some of the option strategies that producers are using will be shown later in the chapter. Australia The second most prolific user of futures and options among producing countries is certainly Australia. The Australians have been respected as one of the few producing countries that had the foresight to have priced a good percentage of their 1998/9 production at very Chapter 13/page 13
Sugar Trading Manual remunerative rates well before anyone else. Much, if not all, of Australian hedging is done through trade houses, with very little evidence of independent trading being noted. The two largest producing groups have developed close ties with the trade houses, to the point that one of the producing groups is owned by one of the trade houses. Australia, because of its geographic proximity to the Asian continent, is very much dependent upon Asian demand. The Asian financial crisis certainly impacted negatively upon that demand in 1998 and Australia felt the impact directly. It was expected that Australia’s Asian competitor, Thailand, would suffer a production decline in 1999 because of the low world price but, in fact, the cane production surpassed that of 1998, much to the surprise of many traders. Indeed, even Central and South American producers such as Guatemala and Brazil are beginning to make more inroads to Australia’s traditional Asian clients. One thing that has not helped Australia is the strength of the Australian dollar, showing a good recovery after the Asian turmoil of 1998 and 1999. Australian producers have been known to trade options but they tend to be more sporadic: traders are not prone to jobbing. Instead they are more apt to put on large directional positions from time to time. Since they trade through trade houses it is sometimes difficult to separate the Australian producer activity from that of the trade house. Thailand Thailand went though a difficult period with the Asian currency and equity collapse hitting it squarely between the eyes. The government’s fear that foreign reserves would be drawn down excessively has forced it to severely limit foreign exchange transactions. This restriction, along with the economic crisis, has effectively quashed any independent futures trading as the external transfer of funds for margining purposes is almost impossible. As a result, all of Thai futures activity is done through trade houses and generally is considered very conservative in nature. Option trading, too, is seen only sporadically. Though similar to Australian option trading, it is difficult to identify as it is disguised by trade house activity. Thai sugar can, and sometimes is, delivered against the No. 11 contract, but usually the high freight differentials and Thai physical sugar premiums are enough to keep Thai sugar away from the board. Only when New York has an extreme structure premium do we increase the possibility of Thai deliveries. Guatemala, Colombia and Mexico Guatemala and particularly Colombia are two of the most efficient producers in the world today, achieving yields that are the envy of other Chapter 13/page 14
Futures and options producers. Colombia has the unique advantage of being able to produce sugar on a year-round basis. It is no wonder that the production of the two countries has continued to grow over recent years. Guatemalan sugar normally makes a routine appearance against the New York board during the month of March and can show up as well against May. Colombian production comes primarily from ten mills but all of the exports come from one group, which operates like a co-operative but in fact carries out all the functions of a trade house. Colombian sugar has not shown up against the exchange in recent memory as there seems to be sufficient demand for it throughout Central and South America. Mexico’s production has risen of late despite the fact that it does not attain the productivity of Guatemala, let alone Colombia. It does though have a very real geographic advantage with its close proximity to the border of the USA. The problem is that the USA still limits imports at least until the NAFTA treaty agreement begins to alter the current status with Mexico. Ultimately Mexico should be able to export 250 000 tons of sugar a year to the USA, which will be like gold to the mill(s) responsible. It would certainly be more lucrative than delivering against the exchange, which Mexico routinely does. In fact the recent tariff the Mexican government put on high fructose syrup from the US has had a positive effect on internal Mexican sugar prices, so in effect in one way or another Mexican producers are making money from the US. Mexico is only beginning to look at futures and options trading. The internal market has always held precedence to the export market owing to the higher price it commands. Guatemala and Colombia are similar in that respect. The export market has always been treated as a secondary consideration as the mills limit internal sales quantities in order to keep the local market much higher than the world market. Exports are just the excess that needs to be disposed of. Increasing production has only now made the export market more important, which is why futures and option trading is now being considered.
European producers European producers are white sugar producers so they have to use the London white sugar market for hedging purposes. The French tried for a time to utilize the Paris MATIF futures exchange. However, the liquidity has slowly diminished, leaving the London LIFFE exchange as the only viable hedging vehicle. The liquidity of the London exchange sometimes leaves a lot to be desired as it is missing one element that the New York exchange has, the locals. The London exchange is electronically traded and this does not make it conducive to local activity. The absence of locals does tend to affect the daily trading volume Chapter 13/page 15
Sugar Trading Manual negatively and consequently the daily liquidity. The average daily trading volume in the New York exchange in 2001 was 23 667 contracts. If the LIFFE sugar contract trades 20 000 contracts it is considered a very active day. Another thing that is severely lacking on the London exchange is option trading volume, which would also partly explain the absence of futures daily volume. Options do trade but the trades are arranged in much the same way as OTC activity is set up. If options trade 5000 lots in a single day it is considered an extremely active day. The New York exchange in 2001 averaged 4488 contracts a day. The lack of option activity does not allow the same hedging possibilities or flexibility that the raw sugar producers are afforded. Therefore it is probably safe to say that Brazilian mills are much more option-adept than their European counterparts.
Industry The final end-user of sugar is as wide and diverse as the number of countries that produce it. The developed countries, however, are increasingly replacing sugar with alternative sweeteners such as Nutrasweet and principally high fructose corn syrup (HFCS) – see Chapter 5, page 2. Sugar consumption is still very high but the per capita consumption for the USA and Europe lags behind many emerging market countries. Growth in sugar consumption will therefore be seen more in Asia, the Middle East, Africa and Latin America than in Europe and North America. That is probably where the growth in sugar futures market activity will be seen as well. Already Brazilian soft drink manufacturers are dabbling in the local exchange sugar contract. Larger multinational groups are also looking at hedging their sugar consumption needs whether through local offices or through centralized buying and distribution centres. For now most futures or futures-related activity is taking place through trade houses. Independent trading activity is still only being contemplated. The Middle East has seen a tremendous amount of growth in its refining capacity over the last ten or more years. The return on petroleum revenue has gone toward the construction of a number of large refineries, and there are more in the planning stage. The idea to increase refining capacity comes from not only the increase in local demand for refined sugar but also the desire to become less dependent upon the traditional white sugar supplier, Europe. The increase in refining capacity has caused a switch in sugar demand for the region from white sugar to raw sugar. Sugar futures trading for many of the Middle Eastern refineries is just beginning, but they are quick learners and many have previous experience with crude trading. Option trading
Chapter 13/page 16
Futures and options is already on the rise as the experience of a market in a one and a half year downtrend has taught a valuable lesson.
Others Some traders are difficult to categorize because they cannot really be classified in any of the major groups. There are a number of trading houses located in Brazil that are small to medium size and trade almost exclusively with Brazilian mills. They cannot really be compared with the large multinational trade house though they perform much of the same functions. They can probably best be described as regional trade houses. They do not have access to massive amounts of capital but their size makes them very agile and they tend to know the political ins and outs of the cumbersome Brazilian government’s rules and regulations. Client relationships are very important within the country, and long-time established traders are treated more openly than the rotational trader in the multinational trade house that may trade sugar one year and soybean the next. Despite their small size the regional trade houses are still a force to be reckoned with on the futures markets as they trade greater volumes than many mid-sized mills. The reason is that they tend to be more aggressive traders than the normally conservative mills.
Option strategies Having discussed the increase in option strategies, some attention should be paid to those other strategies that are becoming more prevalent. The market has been trending downward since the beginning of 1995 so this is a big help to the trading strategy of the producing country. When one is always working short it does not hurt to have the market co-operating. A similar situation has been occurring in the stock market over the last few years. Stock traders are all experts as long as the market continues to rally. In any case it must be remembered that there is no grand solution in options trading, or any trading for that matter. It is necessary primarily to have discipline, to admit when you are wrong about your price parameters and to be able to adjust your trading accordingly. When dealing with options it is also necessary to have efficient options pricing/simulation software at your disposal. Options are in concept a simple tool but, when you begin to combine options with futures and/or with other different options, things can become confused very rapidly. It is important to know your overall exposure in the market or your delta to know how much protection you have or how much you need. The most simple option strategy, assuming you are wanting to hedge
Chapter 13/page 17
Sugar Trading Manual downside price risk, is to buy a sell option or put. Purchasing a put allows you to choose a price floor and limit your financial outlay by paying only for the option premium and nothing more. No margin deposit is needed, similar to when you operate futures, and if the market rallies you can still fix or sell your sugar at a higher level. You are not locked in, similar to what would happen if you were to sell a future. The only problem is that the cost outlay for the put premium is relatively expensive if you want price protection that is anywhere near the underlying future. If you choose a cheaper put your price floor protection will be so far away from the market that it makes buying the protection not worth the trouble. (When the sugar market was trading 12.00 cents how much was an 8.00 put trading and how many would love to be able to sell at 8.00 today.) If the cost of the outright put is too expensive, what can be done to reduce the cash outlay and still have a reasonable price floor? One answer is to ‘finance’ the purchase of the put with the sale of a call or buy option. This strategy is also known as a fence. In this way you can buy a put that is closer to the market with the receipt of the premium of the call option that you sell. The drawback in this strategy is that you are now limiting your upside pricing potential to the level of the strike price in the call you sold. Be sure to choose carefully the level of the call you want to sell in order that you can become short at that tract level at a later date. If your hedging needs to extend beyond the immediate contract month and the market is in a cost of carry situation, you may want to put on a variation of the above strategy. Instead of selling a call to finance a put in the same month you may want to sell a call further out to take advantage of the higher time value. This strategy is known as a calendar fence. This strategy is dangerous because you are working with two distinct contract months and, if one side expires or is exercised by you, then you must remember that your operation is still partially open. An alternative to selling futures is to short a call. In this way you are trying to capture the additional premium of the call you sold to increase your sales or hedged price above what you would have received from just selling the futures. With this strategy you would prefer that the call strike level is in the money by the time it expires so you are automatically exercised. The drawback with this strategy is that the downside protection afforded by the short call is entirely limited to the premium that you sold and, when the market moves, your premium will only fluctuate in relation with the underlying futures by the percentage stipulated by the option’s delta. This basically means that if an option has a delta of 0.5% and the underlying market moves 100 points, the option premium will only fluctuate 50 points. A rule of thumb states that, if an option strike price is situated about where the market is, then the delta Chapter 13/page 18
Futures and options of the option will be close to 0.5%. If the market begins to move away from your strike level then you will have to adjust the position accordingly. This means that if the market begins to move lower then you will have to roll the option to a lower strike price. If the market is extremely volatile this can increase your transaction costs greatly so any change in position must be done cautiously. There exist many other variations of option strategies, but the examples above are the basic trading tools that are needed to commence option trading. For further assistance you should contact a knowledgeable and experienced option broker.
Conclusion Sugar futures and option trading continue to grow and expand throughout the world. The diversity of clients that are partaking in futures trading is increasing, and this has to be considered healthy. It is not only trade houses that are making up the volume and open interest today but, increasingly, we are seeing more independent trading from origin country exporters. The final end-user is also utilizing futures and options as a price protection tool. Managed money trading is also increasing its participation as the overall market grows and expands. Last, but not least, local participation continues to provide the necessary liquidity in the market that helps to facilitate the entry and exit of so many different traders and trading styles. In 1998 sugar futures and options had a record year, despite a market that was trending lower for most of the year. This is in marked contrast to the previous record volume year, 1990, when the market was strongly trending upward. One of the single biggest factors for this resurgence in volume is the renewed interest in options trading. Options have provided a low cost, flexible way for the producer country to participate actively in price protection, allowing it to operate in an independent manner from the trade house. This newfound independence is modifying the traditional business relationship between the trade house and the producer. The trade houses may not welcome the change with open arms but the futures exchanges and the overall market can only benefit from the increased volume and liquidity that is being generated by what are essentially new traders. Are there inherent dangers in futures trading from what is essentially a new group of traders on the market? Certainly, but even though some producers will encounter difficulties, the ones that succeed will be better able to take on the increasingly competitive world of sugar trading.
Chapter 13/page 19
14 The exchanges Doug Nicolson Sucden UK Ltd
The New York Coffee, Sugar and Cocoa Exchange (CSCE) Futures contract on Sugar No. 11 (world) Contract terms Trading unit Position limits Grades deliverable Deliverable growths Other conditions Going to delivery Arbitration Force majeure Recent deliveries 2004 amendments Amendments effective immediately Amendments effective commencing with the March 2006 contract
LIFFE LIFFE No. 5 White Sugar Futures Contract Contract terms Term 1 Interpretation Term 2 Sugars tenderable Term 3 Contract specification Term 4 Price Term 5 Exchange delivery settlement price (EDSP) Term 6 Settlement payments Term 7 Payment Term 8 Invoicing amount Term 9 Freight differential Terms 10 and 11 Tender day and tenders Term 12 Delivery Term 13 Presentation of documents Term 14 New legislation
Term 15 Default in performance Terms 16–21 Other clauses Administrative procedures Recent deliveries
The Tokyo Grain Exchange
The central point of contact for the various elements of international sugar trading, trade houses, producers, consumers, locals and speculators is across the floor or computer screen of various futures exchanges. It is therefore useful for all participants in sugar futures to know what these exchanges are and what contracts they offer. Each contract has its own function and characteristics, strengths and weaknesses, but the common factor is that each exchange, backed by a clearing house to organize the financing and accounting role, tries to provide a secure marketplace for these various users to do what they need or want to do. Some contracts are more successful and more liquid than others, but all have to be carefully constructed and adequately financed. This chapter details the contracts offered by the exchanges in New York, London, Paris and Tokyo. The full terms of the contracts in New York and London appear in Part 7, Appendix 3, with the kind permission of the CSCE and LIFFE, but it must be stressed that these terms and conditions are not set in stone forever and are always liable to change in order to keep pace with developments in world sugar trading.
The New York Coffee, Sugar and Cocoa Exchange (CSCE) Among the various contracts offered and controlled by the Coffee, Sugar and Cocoa Exchange, a part of the New York Board of Trade, is the most heavily traded sugar futures contract in the world, the No. 11. Trading in this contract is by open outcry in a pit, through floor brokers and locals, the latter being floor traders who are allowed to trade for their own account. The system is considered by some to be old fashioned in this era of high technology but there is no doubt that locals add a large measure of liquidity to the marketplace and, in New York, the locals have a strong tradition and presence, enough to allow the contract to generate reasonable volumes even when there is little trade or fund involvement. It is estimated that locals on average provide 50% of the daily volume and this, in turn, gives confidence to other users, producers and final buyers worldwide, to use the market for their own hedging or speculative purposes. The full No. 11 rules are given in Part 7, Appendix 1, but the basic contract specifications are as follows, courtesy of the CSCE.
Futures contract on Sugar No. 11 (world) This calls for the delivery of cane sugar, stowed in bulk, fob (free on board), from any of 28 foreign countries of origin as well as the USA. Chapter 14/page 1
Sugar Trading Manual Trading unit Trading hours Price quotation Delivery months Ticker symbol Minimum fluctuation
112 000 lbs (50 long tons). 9.00 am to 12 noon New York time. Cents per pound. March, May, July, October. SB. 1/100 cent/lb, equivalent to $11.20 per contract. Daily price limits None. Position limits 6000 contracts net any one month 9000 net total; 5000 contracts net effective 2 business days after expiry of underlying options. Combine with published ‘futures equivalent’ ratios of options positions. Exemptions may apply for hedge, straddle and arbitrage positions. Contact the exchange for more information. Grade Raw centrifugal cane sugar based on 96° average polarization. Deliverable growths: Growths of Argentina, Australia, Barbados, Brazil, Colombia, Costa Rica, Dominican Republic, El Salvador, Ecuador, Fiji Islands, French Antilles, Guatemala, Honduras, India, Jamaica, Malawi, Mauritius, Mexico, Nicaragua, Peru, Republic of the Philippines, South Africa, Swaziland, Taiwan, Thailand, Trinidad, the United States of America and Zimbabwe. Delivery points A port in the country of origin or, in the case of landlocked countries, at a berth or anchorage in the customary port of export. It is subject to minimum standards established by the exchange’s rules. Last trading day The last business day of the month preceding the delivery month. Notice day The first business day after last trading day.
Contract terms This is the basic structure of the contract, and there is much more to add later on such as original margin requirements, general contractual obligations and rules regulating delivery but these are some points of comment. Trading unit The trading unit is 50 tons of 2240 avoirdupois pounds. Other futures markets and most international physical trades are expressed in metric Chapter 14/page 2
The exchanges tonnes so care must be taken to make accurate conversions, when arbitraging for example. The delivery months extend forward to a maximum of two years ahead. Position limits This has become more and more a topic of discussion in recent years. While the number and strength of trade houses has at best remained static, the number and financial power of speculative funds has increased. This creates periodic distortions in fundamental switch values and a tendency for changes of direction in the futures to be very exaggerated. In an effort to smooth out some of these exaggerated movements, the Exchange from July 2001 allowed the spot month limit to be raised from 4000 to 5000 lots. Additionally, and more crucially, this new limit does not come into effect until 2 business days after the expiry of the underlying options. The new measure should in theory allow a significant percentage of open futures positions to be automatically closed out against an equivalent number of protective options. It is not entirely clear how effective these new changes to Rules 13.03 and 13.06 (see Appendix 1) have been in reducing undue erratic behaviour, but at least the growing influence of the options market is finally being recognized. Trade houses that can provide genuine physical proof of sales or purchases that require them to have hedges amounting to more than 5000 lots may still receive exemption, as can those with heavy switch positions, but generally the Exchange is not keen to allow any excessive, potentially manipulative, positions to remain in place. Grades deliverable The grades deliverable under the No. 11 contract have also been a contentious issue over the past few years. The rules define raw sugar as any crystallized sugar product from a cane sugar production facility delivered in bulk. There is no restriction on the polarization above and below 96° (though there is allowance for proven damages if the polarization is below 95° at the time final weights and tests are taken). For sugar above 96°, a graduated scale of premium is paid up to a maximum of 3.75% at 99.0, but there is no allowance for proven damages if a receiver gets 99.7 polarization bulk crystals, for example, from South Brazil delivered on the No. 11 and is obliged to pay import duty on a white sugar basis at the country of destination. This is particularly a problem for shipments to Russia, potentially the largest outlet for raws, but with a customs limit of 99.5 before white sugar duties are charged. There is therefore, at certain times of the year, a reluctance to source sugar from Chapter 14/page 3
Sugar Trading Manual the ‘tape’, potentially creating a depressed switch structure on the futures board. Deliverable growths Out of the list above, in practice only nine origins have tended to be delivered in recent years. These are Brazil, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua and Thailand. The other major producers on the list, Australia, Colombia and South Africa, have a policy of not tendering to the futures market, no doubt because their shipment programmes are so well organized that having to have a certain amount of sugar on call to a receiver’s whim for two and a half months at seven days’ notice is simply more trouble than it is worth. Other conditions There are other conditions that are implicit to the No. 11 contract terms as set out in Rules 11.00 to 11.04, which have to be mentioned before setting out into the deeper waters of the rules that govern delivery. The sugar delivered shall have been manufactured no earlier than 18 calendar months preceding the delivery month. The deliverer shall be responsible for all expenses pertaining to the delivery and loading of sugar into the vessel, including freight taxes and other taxes of the country of origin of any nature. The receiver shall be responsible for all charges pertaining to the entry or exit of the vessel at the loading port. The sugar delivered shall be free and clear of all liens and claims of any kind which shall be warranted by the deliverer to the receiver in making the delivery. The sugar delivered shall be freely available for export. The receiver shall provide vessels suitable for the carriage of the sugar and contracted for under a standard form of charter party for raw sugar currently in general use in the world sugar trade at the time of shipment, or a freighting agreement no less favourable to the deliverer than the said charter party. The charter party shall conform to sugar trade custom in respect of the deliverer’s rights and obligations including, but not limited to, despatch, demurrage, loading conditions and the vessel’s responsibility to the cargo. The demurrage and despatch shall be limited to commercially justifiable rates. The rates specified in the charter party shall be presumed to be commercially justifiable unless the deliverer can clearly establish that they are not. This last point is a development from a previous occasion when large delivered cargoes in one port (Santos in South Brazil) created long shipment delays and frustrated receivers who sought to gain some recompense by presenting vessels with Chapter 14/page 4
The exchanges abnormally high demurrage rates. The compromise reached by the Exchange for protecting deliverers by enforcing commercially justifiable rates was to raise the daily load rate from 750 long tons per weather working day (wwd) to 1500 long tons, as from May 1997. Also, from the same date, the Exchange introduced a penalty over and above demurrage whereby, 15 days after the normal laytime expires, the demurrage rate will be increased by 50%. Fifteen days after this, the rate will be increased by 100%. This went some way to a fairer balance and perhaps made potential tenderers think twice before committing too many shorts to actual delivery. However, such was the improvement in rates of loading at many of the ports used for delivery that from the May 2003 delivery onwards, the loadrate was increased to 3000 mts per wwd. Even now, in late 2003, traders are proposing a further increase to 4000 mts. It must be said that these conditions were designed principally with South Brazil in mind and their implementation no doubt accelerated what was already heavy investment in that region to improve loading facilities. From a futures trading point of view, any large user of the market must take account of factors like this. It is now possible, for example, for a tonnage well in excess of 1 million tonnes to be loaded at two new bulk terminals in Santos within the 75-day period, the only limitation being the logistics involved in getting sugar to the port. And herein lies the nub of several recent disputes that have been taken to the Exchange for arbitration. It is patently clear that a large quantity of delivered material cannot be made available in the loading terminal within a short time span, so a receiver of 500 000 mts will have a problem if he needs to ship (and organize the freight for) serious tonnage very soon after the required 7-day notice period. The wording of Rule 11.10 (2), ‘Obligations of the Deliverer’, states that ‘once Notice of Readiness has been presented, the vessel shall be berthed (or anchored) promptly and Deliverer shall commence loading promptly’. Thus far, the arbitrators have been reluctant to consider such instances as a default of the No. 11 contract, especially when in most cases, since the rate of loading (in Brazil at least) is so much greater than the allowed 3000 mts, the vessels in question have managed to sail without demurrage claims. Having said that, most observers feel that the rules have to be made clearer, since it seems that any trade futures’ short has an option to deliver sugar that does not strictly fit the tender terms. On a lesser scale, there can be a problem for the deliverer if the receiver puts in a certain kind of vessel, allowed by the No. 11 rules, but not accepted by the port he is using. For example, both Maceio and Recife in North Brazil refuse to accept twin-hatched vessels, i.e. where there is a bar running fore to aft, which restricts the free movement of the bulk loader. Similarly, there can be problems for a deliverer in the Chapter 14/page 5
Sugar Trading Manual Paranagua export corridor if a receiver puts in tweendeckers to pick up bulk sugar. The question here is whether the Exchange should make another amendment to the rules to cater for such potential difficulties or just trust to luck and common sense and leave it to the trade to sort things out on the basis of what is customary for such and such a port or region or country.
Going to delivery After the close of business on the last trading day of any delivery month, the clearing members of the Exchange who hold all the open futures positions on behalf of their customers must issue a memo of deliverer/receiver to the clearing association by 5 pm. The delivery notice specifies the origin and load port for a minimum of 20 open sales contracts (it is the clearing member’s responsibility to ensure that either this figure is 20 or more, or the position is liquidated before close of business on the last day). The receiver notice merely specifies the total number of open purchase contracts that the member will be receiving. The clearing association then allocates to each receiver the requisite number of lots split on a pro rata basis in each of the ports tendered by the deliverers. The receivers then have some time to exchange these between themselves before the delivery notices become final and contractually binding through the exchange. It makes sense, for example, for two receivers each being allocated a half cargo in two different ports to swap halves and end up with a full cargo in one port. It is worth noting at this point, under Rule 11.04 (contract binding) that, as long as the deliverer and receiver keep their contract open through the exchange and clearing corporation, they are not allowed to make any changes in terms that do not comply with the No. 11 rules or make any tacit agreement that the sugar does not have to be delivered or received. If the deliverer and receiver mutually agree to change contract conditions between themselves, they must take the contract ‘off the exchange’. A written agreement to the exchange and the clearing corporation will relieve the latter of any further obligations and indemnify them against any liability and costs that may arise thereafter in the execution of the contract. This is simply converting an exchange contract, with the respective futures positions held open and margined at the delivery price until the shipping documents are finally paid for, to a normal commercial contract. Of course, if the contract becomes a private commercial one between the deliverer and receiver, the futures connection is over and we drift away from the scope of this chapter. If it stays an exchange contract, Rule 11.09 provides comprehensive rules regarding the ‘determination Chapter 14/page 6
The exchanges of final weights and (quality) tests’. The rule basically covers whether settlement is based on landed or shipped weights and tests, depending on the destination declared by the receiver. The obligations of the receiver and deliverer are covered in Rule 11.10. In the receiver’s obligations, the clauses are fairly straightforward, though (1) (b) has, in the past, created some discussion. This relates to the receiver’s right to ‘request specific language and wording in the description of sugar’ and the deliverer should provide this in the shipping documents, unless he can prove it is unreasonable. If the receiver/deliverer cannot agree on the description, then ‘sound raw centrifugal cane sugar in bulk’ should be used. There is some support in the trade for incorporating the requirement of a Form A if Russia is the destination. The deliverer’s obligations include providing a berth with a minimum draft of 30 feet, though La Romana in the Dominican Republic is still allowed 28 feet. The remaining clauses of Rule 11.10 cover settlement procedures and how the futures variation margins that have been kept up to date on all exchange contracts are released.
Arbitration Rule 11.11 covers disputes that are resolved by arbitration, with the decision of a special arbitration committee binding on both parties. The committee is comprised of three disinterested (in the sense of impartial) members of the Committee on Sugar Deliveries. Both sides are entitled to appear personally at the hearing and/or be represented by counsel. The arbitration committee decides on a settlement price, valuing the sugar on the day of default, and the difference between this and the delivery notice price is the basis of the penalty imposed on the defaulting party. However, there is in addition a penalty imposed on the defaulter of no less than 10% of the committee’s settlement price or 35/100 of 1 cent, whichever is the greater. Also, the committee may then decide that the combination of both these sums does not adequately recompense the injured party, and can grant ‘any further remedy or relief which it deems just and equitable’. Patently, defaulting on an exchange contract is not something to be undertaken lightly.
Force majeure Rule 11.12 is defined as government intervention, war, strikes, rebellion, insurrection, civil commotion, fire, act of God, or any other such cause beyond a party’s control. If it is the deliverer who has to declare force majeure and the cause of force majeure has not been removed Chapter 14/page 7
Sugar Trading Manual even after extending the original delivery period by 30 days, then there is a financial settlement between the deliverer and receiver based on a price established by an arbitration committee, but the deliverer is not liable for damages. If the receiver declares force majeure, and still fails to take delivery for any reason (whether force majeure or not) after an extension of 30 calendar days, then he ‘shall be in default’.
Recent deliveries The No. 11 contract, looking at the above rules and conditions, is obviously well constructed and comprehensively defined. It is also amended from time to time to reflect changing world circumstances or to cater for the occasional loophole/discrepancy. Despite its obvious success, there are continuing debates on whether the market is tilted too much to being a delivery mechanism rather than a hedging medium and that, moreover, some producers are benefiting more than others from the catch-all nature of the contract. Table 14.1 lists the actual deliveries against No. 11 for the period 1996–2003. Obviously, Brazil features strongly in these statistics, particularly with CentreSouth sugars dominating the deliveries in both July and October. It is worth noting, however, that as mentioned earlier, the other main Southern Hemisphere producers, Australia and South Africa, do not traditionally allow their sugars to be tendered on the futures market. In normal circumstances, the extra distance from potential outlets and consequent higher freight rates have tended to leave Central/Southern Brazil sugars relatively uncompetitive in times of surplus and the No. 11 has provided the only sure outlet. In 1998/9, the freight factor improved dramatically, to the point where Far East destinations were within the price range, but the potential delivery-reducing effects of this may have been overshadowed by record cane crops, lower alcohol usage and, above all, a heavy devaluation of the Brazilian real. In 2003, high freight rates from Brazil should have implied large potential deliveries against both the July and October contracts, and in some respects did so, both contracts showing new tonnage records for the past eight years, but it was also clear that the Centre/South producers were not too keen to deliver their sugars in terminals with very high loadrates at flat with the No. 11 and under No. 11 rules. In any case, the high quality of C/S Brazilian raws, for example in low loss in weight at the refining stage, perhaps helps balance high freights against cheaper origins that have inferior quality. Deliveries in March and May cover Northern Hemisphere origins, with Guatemalan sugars regularly making an appearance along with other Central American origins. There is, however, always the possibility of Central/Southern Brazilian shippers clearing out stocks ahead of the new crop. This then raises the possibility, if final buyers prefer Chapter 14/page 8
The exchanges Table 14.1 Actual deliveries against the No. 11 (1996–2003) MARCH Argentina Brazil Honduras Costa Rica Dom Rep El Salvador Guatemala Mexico Nicaragua Thailand
1996
1997
1998
1999
2000
2001
2002
2003
0 250 0 0 0 0 40 400 0 34 450 86 150
0 0 0 2000 0 2500 47 950 27 750 0 4000
0 0 0 0 0 0 0 13 850 0 0
0 94 150 0 0 0 25 650 33 400 0 48 750 0
0 2850 0 0 0 0 3650 0 19 350 0
0 24 700 19 700 0 0 79 750 110 800 0 131 400 0
0 0 14 000 25 000 0 20 500 20 500 0 1400 0
7500 218 800 0 49 700 256 750
Total
161 250
84 200
13 850
201 950
25 850
366 350
81 400
672 300
MAY
1996
1997
1998
1999
2000
2001
2002
0 116 400 20 100 3050
2003
Argentina Brazil Honduras Costa Rica Dom Rep El Salvador Guatemala Mexico Nicaragua Thailand
0 62 550 0 0 0 0 0 0 0 0
0 295 750 0 2000 0 16 750 23 550 2000 0 0
0 87 600 0 0 0 0 0 0 0 0
0 6250 0 4500 0 0 0 0 0 2000
0 0 0 0 0 0 0 0 0 0
0 303 500 22 750 0 0 0 15 900 0 0 0
0 43 300 0 0 0 0 0 0 0 0
0 2550 0 0 0 0 1250 0 0 18 100
Total
62 550
340 050
87 600
12 750
0
342 150
43 300
21 900
JULY
1996
Argentina Brazil Honduras Costa Rica Peru El Salvador Guatemala Mexico Nicaragua Thailand
0 124 000 0 0 0 0 0 0 0 0
1997 0 56 350 0 0 0 0 1450 0 0 0
1998 0 213 900 0 0 0 0 0 0 0 0
0 29 700 0 0 0 0 0 0 0 0
0 38 700 0 0 0 0 0 0 0 0
0 51 650 0 0 0 0 0 0 0 0
0 98 300 0 0 0 0 0 0 3150
0 226 200 0 12 950 19 950 1200 6500 0 11 500 0
Total
124 000
57 800
213 900
29 700
38 700
51 650
101 450
278 300
OCTOBER
1996
1997
Argentina Brazil Honduras Costa Rica Dom Rep El Salvador Guatemala Mexico Nicaragua Thailand Belize
0 206 200 0 0 0 0 0 0 0 0 0
0 186 350 0 0 0 0 3800 0 0 0 0
Total
206 200
190 150
1998
1999
2000
2001
2002
2003
1999
2000
2001
2002
2003
0 23 600 0 0 0 0 0 0 0 0 0
47 850 292 850 0 0 0 0 14 150 0 10 400 13 750 2450
9800 129 450 0 0 0 1150 22 300 0 0 0 11 000
0 109 000 0 0 0 0 0 0 0 0 0
3050 264 700 0 0 0 0 0 0 3200 0 0
0 307 650 0 0 0 0 0 0 0 0 0
23 600
381 450
173 700
109 000
270 950
307 650
Chapter 14/page 9
Sugar Trading Manual the C/S quality and impressive loadrates, that other origins, Thailand and some Central Americans for example, may find that any advantage gained from freight or from geographical proximity to end-buyers is diminished. So it is curiously logical that the problem of a large surplus in C/S Brazil is effectively transferred to other origins, including the Brazilian North-East. The sheer scale of production increases in the C/S will continue to imply potentially large deliveries, whether from this region or from elsewhere, and there are many traders who feel that the terms of the No. 11 Contract should be tightened up to keep pace. For example, increasing minimum delivery tonnages, shortening the 75-day delivery period, increasing the penalties for those who deliver sugar they do not have, and so on, are points that have been widely discussed. Other traders feel that, if there are imperfections in the terms currently framed by the No. 11 rules, then so much the better, because a perfect hedging medium does not ultimately encourage volume and price movement, which in turn are prerequisites for increasing fund and speculator interest in the market.
2004 amendments On 12 February 2004 the New York Board of Trade announced several amendments to its Sugar No. 11 futures contract rules. In certain instances, the amendments will become effective immediately and apply to all deliveries commencing March 2004. In all other instances, the amendments become effective for the next futures month to be listed – the March 2006 contract. In the case of each amendment discussed below, the effective date is as noted. Amendments effective immediately • Require the receiver to declare to deliverer additional information: vessel characteristics, total quantity to be loaded and demurrage/despatch rates (Rule 11.05(1)(a)). • Move the time by which such declaration must be made to 11.00 (from current 17.00) (Rule 11.05(1)(a)). • Require receiver to keep deliverer advised of the vessel’s estimated arrival time following the declaration (Rule 11.05(1)(a)). • Provide that, in the event a vessel’s Notice of Readiness is presented earlier than seven days after the declaration, time starts counting on the first local working period after expiration of the seven-day notice period (Rule 11.05(1)(a)). • Extend the last day by which receivers may exchange delivery notices among themselves (with no change to the number of notices each receiver is assigned) from the business day after the notices Chapter 14/page 10
The exchanges
•
• • •
•
•
• • •
are assigned by the Clearing Corporation to the day the Notice of Readiness is presented (Rule 11.06(e)). Remove obsolete language providing for different treatment of expenses for weighing, sampling and testing in the event the sugar being delivered is shipped to the United States (Rule 11.09(b)). Add certificate of origin to the list of documents for which the deliverer is responsible for the cost (Rule 11.10(1)(e)). Require that the receiver make settlement of despatch with the deliverer within 60 days of the Bill of Lading Date (Rule 11.10(1)(g)). Replace the first paragraph of Rule 11.10(2)(a) to provide clarity to the nomination of berths, nomination of alternate berths, the commencement of lay time and berthing priority in instances of congestion at the berth (Rule 11.10(2)(a)). Provide for the apportionment of lay time, demurrage and despatch among deliverers in instances of multiple deliverers to a receiver’s vessel (Rule 11.10(2)(a)). Add to the existing minimum draft of 30 ft for a delivery port the further definition that the requirement is “30 ft salt water,” as well as a new requirement that the port also permit ships with a length overall of up to 190 meters (Rule 11.10(2)(d)). Eliminate the allowance for delivery in the Port of La Romana even when these provisions are not met (Rule 11.10(2)(d)). Require settlement of demurrage within 60 days of the Bill of Lading date (Rule 11.10(2)(e)). Add “certificate of origin” to the list of documents the deliverer must provide the receiver (Rules 11.10(3)(a) and (b)).
Amendments effective commencing with the March 2006 contract • Provide that sugar delivered under the contract must be manufactured no earlier than 12 months prior to the delivery month, less than the current 18 (Rule 11.00(e)). • Provide that the par polarization under the contract be raised from 96° to 97° and revise the schedule of polarization premiums (Rules 11.00(b), (d) and (e)). • Increase the minimum permitted delivery quantity per port from 20 to 80 contracts (Rules 11.06(b) and 3.06 (f)). • Raise the minimum loading rate from 3000 to 4000 long tons per weather working day (Rule 11.10(2)(a)).
LIFFE The London International Financial Futures and Options Exchange (LIFFE) offers the No. 5 White Sugar Futures Contract, launched in July 1983. This was one of the first markets to be traded on a Chapter 14/page 11
Sugar Trading Manual computer screen instead of the open outcry system still used in New York. After a short gestation period in the 1980s, the No. 5 White Sugar Futures Contract has grown quite rapidly in recent years. Early reluctance by funds and the larger speculators to participate in a market supposedly devoid of pit locals to provide liquidity has been overcome by an ever-increasing volume from trade, producers and final buyers, so that now the funds are continuously involved in the market.
LIFFE No. 5 White Sugar Futures Contract The specifications are as follows: Unit of trading Delivery months
Tender period Last trading day
Price basis
Tick size (and value) Trading hours Tender date
Chapter 14/page 12
50 tonnes. March, May, August, October and December, so that seven delivery months are available for trading. Any business day during the specified delivery month and the following month. Sixteen days preceding the first day of the tender period at 17.30 (if not a business day then the first business day immediately preceding the tender date). US dollars and cents per tonne fob and stowed in the vessel’s hold at one of the following designated ports: Amsterdam, Antwerp, Bangkok/Kohsichang, Bilbao, Bremen, Buenaventura, Buenos Aires, Cadiz, Calais, Delfzijl, Dunkirk, Durban, Eemshaven, Flushing, Gdansk, Gdynia, Gijon, Guangzhou, Hamburg, Huangpu, Imbituba, Immingham, Inchon, Itajai, Jebel Ali, Laemchabang/Sri Racha, Le Havre, Leixoes, Lisbon, Maceio, Marseilles, Matanzas, New Orleans, Paranagua, Penang, Port Kelang, Puerto Quetzal, Recife, Rostock, Rotterdam, Rouen, Santander, Santos, Savannah, Shekou, Singapore, Szczecin, Ulsan, Xiamen or Zeebrugge. Freight differentials, as from time to time determined and published by the board, shall apply to any non-European port. 10 cents per tonne ($5). 09.45–17.30 on LIFFE Connect. Fifteen days preceding the first day of the tender period (if not a business day then the first business day following).
The exchanges Quality
Packing
White beet or cane crystal sugar or refined sugar of any origin of the crop current at the time of delivery, free running of regular grain size and fair average of the quality of deliveries made from the declared origin from such crop, with minimum polarization of 99.8°, moisture maximum 0.06%, and colour maximum 45 units ICUMSA attenuation index (except that sugar originating in the EU shall satisfy the colour specification set out or referred to in the ASSUC rules), all at time of delivery to vessel at port. Sugar shall be packed in new sound jute bags with polythene liners of uniform weight of 50 kg net of sugar and with a minimum tare of 400 g, save that the seller shall be entitled to elect in his tender to deliver, in respect of a lot, sugar packed in new sound polypropylene bags with polythene liners of a uniform weight of 50 kg net of sugar and with a minimum tare of 160 g at a discount to the price payable in respect of each lot, such discount to be determined by the board at its absolute discretion and specified by general notice. The bags of each lot of 50 tonnes shall be uniform and suitable for export and, if marked, all shall bear the same mark.
The full contract terms and administrative procedures can be found in Part 7, Appendix 2. It is worth noting that the No. 5 contract applies, for each delivery port, a freight differential which is determined, no later than 30 days prior to the tender day of each delivery month, by a sugar market freight panel appointed by the LIFFE board. This is a major difference to the New York No. 11 fob stowed market, apart from the white/raw one, since New York has no freight differential at all and, although any origins as specified may be delivered, in practice the likeliest deliveries will originate in the ports with the highest freight rates to the largest final buyer of that time.
Contract terms Term 1 Interpretation This defines the various words and phrases used throughout both the terms and the procedures. Chapter 14/page 13
Sugar Trading Manual Term 2 Sugars tenderable It was only from the August 1998 delivery month that the seller was entitled to deliver sugar in polypropylene bags. Also, the quality of the sugar was improved to 45 ICUMSA from 60. It has become clear over the last ten years that more and more white sugar in world trade has been transported in polypropylene packing and this had to be reflected in the No. 5 terms but, at the same time, in order to preserve the quality nature of the contract, the ICUMSA measure of colour was tightened slightly. This concept of a quality contract is almost diametrically opposite to the philosophy of the No. 11, but it works because the No. 5 in effect provides a price umbrella for the lower quality 60s, 100s and 150s, which, although they may be traded in the physical market at discounts to the No. 5 (though not always), the actual flat price they obtain is arguably higher than it would be if the whites had a lower common denominator, say 100 ICUMSA. At the same time, since the contract has a solid backing of something over 4 million tonnes of EU white sugar exports annually, there is enough liquidity in fully tenderable material not only to allow the non-tenderable sugars to be hedged, but also to encourage the speculative element to participate in reasonable volume. However, in the current climate of WTO pressure on the EU to reduce subsidized exports, any shortfalls in the supply of EU sugar to back the No. 5 Contract will have to be made up from other origins, in particular Brazils and Thais, plus, as seen in the August 2003 delivery, toll-refined sugar from the UAE, which in fact supplied the largest tonnage. Another problem with EU sugar in 2003 was the requirement, stemming from fraudulent reimporting of refined sugar from the Balkans into the EU, of a certificate of customs entry at final destination of any A/B sugars tendered on the futures market. While this may solve the problem with the fraudsters in former Yugoslavia, it has created more problems for the No. 5 Contract, which is basically fob. The result of these imposed conditions has been for brokers to be very careful for whom they are prepared to make or take delivery. The problem is that without the required certificate, the seller will not receive his subsidy from Brussels, and as this amounts to more than $500 per mt, it is clear that the risks of non-performance have risen enormously. Another point of some friction in the recent past is clause 2.03, which refers to bags having to be uniform and suitable for export, ‘and if marked, all shall bear the same mark’. The lack of any mention of how much any bag-marking should cost has allowed some deliverers to charge high prices for marks, and raised the issue of marketability of any such sugar delivered. Curiously enough, the trade as a whole is reluctant as yet to tighten this up, again for reasons of preserving uncertainty and imperfection as a catalyst to inspire more volume and movement, and to discourage others from using the market as an easy source of flat-price material. Chapter 14/page 14
The exchanges Term 3 Contract specification Each contract to be for one or more lots of 50 kg net. Term 4 Price In US dollars and cents net fob. Term 5 Exchange delivery settlement price (EDSP) This term establishes the price against which both the receiver’s longs and the deliverer’s shorts on expiry are settled and against which both parties are margined until shipping documents are exchanged and paid for. Term 6 Settlement payments This term covers the payment procedure, where both seller and buyer pay to the clearing house, or receive payment from the clearing house, the difference between their futures contract prices and the EDSP. Term 7 Payment This covers the documents required to effect payment through the London Clearing House. Term 8 Invoicing amount This is basically the EDSP (above), adjusted to take into account the freight differential factor and the discount, if any, for polypropylene packing. Term 9 Freight differential A freight differential for non-European ports is established no later than 30 days prior to the last trading day of any spot month, and is based on the difference between European freight rates for a 14 000 mt vessel classified 100A1 at Lloyd’s (or equivalent register) with a destination of one safe port in the Eastern Mediterranean (Alexandria), and the rates for similar vessels and tonnage from other non-European ports to the same destination. The differentials are then used to establish invoicing amounts for tendered sugars. A committee of freight brokers either independent of or affiliated with trade houses is used to calculate these notional rates. Terms 10 and 11 Tender day and tenders The tender day for any expiring month shall be the fifteenth day preceding the first day of the delivery period for that month, and if this Chapter 14/page 15
Sugar Trading Manual happens not to be a business day, the following day is chosen. Tenders may not be changed or withdrawn without the consent of the buyers, who also have the right among themselves and within a prescribed time to exchange ports for mutual convenience. Term 12 Delivery An important change in the delivery terms, moving even further ahead than the Refined Sugar Association (RSA) rule that used to apply, is the change in the supervision clause applied since the August 1998 delivery month. Term 12.05, with further refinements applying with effect from the December 1999 delivery month, has been designed to give buyers through the exchange much better protection regarding the certification of weight, packing or quality than the relevant RSA rules, and is another example of a futures exchange taking the lead in modernizing age-old customs of trade. The term affords the receiver the right to appoint his own supervisor as before but, instead of just two samples of the sugar being taken, one for the deliverer and one for the receiver, a third is taken and sealed, which, in the event of a dispute, is sent to the exchange for analysis by an approved chemist. The findings of this analytical chemist will be binding. The terms are much more detailed than this synopsis but the basic idea is clear – to prevent particular instances of misrepresentation undermining the integrity of the contract and, by extension, the exchange, and in general terms to raise standards of control worldwide. Term 13 Presentation of documents Term 14 New legislation This allows the board of the exchange to vary the terms of the contract with immediate effect if any change in legislation in the EU or elsewhere affects the normal course of business. It has been used most recently in the Balkan affair, as mentioned above. Term 15 Default in performance The clearing house, in addition to its various other functions, also monitors the performance of buyers and sellers and has powers to impose financial penalties through the exchange. Terms 16–21 Other clauses These are typical of the kind of clauses found at the end of a contract and, if anyone needs to read them closely, they are already involved in a major dispute with their counter-party. Chapter 14/page 16
The exchanges Administrative procedures These are an inherent part of the overall contract and include an outline of the timetable and exact requirements for the seller and buyer in their relationship with the clearing house. Note that 14 days’ notice is needed from the receiver in the two-month tender period.
Recent deliveries The table of deliveries (Table 14.2) shows that EU sugar is slowly losing its share of the tendered tonnage. This is simply because EU sugar is inevitably worth a premium to the prices expressed in the No. 5 Contract, and holders of EU sugar will not willingly give it away at flat with the futures. One could say that recent problems with the requirement to provide an arrival certificate for A/B Quota sugars has removed most of the deliverable EU sugars in any case, but the trend was already evident, since pressure from the WTO to reduce the level of subsidy on exported sugar, plus the reduced demand arising from new tolling operations in Algeria for example, has lowered the requirement for 45 ICUMSA sugars. The EU has backed the No. 5 Contract since its inception, but it looks more and more likely that the physical support for the contract will be spread over different origins, namely Brazil, Thailand, the UAE and who knows, even China, despite that country’s reluctance to allow third party supervision. The quid pro quo for replacing diminishing EU supply with such other origins may well be the demise of the freight differential, which is not nearly so weighty a factor without the ample supply of reliable North European refined sugar. A market without freight differentials, as in New York, would certainly add a high level of uncertainty to the delivery process, possibly increasing volume and volatility to the actual longer-term benefit of the No. 5 futures market.
The Tokyo Grain Exchange The raw sugar futures contract offered by the Tokyo Grain Exchange (TGE) is unique in world sugar terms because it is a cif (cost insurance freight) contract. Because of this it has attracted Western trade interest from time to time over the years, especially when it shows prices trading at a premium to the equivalent No. 11 basis, but it has, in its own right, a solid core of domestic trade and speculative interest. The contract is expressed in Japanese yen, so overseas users have to convert to dollars at every trade if they link the TGE contract to the New York basis. There is a sister contract in Kansai but, for the purposes of this manual, the TGE will suffice. The contract is traded on a computer screen, and the basic terms are as follows: Chapter 14/page 17
Thailand
640
640
Thailand
Total
Chapter 14/page 18
Rouen Flushing Santos Bremen Immingham Recife Delfzijl Eemshaven Rostock Dunkirk Antwerp
12 2 6 66 106 22
214
Flushing Hamburg Antwerp Rostock Recife Thailand
Total
Eemshaven Antwerp Dunkirk Immingham
563 240 12
815
Eemshaven Flushing Dunkirk
Total
Total
May 1994
March 1994
Total
May 1993
March 1993
Total
May 1992
March 1992
1186
2 99 133 952
2612
520 230 260 15 680 80 280 252 55 160 80
871
871
Total
Hamburg Dunkirk Santos Itajai/Imbituba Immingham
August 1994
Total
Hamburg Santos Recife Rostock
August 1993
Total
Santos Thailand Antwerp
August 1992
Table 14.2 White sugar tenders, 1992–2003 (000 tonnes)
1114
50 296 287 20 461
285
2 264 9 10
1142
654 240 248
Total
October 1994
Total
Santos
October 1993
Total
October 1992
0
217
217
0
Total
Maceio
December 1994
Total
Santos Bremen
December 1993
Total
December 1992
256
256
482
220 262
0
Sugar Trading Manual
350
Total
14 133
Eemshaven New Orleans Recife Santos Delfzijl Maceio
Total
New Orleans
85
Immingham
44 64 5 5
May 1996
March 1996
Total
Antwerp Flushing
94 71 17 285
1143
Hamburg Savannah Immingham Dunkirk
60 280 166 170
Antwerp Maceio Santos New Orleans Immingham Dunkirk Eemshaven Savannah
Total
May 1995
March 1995
227
227
2418
460 240
270 213 1218 17
Total
Immingham Le Havre
Cadiz Dunkirk
Antwerp
August 1996
Total
Hamburg Bremen Flushing Delfzijl
Santos New Orleans Buenos Aires Recife
August 1995
516
25 120
180 187
4
560
4 4 4 4
306 1 220 17
Total
Gdynia
Gdansk
October 1996
Total
Dunkirk
Hamburg Antwerp Rostock Eemshaven
October 1995
281
280
1
330
88
23 107 37 75
Total
Rostock
Gdynia Eemshaven
Gdansk
December 1996
Total
Hamburg Eemshaven
December 1995
235
35
80 2
118
30
24 6
The exchanges
Chapter 14/page 19
Chapter 14/page 20
Eemshaven Flushing Gijon Hamburg Immingham Rostock
55 128 240
423
Eemshaven Immingham Rostock
Total
EU
2321
2321
EU
Total
Total
May 1998
March 1998
Total
May 1997
March 1997
Table 14.2 (cont.)
1502
1502
1781
21 16 536 20 1158 30
Total
EU
August 1998
Total
Antwerp Cadiz Dunkirk Gijon Hamburg Immingham Recife Rostock Santander Santos Singapore
August 1997
361
361
779
20 181 58 10 17 311 47 4 109 20 2
Total
EU Other Europe
October 1998
Total
Cadiz Calais Gdansk Santos
October 1997
902
893 9
309
61 54 174 20
Total
EU
December 1998
Total
Gdansk Stettin
December 1997
1066
1066
86
80 6
Sugar Trading Manual
87
Total
Chapter 14/page 21
Zeebrugge Dunkirk Rouen Calais Antwerp Hamburg Immingham Eemshaven
137 100 137
374
Immingham Flushing Eemshaven
Total
Total
May 2001
March 2001
Total
Rostock Santander Gijon Eemshaven Immingham
31 22 34
Eemshaven Zeebrugge Gijon
Total
May 2000
729
Total
May 1999
March 2000
270 114 255 80 10
Immingham Eemshaven Recife Rostock Gdansk
March 1999
2687
81 344 514 828 440 100 259 121
1513
54 39 17 10 1393
0
Total
Dunkirk Calais Antwerp Rouen Le Havre Santos Jebel Ali Hamburg Immingham Itajai
August 2001
Total
Rouen Immingham Eemshaven
August 2000
Total
Santos Paranagua Zeebrugge Itajai Port Rashid
August 1999
4695
82 369 94 62 40 2240 711 684 290 123
285
37 96 152
1834
1405 120 73 136 100
Total
Santos Natal Dunkirk Recife
October 2001
Total
Calais
October 2000
Total
Rouen Zeebrugge Cadiz
October 1999
1020
20 280 20 700
19
19
273
107 51 115
Total
Santos Natal Maceio Recife
December 2001
Total
Flushing Eemshaven Rostock
December 2000
Total
Gdansk Rouen Antwerp Rostock
December 1999
2494
460 154 595 1285
345
100 145 100
850
480 30 280 60
The exchanges
Chapter 14/page 22
374
Total
328 288
616
May 2003
Thailand Jebel Ali
Total
Calais Eemshaven Rouen Le Havre Maceio Santos Jebel Ali Thailand Total
2687
81 344 514 828 440 100 259 121
March 2003
723 416 100 100 14 24 818 3842 6037
Zeebrugge Dunkirk Rouen Calais Antwerp Hamburg Immingham Eemshaven
137 100 137
Immingham Flushing Eemshaven
Total
May 2002
March 2002
Table 14.2 (cont.)
Total
Natal Recife Maceio Santander Thailand Jebel Ali Imbituba
August 2003
Total
Dunkirk Calais Antwerp Rouen Le Havre Santos Jebel Ali Hamburg Immingham Itajai
August 2002
4549
4 4 2 15 358 2346 280
4695
82 369 94 62 40 2240 711 684 290 123
Total
Recife
October 2003
Total
Santos Natal Dunkirk Recife
October 2002
960
960
1020
20 280 20 700
Total
Maceio Santos
December 2003
Total
Santos Natal Maceio Recife
December 2002
758
540 218
2494
460 154 595 1285
Sugar Trading Manual
The exchanges Contract size Delivery months
Price quotation Minimum price fluctuation Maximum price fluctuation
Position limits
Last trading day First delivery day
Last delivery day Contract grade
Method of settlement Delivery points
50 000 kg. January, March, May, July, September and November within a 14-month period. Yen per 1000 kg. 10 yen per 1000 kg (500 yen per contract). 800 yen per 1000 kg, if standard price is under 30 000 yen. 1000 yen if standard price is from 30 000 to 39 990 yen. 1200 yen if standard price is from 40 000 yen to 49 990 yen. 1400 yen if standard price is 50 000 yen or higher. There are no price limits in the current month from the first day two months prior to the delivery month. 1500 contracts net in any given delivery month. The gross limit in any delivery month is 5000 lots. The last business day two months prior to the delivery month. The fifteenth day of the month preceding the delivery month; if not a business day, then the delivery day is moved up to the nearest business day. The last day of the delivery month. Raw centrifugal cane sugar of a polarization of 96° from Australia, Brazil, Cuba, Fiji, the Philippines, the Republic of South Africa, Taiwan and Thailand. Physical delivery, cif Japan. The piers of Tokyo, Chiba, Funabashi, Yokohama, Kawasaki, Kinuura, Shimizu, Nagoya, Izumisano, Sakai, Osaka, Kobe, Uno, Shimonoseki, Moji, Hakata or Hosojima ports.
There are several items of note to add to the above. Firstly, the polarization limits allow the normal premiums to be paid up to and over 98° (wet basis) but, unfortunately, if the Japanese customs assess the delivered sugar to be above this figure, the deliverer will be responsible (through the futures broker) for a prohibitive penalty duty. It is not a good idea to make this mistake. Secondly, there are extremely detailed rules regarding delivery, although the documents of title surprisingly do not have to include the Chapter 14/page 23
Sugar Trading Manual Table 14.3 Tokyo Grain Exchange deliveries (1994–2001) 1994
1995
1996
1997
1998
1999
2000
2001
Jan March May July Sept Nov
28 950 33 770 32 560 76 200 56 240 59 720
36 900 69 100 64 280 43 840 37 340 42 520
102 780 101 650 116 150 90 650 33 150 7 100
48 600 91 700 93 350 70 600 52 400 38 550
30 700 32 000 35 500 34 150 17 900 25 900
12 450 55 000 43 850 27 850 27 350 9 100
29 900 26 000 52 750 11 500 42 900 29 600
9 650 19 850 16 500 29 050 28 050 35 800
Totals
287 440
293 980
451 480
395 200
176 150
175 600
192 650
138 900
bill of lading, and only a debit note for the insurance is needed, not the actual certificate. Thirdly, as a converse to fob contracts, the receiver has to nominate the port, though only those who take more than 4000 metric tonnes have to make the nomination by 3 pm of the business day following the last trading day of the futures contract. Lastly, the receiver also has the right to nominate up to two additional berths, provided the tonnage to be discharged at each berth shall be not less than 4000 metric tonnes, and the receiver also has to pay for the extra freight charges involved. A receiver taking more than 4000 metric tonnes, but less than 8000 metric tonnes, may only nominate one port with one berth. Above 8000 metric tonnes, he can nominate two berths. As can be seen from Table 14.3, the list of deliveries over the eight years to 2001 on the TGE contract shows that an average of around 50 000 tonnes has been delivered each month, a reassuring sign that the contract works well. Interestingly enough, the origins of the sugar delivered over the years have not been exclusively those nearest to Japan. Cuban sugar, for example, figures on several occasions, despite the obviously longer trip than, say, from Thailand. Any trader, international or Japanese, who looks at the prices on the TGE will be working out the differentials against the New York No. 11 market, where all his fob stowed purchases are hedged and priced, and these differentials will also take in various origins and their respective freight rates to Japan. The problem is that the TGE is open when New York is closed so, in addition to the currency conversion risk, the arbitrage involves lifting a very long leg. On many occasions, New York jobbers have been caught out when the No. 11 market opens by unexpected trade activity linked to the previous night’s performance in Tokyo.
Chapter 14/page 24
15 Technical trading Jonathan Kingsman Société J. Kingsman
Technical versus fundamental analysis Why does technical analysis work? The investment funds The tools of the technical trade Trend lines and channels Moving averages Oscillators Moving average convergence divergence (MACD) Resistance and support levels Volume Open interest Commitment of traders (COT) report Relative strength index (RSI) Money flow index (MFI) Stochastic indicator Parabolic SAR system Directional movement index (ADX) Daily sentiment indicator (DSI) Candle charts
Risk management and moral hazard Conclusion
Although not quite as old as some other professions (of which the oldest is brokerage), charting and technical analysis have a long history. As far as anyone knows, charts first made their appearance in the 1600s in Japan where they were used to study and predict price movements on the local produce markets. They began to make their first inroads into Western thinking in the late 1800s in the USA where point and figure diagrams were used to chart prices on the domestic grain markets. However, it has only been the relatively recent explosion in computer technology that has really brought technical analysis to the fore. Statistical analysis and complex calculations that used to take hours or even days to complete are now performed instantaneously. This growth in computer power has brought technical trading to a wider audience and has allowed new tools and techniques to be developed. Computing power has also enabled single or sole traders to follow many markets at the same time – something that was impossible a few years ago. Over the last 20 years, a whole new industry has emerged where managed investment funds now trade almost entirely on their analysis of charts and technical indicators. The much disparaged one-lot speculator from Iowa has joined forces with tens of thousands of like-minded souls, forming giant investment funds that have the power to move markets and influence price. These funds now overshadow the traditional trade houses in all of the latter’s traditional commodity markets. (They also, incidentally, overshadow the banks in the financial markets.) These funds are now the ocean in which we all swim. As such any physical or fundamental trader now has to understand how the technical currents ebb and flow – and to stay out of the way of the larger breakers when they hit the shore.
Technical versus fundamental analysis Most sugar traders are, almost by definition, fundamental traders. Their job is to buy, sell and physically move sugar from producers to consumers around the world. To help them in that role, they have built up extensive (and expensive) networks of offices, agents and information systems in most of the important trading areas. These traders use the futures and options markets principally as pricing and hedging media to control and reduce the inherent risks of their business. However, traders also take speculative positions on the markets, using their information systems and their trading experience to try to predict future price movements. Their physical trading activities, at least in theory, give them an edge over the pure speculators as they may have access to important information not available to others. They may also know Chapter 15/page 1
Sugar Trading Manual sooner than others about price-influencing events such as crop failures or strikes (this is called event trading). In addition, their extensive information networks should enable them to build up a comprehensive picture of global supply and demand that should help them to predict future price movements. Technical traders rarely trade on such fundamental information. They argue that it is too difficult to predict future physical supply and demand for a particular commodity because there are too many unknowns. They also argue that the correlation between price and physical supply and demand is too loose. (For example, a constant statistical surplus would probably not result in constant prices.) Technical traders argue that all the market information is available in just one element: the price. They prefer to try to predict future price movements by interpreting how prices have moved in the past. Most fundamental traders will laugh at this idea. They argue that it is broadly the equivalent of a fortune teller reading tea leaves or the lines on the palm of your hand and pretending that they can predict the future. One famous (fundamental) sugar trader likes to tell his clients: ‘I like charts. I find them very useful. They show me where the market has been.’ In one way he has a point – studying fundamentals cannot tell you about past price movements. (Imagine trying to tell how the sugar price moved during 1998 just by knowing what the world sugar surplus or deficit was at the time.) However, if charts can only tell you about the past, why do so many investment funds trade basis charts, and so few trade basis fundamentals? Why are so many investors willing to trust their money to readers of tea leaves? We would suggest that the answer to these questions must be that technical trading works. Not only that, it also provides better returns over the long term than fundamental trading.
Why does technical analysis work? In a way, the answer to this question is circular. It is possible that technical analysis works because people believe it does. The power of positive thinking has long been demonstrated and it sometimes seems that just believing in something can make it happen. (This Sugar Trading Manual would never have been completed if people had not believed that it could be.) However, the power of positive thinking has its limits. Many people believe that aliens already live on our planet. Even though people believe in aliens, it does not mean they exist – although anyone who has visited the New York sugar floor would be excused for having their doubts about that! The power of belief does go some way to explaining why charts work. By studying chart analysis and accepting some basic rules of the game, technical traders may behave in similar ways in response to different Chapter 15/page 2
Technical trading patterns and formations. If, for example, a sufficient number of people believed that markets rally when the five- and ten-day moving averages cross on the upside, then buying will flood in when the averages cross and the market will rally. In other words, the more people believe in technical analysis, the more the whole business becomes self-reinforcing. However, in itself, we find this an insufficient explanation. We believe a better answer can be found in the nature of human psychology and behaviour. Human beings are irrational and emotional. No matter how well you think you know someone, it is difficult to predict how that person will behave in response to a particular event. However, if you put a number of individuals together, then human behaviour becomes repeatable and predictable. There is an old saying that there is nothing new under the sun. Although at first sight this is obvious nonsense, if you narrow the saying down to apply solely to human nature, then it makes more sense. Human behaviour does not change. Taking the argument further, if human behaviour does not change, then it must repeat on itself. And if it repeats itself, it must be predictable. To put it another way, consciously or subconsciously, humans use their experiences of past events to show them how to react to current ones. If you put enough human beings and enough of those experiences together you get a pattern. From that pattern you can predict the future. Psychologists have distilled all human behaviour down to two driving forces. The first is the seeking of pleasure. The second is the avoidance of pain. In futures markets, this can be translated into the infamous ‘greed and fear’. Traders seek pleasure from monetary gain (or from knowing that they got the market right). Against that, they seek to avoid the pain of losing money (or looking a fool in front of their friends and industry peers). So, although you may think that you are a unique individual, you respond in similar ways to similar situations and your behaviour follows certain rules that can be identified. You are a social animal that seeks to be accepted by the herd and to go with the crowd. In that crowd, your behaviour is repeatable and predictable. There is a third possible explanation to the victory of technical over fundamental analysis and that can be found in the role of risk management. Past chart patterns may help to predict future price movements, but they can never work every time. No matter how good he or she is, every trader is going to be wrong a proportion of the time. It is in the way that a trader manages those bad trades that determines whether he makes money or not. A few years back, a colleague explained that his daily trading decisions were in fact made by his threeyear-old daughter. Every morning before he went to work he would ask his daughter whether he should buy or sell that day; he would then follow her instructions on the market opening. The randomness of her responses should have meant that her father finished up even over Chapter 15/page 3
Sugar Trading Manual time – basis probability theory. (He would eventually have buckled under the weight of overheads and commissions and his daughter would eventually have got bored with the game by the time she was an adolescent – but let us leave that aside for the moment.) However, Dad consistently made money over time and he did so through good risk management. By letting the good trades run, by cutting the losses on the poor trades and by ensuring that profits did not become losses (commonly known as ‘snatching defeat from the jaws of victory’) Dad beat the averages and went on to pay her school fees. Technical traders beat the averages in the same way. Their analysis gives them price levels at which to enter and exit the market. If they have the discipline to follow those signals (most particularly to get out when they are wrong) then, over time, technical traders will make money. By following their signals and, if necessary, letting the computer make the difficult decisions for them, technical traders take the human element out of the game. However, a trader acting solely on basic fundamental analysis does not receive those clear signals and often does not know when to get out. Not knowing when to exit a position is one of the main problems with fundamental trading. A trader may be bullish on sugar because he feels that demand exceeds supply, and he may go long on the basis of that analysis. If the price consequently moves down, then that should make the trader even more bullish in as far as a lower price will further stimulate demand and curtail supply. To behave logically, the fundamental trader should buy more in such a situation. If the market continues to fall, losses will mount and, because a lower price is in itself bullish under fundamental analysis, it will be difficult for the trader to set a level at which to cut his position and take his loss.
The investment funds Although a few funds look at fundamentals, nearly all of them trade entirely on technical indicators. They use different indicators and different blends of indicators, giving weights to each of the signals that they receive. However, as any casual observer of the markets will have noticed, the funds usually seem to hunt in packs. They all go long more or less at the same time and they all go short more or less at the same time. In theory, this would suggest that their mix of complicated weightings and rocket scientist mathematics can be distilled down to a simple formula from which their activity could be predicted. A whole subindustry has grown up to do just that, particularly on the floors of the exchanges, with traders and locals looking for key levels and triggers. However, while outsiders try to spot the signals, the funds themselves are seeking the same thing and their systems are constantly being finetuned. (Many have complex computer models that self-correct and Chapter 15/page 4
Technical trading learn from their past performance.) In other words, it is difficult to know what indicators to look out for because the fund managers are not even sure themselves. Some fund managers trade in a contrarian fashion, looking usually for relatively small intra-day movements. Their systems try to show when markets become over-extended in either direction in the short term and they are quick to reverse on range breakouts. Although a large fund manager might allocate a small portion of his funds to such a contrarian, the competitive nature of the industry means that he has to allocate most of the money to do what the others are doing. And the others are hunting in packs for a trend – the holy grail of price movements. The funds are all ranked according to returns and, despite all the disclaimers to the contrary, most investors do take past performance as an indicator for future returns. (After all, what else do they have to go on?) As such, cynics often argue that what matters is not really how much money a particular fund makes or loses, but how their returns compare to their competitors’. (This is not entirely true as managers get paid performance fees on the profits they make, but not, of course, on the losses.) On the basis that funds are trend followers, the more successful ones are those that pick up on a future trend before anyone else does – and get out ahead of the pack once the trend is ending. Going for the earliest signals results in a lot of false starts; in sideways markets the funds will, by their very nature, be whipsawed many times. This is particularly true at the end of a period of trending prices. Markets rarely go straight from a sustained bull move to a sustained bear move without prolonged periods of sideways action and false breakouts. These periods can lead to quite considerable losses as the funds’ buy and sell signals are repeatedly crossed. However, these losing periods are factored into the systems and, as long as everyone else is in the same boat, it does not really matter. However, a fund manager cannot afford to get tired of being whipsawed and stop trading a particular market. He cannot afford to ignore his own signals. The chances are that he would give up just as the market stops moving sideways and breaks out one way or the other. Then he will miss the big move, his competitors will capture it and his returns will be down on the industry average. In essence, a technical trader uses two types of tools: trend identifiers and contrarian indicators. The first type gets the trader into the market, while the second type warns him or her to think about getting out again. Despite the entire forests that have been used up writing about technical indicators, most books on the subject are not that helpful. Many have lovely charts showing all types of formations of key reversals, head and shoulders, doji stars (see below), etc, and show their readers how much money they would have made if they had interpreted them in time. However, the key word here is ‘interpreted’. Most Chapter 15/page 5
Sugar Trading Manual fund managers ignore these traditional indicators because they have to be interpreted by humans. They do not give clear signals as to whether an investor should buy or sell until it is too late. To understand this, imagine you are driving along the motorway at high speed but you are unsure where to exit. When things are moving fast and quick decisions have to be taken, only clear instructions will help. Anything that is open to interpretation must be filtered out. As we have mentioned above, a whole sub-industry has developed to try to predict the behaviour of the funds. This may be useful – and it may be not. If a physical trader has to decide whether to hedge a cargo now or wait a while, it is probably useful to know both how the funds are positioned and what future price action will prompt the funds to change their position. If you are a major trade house you can sometimes play the funds by moving the market to their trigger points, touching off their stops and generally painting a favourable picture on the charts. This can be particularly successful in a sideways, trendless market. Also, if you are a local on the floor or a jobber in an office you will need to know which prices, either resistance or support, are strategic. Jobbers will try to test those levels and force the funds’ hand to make a quick jobbing profit. However, as a market participant, it may be best to concentrate on your own trading system rather than worry what everyone else is doing. One of the first rules in any business is to concentrate on your own affairs, rather than try to guess what the competitors are doing. Trying to second guess the competition can be a frustrating task. You may get some elements of their system spot on but be totally ignorant of others, or their systems might develop or change in reaction to changing markets. As a rule, therefore, we suggest that you forget about trying to work out what tools the others are following and concentrate on working out what is best for you. Here are a few of the better-known technical indicators with a brief explanation of each.
The tools of the technical trade Trend lines and channels These are much loved by physical traders. Trend lines are simple and can be quickly drawn on any chart. They are, however, open to interpretation. What people see in them depends on what they want to see in them. What trend lines look like depends where and how you draw them (and redraw them once the market has moved) to fit your physical/fundamental outlook. If you are bullish, you will find broken downtrend channels or powerful up-trend lines. If you are bearish, the channels you see will slope down. Our advice is that trend lines and channels are only useful as a tool to convince you that your position is Chapter 15/page 6
Technical trading a good one. However, we do not think you should trade on the basis of them. Moving averages are a much better tool for recognizing a trend.
Moving averages These are popular for two reasons: firstly, because they are easy to use; secondly, because they work well in identifying a trend (which is, you remember, what the game is all about). There are a number of variations on a theme. Simple moving averages are calculated by adding values, usually the closes, over a set number of periods and then dividing the sum by the number of periods. Weighted moving averages are calculated by giving more weight to the most recent data. As such they are more sensitive to recent price movements. Exponential moving averages are similar to weighted moving averages in that they give more weight to recent data but they differ in as far as they do not drop off data as time moves on. Each past observation becomes progressively less significant, but it is still included. Moving averages filter out noise and make it easier to identify trends. If the moving average line is upward sloping, then the market is in an up-trend, and vice versa. Combining two moving averages on one chart usually makes the picture even clearer. If a short-term moving average is above a longer-term one, then the market is trending up, and vice versa. Going further, if a short-term moving average crosses a longer-term one, then that is a sign that the trend is changing. Some traders like to plot three moving averages: short, medium and long term. They then only take as a buy or sell signal when the first two cross the third. There are an infinite number of combinations and blends of moving averages that can be created for different time periods. One can play with mixtures of simple, weighted and exponential moving averages both short and long term. However, casual observation suggests that a long-term simple moving average (say eight weeks) should be plotted with a short one (say one or two weeks). As for exponential moving averages, one-week and two-week periods tend to help predict upcoming changes in trends. However, as they say in all the guides: do whatever works for you. (We have a sneaky feeling that some funds use systems based solely on moving averages. However, as it would be difficult to sell such a fund to an investor, no one would ever admit it.) The biggest problem with moving averages is that they whipsaw you terribly in sideways markets. Following a moving average system when prices are trading in a range usually results in you buying at the top end of the range and selling at the bottom end. This tends to be true for most of the funds, and the losses occurring in sideways markets Chapter 15/page 7
Sugar Trading Manual have to be factored in to their systems. For an individual trader, or for a newcomer on a trading desk, it is probably not wise to rely on moving averages alone.
Oscillators If the important thing to watch with short- and long-term moving averages is how far they are apart and how close they are to crossing, then maybe the smart thing to do is to plot the difference rather than the moving averages themselves. This is exactly what an oscillator is: the difference between a short- and a long-term moving average plotted on a histogram that moves above and below a zero line. An oscillator can also alert a trader to bearish and bullish divergence. If the market’s trend is up but the oscillator is trending down (i.e. the difference between the moving averages is narrowing), then this is a sign of bearish divergence showing a weakening trend. The same applies for a falling market and bullish divergence. However, whether moving averages are converging or diverging can easily be seen by looking at the moving averages themselves. It is therefore probably unnecessary to clutter up your screen with oscillators. We would put them in the category of tools that can be used to convince yourself to back your position. The same applies, but to a lesser extent, to the next tool.
Moving average convergence divergence (MACD) This is a type of oscillator that uses exponential, rather than simple, moving averages. MACD is made up of two lines, the MACD line and the signal line. The MACD line is an oscillator that charts the difference between a short-term and a long-term exponential moving average. The signal line is an exponential moving average of the MACD line. When the MACD line crosses from below to above the slower moving signal line, it flashes a buy signal. When the MACD line crosses from above to below the signal line, it flashes a sell signal. MACD is most useful in indicating the trend. (It was first developed to trade three- and six-month stock market cycles.) As such, a number of technical traders will use it when first looking at a particular market to ascertain the long-term trend and to make sure that they are not trading against it. It is probably a good discipline to check the MACD before entering a position. However, if you do decide to trade on the basis of it, make sure that you ascertain where to put the stop loss. MACD trading systems are similar to a good party. It is easy enough getting in, it is good fun while you are there but you almost always stay too long and the hangover hurts.
Chapter 15/page 8
Technical trading Resistance and support levels Breaking or holding certain key levels of support or resistance can have tremendous impact on future price movements. Usually support or resistance levels are areas where the market has stopped in the past or where the price has ranged over a certain period. Most speculators love a bull market (because they find it easier conceptually to go long rather than short) and generally rising prices will, by themselves, tend to bring in more buying. Breaking a contract high will accelerate that process. Similarly, if the funds are short, breaking a contract low will sometimes attract further selling. If the prices are far from contract highs or lows, weekly or monthly highs and lows gain in significance. Similarly, a number of technical traders look at levels that have previously acted as levels of support or resistance on the long-term first or second month continuation charts. Breaking those in either direction is significant and can accelerate either accumulation or distribution. However, although it might encourage locals or jobbers to liquidate or reverse positions, breaking a support or resistance is unlikely to prompt a major fund to do so. Funds trade trends. Breaking support or resistance sometimes confirms or encourages confidence in a trend, but it seldom reverses a trend. Also, simply breaking a particular price level may not be enough to encourage technical traders to react. Often the price break has to be confirmed, either by closing above or below that level, or by the market trading in volume once the level has been broken. Some traders plot moving averages against daily price movements and argue that the averages act as support and resistance levels. If they do, we have not seen them. Similarly, there is a saying in the sugar market that gaps are always filled. (At the time of writing, people are saying that the gap between 6.11 cents/lb and zero will soon be filled.) As such a gap on the charts where the one session’s low is higher than the previous session’s high – or vice versa – it is often given as a support or resistance level. The market is expected to return to the gap, check it out, and then move on with its normal business. It may do, but it is probably not worth betting any money on it.
Volume An experienced local or floor trader can sense and anticipate future price direction often simply by listening to the amount of noise in the pit. A sideways market will produce little noise or activity. The noise level, however, will pick up as the traded volume increases. A trader in an office can often feel or hear this down the telephone line when he
Chapter 15/page 9
Sugar Trading Manual speaks to the floor. In a similar way a trader can study the actual volume of lots traded on the floor – either hourly or daily – and use this as an indicator of the strength of a price move. If the volume does not increase on a breakout from a range, that breakout will often fade. Rising volume during a trend can confirm that trend; falling volume at a time of rising or falling prices can be taken as a sign of a weakening trend. However, once again, volume figures are open to interpretation and extensive argument. For example, some technicians take a wild high volume day as sign of an exhausted market that is either sold or bought out. As there are so many exceptions to the rule, technical traders often disregard volume figures as background noise that should be filtered out. We are prepared to accept, however, that they can prove particularly useful for locals and floor traders.
Open interest Open interest figures are published daily by the exchange and refer to the number of positions open or uncovered in each futures month at the close of business the previous day. Although there is a certain amount of confusion as to how they are calculated, it is relatively simple. If you were to buy one lot from someone in a market that had just opened, then the open position would be one. If you then sold that position to a third party, the total open position would still be one. The lot that you had bought and then sold would be closed out and the only position left ‘open’ would be one lot. Technical traders tend to use the same rules for open interest as for volume. Rising open interest in a rising market is construed as bullish. When open interest starts to fall, or rise less quickly, then that is often taken as a sign of bearish divergence and should alert traders to a possible trend change. A falling open interest in a falling market can be read as a sign of long liquidation by speculators and is often seen as a sign of a weakening downtrend. Rising open interest in a falling market implies new longs and shorts and confirms the downtrend, suggesting that the market’s momentum will carry prices lower. However, there has been growing criticism of the way the sugar open interest figures are reported. Some commentators have suggested that the numbers are quite simply wrong and that inaccurate data is fed into the computer that calculates them. More importantly, as we showed in the above example, if the open interest is to be calculated correctly, offsetting long and short positions must be closed out. Similarly, offsetting longs and shorts that are held by different brokers for the same client should be reported as duplications and an allowance should be made in the calculations. Unfortunately, they are often not reported and the open interest figures can be unintentionally inflated. Similarly, difChapter 15/page 10
Technical trading ferent accountancy rules mean that against actuals and executable orders are sometimes treated differently in different countries. This can also lead to double counting. Unfortunately, all this has led to the weakening of the importance of open interest data in technical trading. It is still important, but less so.
Commitment of traders (COT) report This is released once a week by the Commodity Futures Trading Commission (CFTC) based on data received from the exchange. The report shows, after a time lag, the size of the positions held by different categories of traders: large and small hedgers and large and small speculators. Traders have taken to watching the report carefully and it is now always awaited with anxiety and announced with a fanfare. (The report is released after the close on a Friday night.) The market’s reaction to it can often be brutal. Although the subject is complex, traders usually concentrate on just one element: the size of the speculative position. As far as sugar is concerned, the funds are believed to be maximum long at close to 100 000 lots and maximum short at close to 30 000 lots. When the market is rising and the funds are close to 100 000 lots long, it is assumed that they have no buying power left and the market is ripe for a major correction. The same applies in the opposite direction at 30 000 lots short. The CFTC releases, on Mondays, an option-adjusted COT report. This takes the open option positions at each price level and converts them into the equivalent number of futures contracts by using the delta. This sounds complicated – and it is. Broadly speaking, the delta of an option is the amount that it will move in reaction to a move in the price of the corresponding future position. For example, at the time of writing, March 7.0 cts/lb calls have a delta of 33. This means that, in theory at least, if the March futures rally 100 points, then the 7.0 cts/lb calls will rally 33 points. So, for the COT report, if the funds are long 1000 lots of 7.0 cts/lb calls, then this is adjusted down and taken as being a long of 330 lots. However, traders often treat the option-adjusted COT report with circumspection. Options are not futures and a human will react differently, say, to being long call options in a falling market to being long futures. (He might stop himself out of the futures but stay long the options.) As such, options can sometimes do weird and not so wonderful things. The COT report is important in as far as it tells you of the funds’ potential buying or selling power and of their excesses. For example, if the funds are short and the technical indicators begin to cross on the upside, it is likely that the funds will cover their shorts and may even go long an equal amount. As they do so, their buying may feed on itself, touching off other indicators, bringing in more funds and reinforcing the Chapter 15/page 11
Sugar Trading Manual move. (If this happens, think of the funds as a runaway truck and try to step out of the way.) There are, of course, problems with the COT report. The first is that it is only published with a time lag. (It only reports data as of the close the preceding Tuesday.) As such, the funds’ excesses have often corrected themselves before anyone even knows about them. Also, as in the case of the open interest figures, no one is entirely sure that they are accurate. However, these reports have taken on such importance in the minds of traders that they should be treated with respect. Rather like a skier on a steep slope, markets will move from one side of the run to the other, turning and correcting as they go. Even the strongest bull or bear markets rarely move in a straight line: they move from one short-term exhaustion point to another, alternating between overbought and oversold. Traders use the COT report as a rough guide to whether the market is overbought or oversold. However, there are many others.
Relative strength index (RSI) This is one of the most popular guides to a market’s current situation. It works by calculating the difference in price values over a certain time period. These values are averaged, with an up average calculated for periods with higher closes and a down average for periods with lower closes. The up average is then divided by the down average to create the relative strength, which is then put into a formula to produce an oscillator that fluctuates between 0 and 100. You do not, however, really need to know all that. What you do need to know is that a market becomes overbought as it approaches 100 and oversold as it approaches zero. Most sugar traders will tell you that on a scale of 1–100, sugar normally trades between a 30 and 70 basis, the index and anything outside those levels is overbought or oversold. What they do not tell you is that there are periods of acute volatility where the index can show values below 10 or above 90. Also, it is important to remember that just because the RSI is high or low does not mean that the market will correct. Sometimes the RSI will come back into mid-range just through sideways price action. The RSI is one of those technical indicators that can be used to add confidence to holding or instigating a particular position, but it should not be traded on in isolation.
Money flow index (MFI) This is rather a grand-sounding name for a volume-weighted RSI that tries to measure the amount of money entering or leaving a market. Chapter 15/page 12
Technical trading The MFI measures price volume momentum in the same way as the RSI measures straight price momentum. In other words, it is an RSI with a volume component. (The MFI uses an average of the day’s high/low close rather than just the close, which is used by the RSI.)
Stochastic indicator This is another oscillator designed to show when a market is overbought or oversold. Most traders use only a slow stochastic, which is the normal stochastic slowed by a moving average. The basic theory behind the indicator is that, as prices increase, closing prices tend to be closer to the upper end of the daily price range. As prices decrease, closing prices tend to be closer to the lower end of the daily price range. In other words, in an up trend, prices tend to close near the highs of the day. In a down trend, they tend to close near the lows of the day. The indicator generates two lines, %D and %K, which both plot between zero and 100. In the same way as the RSI, the stochastic has overbought and oversold areas. When the two lines are below, say, 25 then the market is considered oversold. A reading above 75 is considered as overbought. The slow stochastic %D line is also useful for showing bullish or bearish divergence – in other words, a weakening trend. If the actual sugar price is rising while the %D line is falling – if the %D line makes a series of lower highs while price makes a series of higher highs – this shows a weakening up trend. If the price is making a series of lower lows while the %D line makes a series of higher lows, then the market is oversold. The system sends out a buy or sell signal when the %K line crosses the %D line from the right-hand side. This occurs when the %D line has bottomed or topped and is moving higher or lower when the %K line crosses the %D line. The strongest signals are given when the %D line is exiting an area below 15 for a buy signal and above 85 for a sell signal. Technical traders love the stochastic indicator and it appears to have a reasonable success in sugar.
Parabolic SAR system This is one of twenty-nine studies presented (and invented) by J. Welles Wilder in his book New Concepts in Technical Trading Systems. The parabolic SAR system is a time/price reversal system where SAR stands for ‘stop and reverse’, a mechanism where positions are reversed as stops are hit. In doing so, the system always has a position in the market. It is a trend-following system where the trailing stops curve on the chart like a parabola. When the price is trending higher, the trailing stops are obviously below the price, and vice Chapter 15/page 13
Sugar Trading Manual versa. The stops start slow and then accelerate with the trend, moving closer to the price as they do so. This acceleration is intentional and is designed to allow the trend to establish itself, thus avoiding stops being hit too early on.
Directional movement index (ADX) As one might imagine, this system works well in a trending market but not the rest of the time. To try to compensate against this, Wilder developed a tool that is designed to show when the market is trending and when it is not. When there is no trend, stay out of the market. This tool is called the directional movement index and is an index that shows how much directional movement (or trend) is present in the market at any one time. It measures the strength of the trend on a scale of zero to one hundred and shows if the trend is weakening or strengthening. It is therefore a good indicator of bullish or bearish divergence. If the market is falling but the ADX is rising, then the trend is weakening. If the market is rising and the ADX is falling, then the trend is also weakening. Some traders distil Welles’ system down to four lines: DX, a measure of the strength of the trend; ADX, an averaged, or smoothed DX line; +DM, a measure of upward movement; and -DM, a measure of downward movement. The rules for the system are relatively simple. If the +DM line crosses above the -DM line, you buy. When it crosses below again you reverse the position and go short. However, if you are wrong you need a stop, and this should be the high of the session on the day when you initiated a short position, or the low of the trading day when you went long. This stop remains a good till cancelled (GTC) order until either it is touched or the +DM and -DM lines cross again. Most important of all, the ADX must be above the +DM and the -DM lines. If it falls below these two lines then the market is trendless and you stop trading for a while.
Daily sentiment indicator (DSI) This is a non-mathematical technical tool developed by Jake Bernstein and explained in his excellent book, Why traders lose; how traders win. It is based on the observation that most traders are bullish at the top and bearish at the bottom of any particular move. By the simple means of a daily poll of market participants, his organization publishes an index showing the percentage of people who are bullish (and by implication the percentage who are bearish). If everyone polled on a particular day was bullish, then the index would show 100; if no one was bullish the index would read zero.
Chapter 15/page 14
Technical trading The DSI helps traders partly by alerting them to their own folly. As already mentioned, we are all herd animals and we follow herd instincts. This can be particularly dangerous in a crowded cinema when someone shouts ‘Fire!’ and everyone rushes for the same exit at the same time. It is also dangerous in a futures market when everyone is bullish, everyone is already long and there is no one left to buy. We all love being part of the crowd, but being long in a market with a DSI above, say, 90 should send the alarms ringing. Similarly, being short after a prolonged down move when all the news is bearish, when the DSI is reading under 10, is a good time to exit the position and leave the rest of the move to the others.
Candle charts These have been around almost as long as candles themselves. Like bar charts, they use open, high, low and close price data for the session. If the price falls during the session and the close is below the opening, the body of the candle is filled in black. If the market closes higher than it opened, then the candle body is left uncoloured. Many technical traders love them and it would not be proper to write a chapter on technical analysis without a brief discussion of their methods. However, candle charts are open to interpretation and, as such, should come with a financial health warning. Fans of candle charts will happily spend hours explaining that the market moved one way or another because of a particular candle chart formation. However, the difficulty is in reading the formations as they occur. There are a few alarm signals on candle charts that can signal a change in trend. These are the main ones a trader should watch out for: A doji star occurs after prices have been trending and then the current session closes at the same price as it opened. Doji stars can either be bullish or bearish depending on the preceding trend. A bullish engulfing pattern occurs when the current period’s white candle body engulfs (i.e. is longer at both ends) the prior period’s black candle body. A bearish engulfing pattern occurs when the current period’s black candle body engulfs the prior period’s white candle body. A hanging man occurs during an uptrend when prices fall during the session but then rally back to close near to opening levels. It does not matter if the main body of the candle is white or black but the lower shadow (line) should be at least twice the length of the main body. A hanging man is a signal that either the market will reverse its previous bull trend or will at least correct to the downside. A hammer has the same form as the hanging man but signals a bullish reversal.
Chapter 15/page 15
Sugar Trading Manual A morning star forms after a downtrend and develops over three trading sessions. The first candle has a long black body; the body of the second candle is small and below the previous day’s body; the body of the third candle is white and above the second day’s body. This formation indicates support on the downside. An evening star is the reverse pattern to the morning star and shows resistance on the upside. A shooting star has a small candle body and a long upper shadow. It occurs after a downtrend and is a reversal pattern. It does not matter whether the candle body is black or white.
Risk management and moral hazard Technical analysis is a useful tool in money management in as far as it sends out clear and consistent signals as to when a trader should enter and exit a position. However, it is often used and abused by fundamental traders seeking simply to justify their current position. Those that are long will take note of bullish indicators. Those that are short will only take note of bearish indicators. Professional money managers take out this human element and develop computer systems that distil a number of technical indicators into instructions that cannot be overridden. Technical systems simply try to beat the averages over time. As such their returns are rarely fantastic but often consistent. If you have ever wondered why fund managers manage funds rather than trade for themselves, it is partly because of these often meagre returns (after all, they are only trying to be right 51% of the time) and partly because managing funds provides a share of the profits but not the losses. The fund manager gets a management fee (usually 2% of the total funds invested) as well as a percentage of the profits (usually between 15% and 25%). Of course, he does not take a share of the losses and the only risk he has is of losing his job – or the funds under management – if he performs badly. The same applies, of course, to fundamental traders working for a large company. Here they are speculating with the funds of their shareholders – or sometimes of the banks – with limited downside potential. If they make money, they often receive substantial bonuses. If they lose money, they will receive no bonus but will rarely lose their jobs. (After all, everyone has a bad year from time to time.) As such there is a certain ‘moral hazard’ involved. Traders who have virtually no downside might be tempted to take excessive risk – or to misprice business by underestimating the risk involved – in an attempt to boost the Chapter 15/page 16
Technical trading company’s profits and their own bonuses. It is not a coincidence that traders who are also shareholders are generally far more conservative in their assessment of risk. It is important to realize, therefore, that very few people actually trade for themselves these days. Given the choice between a share of the profits and no recourse against losses, or a pretty even chance of either making profits or losses, very few people would choose the latter. Generally those who do trade for themselves are locals, in and out for a few points, or technical traders seeking to build up a track record over time in order to attract people to give them funds to manage. Be wary, therefore, of the hype around particular traders or fund managers. Those media stars that make excellent, or above average, returns are either lucky or taking excessive risk. In both cases, they are soon certain to become fallen stars. It is better to admire someone who is successful in controlling and assessing risk in a consistent manner and who makes steady returns over the long term.
Conclusion The sugar market generally, and in the long term, follows fundamentals. The problem is that it is so hard to know what those fundamentals are. They are like a giant jigsaw puzzle where you have lost the box and half the pieces. Try to put that puzzle together on the deck of a sailing boat in a gale and betting money on the end result, and then you have a pretty good idea of what it is like to trade basis fundamentals. Trading basis technical indicators can provide the necessary discipline to beat the averages. Technical analysis works because it sends out clear and consistent signals as to when a trader should enter and exit a position, but it is also hard work. For a fundamental trader, technical analysis is important because it helps to show how the market will react at particular trigger points and it aids in decisions over hedging or pricing physical cargoes. However, technical analysis is most often used by fundamental traders seeking simply to justify their current position. Those who are long will interpret them bullishly. Those who are short will interpret them bearishly. This is self-deception and self-deception leads to losses.
Chapter 15/page 17
Part 5 Administration and management
16 Payment and documents John Maton Coimex, Geneva
Cash against documents (CAD) Example A Example B Example C
Letters of credit (L/C) or documentary credit (credit) Example D Example E Article 13 Article 20 Article 21 Example F
Bid bonds (BB) and performance bonds (PB) and guarantees Example Example Example Example
G H I J
‘What is the most important aspect of a trading company’s activities?’ This is the first question that should be directed at new employees. It is doubtful the right answer will be given; that is, ‘to gain payment from buyers’. All activities of a trading company should be directed towards that end. How difficult that proves to be depends initially on the terms and conditions of the payment clause incorporated in a sale contract. A trader writing a contract will be influenced by his credit rating of a buyer and how desperate he is to sell. The more pressure he is under to sell the more likely he is to accept the terms and conditions imposed on him by a buyer. The subject of payments, with which this chapter is concerned, is not only restricted to obtaining payment from buyers but also to making payments to sellers. The most frequently employed methods in the sugar trade for effecting payment to sellers and collecting money from buyers are cash against documents (CAD) or letters of credit (L/C). Other methods can be considered as variations on either of these schemes.
Cash against documents (CAD) For a sale contract of EEC white sugar, concluded with payment terms basis CAD with ‘parity’ (delivery basis) fob stowed (load port) we would expect to see a payment clause in the sale contract similar to the following:
Example A Payment by net cash by telegraphic transfer, for 100% of invoice value without any deduction and/or set-off whatsoever, to Seller’s designated bank account against presentation in . . . . . . [Buyer’s Location] of documents as set out in Contract Rule 17 of The Rules of the Refined Sugar Association. Charter-Party bills of lading shall be acceptable. Documents presented before 11:00 hours shall be paid value next banking day. An analysis of the different elements of this clause reveals: ‘By net cash by telegraphic transfer, for 100% of invoice value without any deduction and/or set-off whatsoever.’ The buyer has to pay to the seller and the seller has to receive from the buyer, most commonly in United States dollars, the exact value of the seller’s sales invoice established for the quantity and value of the sugar covered by the contract of sale, net of any banking charges incurred by the buyer for effecting the payment, and without the deduction of the value of any Chapter 16/page 1
Sugar Trading Manual other invoices, debit notes or credit notes that may be outstanding between the buyer and the seller relating to the same contract or any other purchase or sale contracts between them. ‘To Seller’s designated bank account against presentation in . . . . . . . . . (Buyer’s Location) of documents as set out in Contract Rule 17 of The Rules of The Refined Sugar Association.’ The seller has to present the ‘shipping’ documents as specified in Rule 17 of The Rules of the Refined Sugar Association (RSA) to the buyer at his designated address against receipt of which the buyer is to make payment in favour of the seller to the seller’s designated bank account. The shipping documents as specified in Rule 17 of the RSA are: (some words and comments added by the author) (a) For contracts with delivery basis/parity F.A.S. (Free Along Side), F.O.B. (Free On Board) or F.O.B. Stowed (load port) against a complete set of (original) signed clean ‘on board bills of lading’ (receipt issued by the captain to the shippers for their cargo loaded on to his vessel – a negotiable document of title for the goods. The captain of the ship into which the goods have been loaded should only hand the sugar over at discharge port to the person that presents to him at least one original bill of lading issued for the cargo that he is carrying), certificate of origin, certificate of weight, quality and packing and a signed commercial invoice. (b) In the event that the delivery basis/parity is C.&F. (Cost And Freight) at the discharge port in addition to (a) above the bills of lading would have to show evidence that the freight has been paid. (It is worth noting that the fob seller does not have an obligation to supply bills of lading marked ‘freight prepaid’ or similar.) (c) In the event that the delivery basis/parity is C.I.F. (Cost, Insurance and Freight) at the discharge port in addition to (a) above the bills of lading would have to show evidence that the freight has been paid and additionally a policy, certificate or letter of insurance, in compliance with Rule 16 of the RSA, would have to be supplied. The above mentioned shipping documents would be considered ‘simple’ shipping documents. For a sale contract subject to the rules of the RSA, Rule 17(d) also applies and states as follows: In addition to the documents stipulated in (a), (b) and (c) above, the Seller shall, if requested, not later than seven days prior to the commencement of loading of the vessel, include in the presentation for payment other documents customarily required by and acceptable to the authorities in the country of destination. Any such additional documents requested with less than the above notice, shall be supplied by the Seller as soon as possible. The Seller shall have any documents visaed in accordance with the requirements of the country of destination and any Chapter 16/page 2
Payment and documents costs incurred in obtaining such documents and any visa charges thereby incurred shall be for Buyer’s account. The Seller shall not be responsible if, for reasons beyond his control, such documents or visas are unobtainable. The implications of Rule 17(d) as above relate to the shipping documents requested by a buyer from a seller and the time that a buyer passes his documentary requirements to his seller. If a buyer passes to a seller his documentary instructions more than seven days before the commencement of loading and if such shipping documents are obtainable then these shipping documents should be the ones that the seller presents to the buyer to obtain payment for his sugar. However, if a buyer passes his documentary requirements to a seller less than seven days before the commencement of loading and if those requirements/documentary instructions include a request for the shipping documents to be supplied to include documents in addition to those as specified as per (a), (b) and (c) of Rule 17, then the seller does not have an obligation to supply those additional documents to a buyer in order to obtain payment. In such a case, a seller can request a buyer to make payment and a buyer cannot refuse to make payment against ‘simple’ documents as specified in (a), (b) and (c) and must supply the additional documents as soon as they are available. ‘Charter-Party bills of lading shall be acceptable.’ Bills of Lading (Receipt for the cargo loaded/Negotiable document/Document of title to the goods shipped) can be established on various types of form/paper. The most common type of form in use in the sugar trade, typically used where one charterer is shipping the total quantity or full cargo on one vessel, is the charter party bill of lading (also known as the ‘congenbill’), which is to be used with (read with) the charter party (the contract between the vessel owner and the vessel charterer) for the goods loaded/covered by the bill of lading. The bill of lading does not itself include all the terms and conditions of the contract of carriage. An alternative type of bill of lading is the shipping company bill of lading, which is a form typically drawn up/printed by the vessel owners, which would normally state the name of the shipping company on the form itself and would include in the preprinted text of the bill of lading all the terms and conditions of the contract of carriage. Despite the fact that the charter party bill of lading is the most common form of bill of lading in use in the sugar trade, it is still necessary to state in the contract terms and conditions that this form of bill of lading is to be acceptable to the buyer. This is because the ICC Uniform Customs and Practice for Documentary Credits (UCP) publication No. 500 (UCP 500) – to which letters of credits (an alternative way of making and receiving payment to be covered later in this Chapter 16/page 3
Sugar Trading Manual chapter) are habitually subject – specifies that banks will not accept a bill of lading which contains an indication that it is subject to a charter party. Although a contract with payment terms CAD does not involve the negotiation of a letter of credit, and is not subject to UCP 500, it is stated that charter party bills of lading shall be acceptable as an emphasis and to draw a buyer’s attention to the fact that he may well receive charter party bills of lading for payment. If he has an onward sale with payment terms on the basis of a letter of credit he should ensure that any letter of credit he receives from his buyer should specifically allow for the presentation of charter party bills of lading. In the event that such a letter of credit does not allow for the presentation of charter party bills of lading, an amendment to the letter of credit should be requested/obtained covering this point because the alternative would be non payment. ‘Documents presented before 11:00 hours shall be paid value next banking day.’ This is stated as a clarification of buyer’s and seller’s obligations with regard to the time for presentation/receipt of shipping documents evidencing shipment under a contract and the time following receipt within which payment has to be made. Furthermore, in the event that a contract is subject to the RSA rules, the seller should ensure that the correct notification of presentation of shipping documents for payment is given to the buyer in accordance with Rule 18 of the RSA. This states: Notice of intention to present documents for payment must be given to the Buyer not later than 15.00 hours local time on business days at the place of presentation of such notice (see Contract Rule 25). Documents shall be presented to the Buyer not later than 11.00 hours local time at the place of presentation of documents on the following business day. The Seller shall not be liable for charges incurred as a result of the goods arriving at the port of discharge prior to the receipt of documents provided they have been passed on without delay. RSA Rule 25 states: Any notice to be served by the Seller or the Buyer under these contract Rules shall be delivered by courier or transmitted by cable, telex or facsimile. In the case of a notice served by facsimile such notice shall also be delivered by courier or by post in a registered letter. In the event that a seller has not given the due notification to a buyer of his intention to present shipping documents for payment, then a buyer could use this as a reason to delay payment, by one business day. Chapter 16/page 4
Payment and documents For a contract of sale which does not include the last sentence of the payment clause in Example A above, then the payment clause would therefore read as per Example B below.
Example B This is a typical example of a payment clause that can be found in a contract of sale of white sugar of origin other than EEC where the buyer is to be considered 100% reliable: Payment by net cash by telegraphic transfer, for 100% of invoice value without any deduction and/or set-off whatsoever, to Seller’s designated bank account against presentation in . . . . . . . . . [Buyer’s Location] of documents as set out in Contract Rule 17 of The Rules of the Refined Sugar Association. Charter-Party bills of lading shall be acceptable. With the omission of the last sentence from Example A so that the clause will then read as per Example B and without anything further being stated with reference to either the seller’s obligations as to a time limit for presentation of shipping documents to the buyer, or the buyer’s obligations as to the value date of his payment for those documents, and if the sale contract is subject to the rules of the RSA, then reference must be made to those rules. Rule 18 of the RSA obliges the seller to give notice of presentation of shipping documents to the buyer not later than 15.00 hours local time on a business day at place of presentation of such notice and documents are to be presented to the buyer not later than 11.00 hours local time on the next following business day. Rule 19 of the RSA states: Documents evidencing proper fulfilment of the terms of a contract and tendered for payment in accordance with Rules 17 and 18 shall be paid for on presentation without any deduction and/or set-off whatsoever and such payment shall not prejudice any claim or dispute to be referred to arbitration. Should the Buyer fail to pay on presentation of documents the Seller may resell the sugar for account of whom it may concern. The key words of the above clause, as regards the delay within which the buyer is to make payment in the seller’s favour are ‘shall be paid for on presentation’. This is accepted as meaning that a buyer’s payment in a seller’s favour should be without delay and for value the same day as the shipping documents have been received by the buyer. Chapter 16/page 5
Sugar Trading Manual The two payment clauses above are typical examples found in contracts of sale where the seller considers the buyer a first class trustworthy and creditworthy contract partner with whom he feels completely confident will take up and pay for contractual shipping documents in accordance with the terms of his sale contract. For a buyer whom a seller considers a reliable contract partner, but there is some doubt in the seller’s mind as to the buyer’s ability to pay, a seller may decide to present shipping documents for payment to the buyer through the intermediary of a bank (documentary presentation). A seller would employ such a scheme in order to reduce or eliminate the risk that a buyer utilizes the shipping documents, disposes of the documents and presents them to his buyer for payment before he has paid the seller for the documents. Such a payment scheme, as with all contract terms and conditions, should be agreed between the buyer and seller at the time of the negotiation of the contract. An example of a payment clause on this basis is shown next in Example C.
Example C Payment by net cash by telegraphic transfer, for 100% of invoice value without any deduction and/or set-off whatsoever, to Seller’s designated bank account against presentation through a bank nominated by seller of documents as set out in Contract Rule 17 of The Rules of the Refined Sugar Association. Bank charges for seller’s account – Charter-Party bills of lading shall be acceptable. Documents presented before 11:00 hours shall be paid value next banking day. Because it is the seller’s choice to present the documents to the buyer through a bank, the bank in question would be expected to be the seller’s choice. The bank that the seller chooses for this purpose could be expected to be a bank of which the seller is a good client and one which the seller expects to best look after his interest and furthermore look after the seller’s interest rather than the buyer’s interest. The seller could choose a bank in either his own location or the buyer’s location (if their places of residence are different). In this circumstance, if the seller chooses a bank in his own location, it could be that this bank would send the documents to a bank with which it had good relations, perhaps its own branch, in the buyer’s location. At the time of sending or delivering the shipping documents to his chosen bank, the seller would enclose a covering letter for the documents which includes an instruction along the following lines:
Chapter 16/page 6
Payment and documents These shipping documents [as specified in this covering letter] are presented to you for the account of . . . . . . . . . . [buyer] and disposal of the same is not to take place until after payment in full of our invoice no. . . . . . for US$ . . . . . . . . . . . . as per the payment instructions contained in our invoice/this letter. In the instruction above the seller is leaving it to the discretion of the bank through which the documents are being presented as to how the bank arranges the presentation of the documents to the buyer. If the bank follows the seller’s instructions to the letter, when the bank receives the documents from the seller it would normally inform the buyer that it has received documents for the buyer’s account and invite him to come and inspect the documents at the bank. The bank would not be at any risk if it faxed copies of all the documents to the buyer. In this case the buyer could check the contents of the documents at his leisure and would only have to go to the bank to check that the correct number of original and copy documents have been established and that the documents are signed correctly. If the buyer was a well known, trusted and valuable customer of the bank, the bank may decide to present the documents ‘in trust’ to the buyer at the buyer’s place of residence. If the bank follows this course of action, it would be taking upon itself the risk of the buyer disposing of the documents before the buyer has arranged payment. In the event that the buyer received the original documents from the bank and did not arrange payment of the documents and did not return the documents to the bank, the bank would be responsible to the seller. Irrespective of what is stated in the contract concluded between the buyer and seller, and to which the bank is not subject, it can be taken for granted that a documentary presentation to a buyer through a bank is a more time-consuming process than a straightforward presentation of documents CAD by a seller to a buyer. Therefore, it should be taken into consideration by a seller that if documents are presented to a buyer through a bank it may be difficult, if not impossible, for a buyer to make payment within strict time limits specified in a contract. A bank receiving documents from a seller for presentation to a buyer may be busy and may require some time before processing the documents. (A bank receiving documents presented for negotiation of a letter of credit which is subject to UCP 500 is allowed seven banking days to check a set of documents.) However, if the chosen bank considers the seller a good client it is hoped that the bank will process the documents as fast as possible in order to keep the client happy.
Chapter 16/page 7
Sugar Trading Manual If, however, the contract was concluded on the basis of payment CAD at the buyer’s location but, at a certain time after the contract terms and conditions have been fixed, the seller decides that he would prefer presenting the documents to the buyer through a bank, the seller could adopt such a procedure, but it could be that the buyer would not accept to receive the documents in such a way, arguing that this would not constitute a contractual presentation. If the buyer is the party that is requesting shipping documents to be presented to him through a bank, the bank charges would normally be for the buyer’s account and a seller may insist that the bank through which documents are presented to the buyer is to be subject to his agreement. Furthermore, the seller may decide that any bank nominated by the buyer will be more interested in looking after the buyer’s interests rather than those of the seller and, because of this, the seller may decide to present the shipping documents to the buyer’s bank through his own bank with the bank charges of the seller’s bank being for the seller’s account.
Letters of credit (L/C) or documentary credit (credit) A letter of credit is an arrangement whereby a bank acting upon the request of a customer is to make payment to the order of a third party or authorizes another bank to effect payment or authorizes another bank to negotiate against stipulated documents, provided that the terms and conditions of the Credit are complied with. It is also a method by which a seller may secure payment from a buyer in circumstances where the seller either does not consider the buyer completely reliable or does not have sufficient information available to judge what the buyer’s financial situation is or where the seller and buyer reside in different distant locations. L/Cs can be either revocable or irrevocable. Whenever L/Cs are mentioned in this chapter it is to be assumed that they are irrevocable. Once issued by a bank on behalf of a buyer, an irrevocable letter of credit cannot be withdrawn or cancelled without the agreement of the seller. Usually L/Cs are subject to UCP 500. As per Article 6 of UCP 500, in the absence of any indication the credit shall be deemed to be irrevocable. An irrevocable L/C constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that the terms and conditions are complied with to pay the beneficiary (seller of goods or services), at sight or on a specified maturity date, a specific sum of money. As per Article 8 of UCP 500, a revocable credit may be amended or Chapter 16/page 8
Payment and documents cancelled by the issuing bank at any moment and without prior notice to the beneficiary. A buyer and/or seller may be restricted to adopting L/C as the method of payment by their bankers owing to the fact, for example, that a bank may have financed the production of the sugar for a supplier/producer or because a buyer/consumer has insufficient funds of his own to take up and pay for shipping documents, until he has sold the goods and received payment from his buyer(s), and therefore has to rely on the financing of his bankers. A letter of credit can therefore be used as a tool by a bank as security for a loan made by it on behalf of a seller or buyer with the shipping documents, with particular reference to the original bills of lading that pass through the letter of credit/banking channels acting as security of such payment. In the case of a producer as L/C recipient, a condition of a loan made to him by his bankers where the sugar he has produced is for export, would most probably be that the shipping documents established for the sugar loaded on to a buyer’s vessel, or other means of conveyance, are to be presented to the financing bank for negotiation of a letter of credit received by them from the buyer’s/applicant’s opening bank with the producer named as beneficiary. The bank that has granted finance to the producer, and in whose favour payment under the letter of credit would have to be made, would deduct from the proceeds of the L/C negotiation the amount of his loan and any remaining balance would be for the beneficiary’s/producer’s account. For a buyer, on whose behalf and for whose account a bank is establishing a letter of credit in favour of a seller, the buyer’s bank will make payment for a good set of shipping documents but will usually only release the shipping documents to the buyer/applicant against receipt of payment for those documents. However, in the normal course of events, a buyer needs to have the original bills of lading in his possession in order to be able to claim the goods from the vessel captain and it may be that the buyer may only be able to obtain payment for the goods after delivery of the same to his own local buyers. Financing from a bank has a role here too.
Example D This is an example of a payment clause stated in a purchase contract with parity fob stowed (load port) with payment terms basis L/C. Payment by irrevocable letter of credit opened by a first class bank in . . . . . . . . . . nominated by the Buyer. The letter of credit to be available for payment at sight at opening bank’s counters in . . . . . . . . . . against presentation of usual shipping documents established in accordance with the requirements of the Chapter 16/page 9
Sugar Trading Manual countries of destination and as per the Rules of the Refined Sugar Association. The letter of credit charges of opening bank in . . . . . . . . . . for Buyer’s account. All other L/C charges for Seller’s account. The letter of credit to be opened by . . . . . . . . . . [date]. Taking the first sentence of the above clause: ‘By irrevocable letter of credit opened by a first class bank in . . . . . . . . . . nominated by the Buyer.’ Payment made by the buyer to the seller for the goods covered by the contract is to be by means of letter of credit. The L/C is to be irrevocable and is to be established in the seller’s favour or other company nominated by the seller. Terms such as ‘first class’ are habitually used in such clauses but add little as one person’s definition of which bank is first class may not be another’s. The location of the opening/issuing bank of the L/C is to be decided solely by the buyer. This is to be expected. A buyer will decide which bank he requests to open a letter of credit on his behalf depending on with which bank he has money deposited or with which he has financing arrangements. It would be unreasonable for a seller to expect to be able to dictate to a buyer which bank a buyer has to use as the opening bank for a letter of credit established in his favour. ‘The letter of credit to be available for payment at sight at opening bank’s counters in. . . . . . . . . .’ As per Article 10 of UCP 500 all credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation. Furthermore, the same article also states that, unless the credit stipulates that it is available only with the issuing bank, all credits must nominate the bank (the nominated bank) which is authorized to pay, to incur a deferred payment undertaking, to accept draft(s) or to negotiate. The fact that the L/C is to be available for payment at sight implies that the beneficiary of the letter of credit should receive payment under the L/C within about two working days after the bank that is authorized to make payment has examined those documents and found them in accordance with L/C terms and conditions. There are no specific rules as to the number of days within which a bank has to effect payment under an L/C which is available for payment at sight. In the event that it is not specified in contract terms, the number of working days within which payment is to be made, after the shipping documents have been found in order by the bank authorized to effect payment under the L/C, would usually be two, and perhaps three working days would be acceptable. Furthermore, there are also no specific rules as to how many days that a payment has to be deferred by for a L/C to be considered a deferred payment L/C. In all cases it is always advisable that the number of working days within which payment has to be effected, after the bank authorized to pay has found documents in accordance Chapter 16/page 10
Payment and documents with L/C terms and conditions, is defined in both contract terms and L/C terms and conditions. It would be irregular and a seller would be justified in being surprised if a L/C that he received from his buyer, where terms of payment were agreed in contract terms to be on an ‘at sight’ basis, stated that payment would be made at the opening bank’s counters, or the counters of the bank which is authorized as per L/C terms and conditions to effect payment, five or ten working days after that bank had checked and found the shipping documents in order. Such a seller could argue that, as payment was agreed to be ‘at sight’, he had calculated the financing of the documents/sugar basis, receiving payment for value the second working day after the shipping documents had been found in order by the bank authorized to effect payment and therefore the extra days of financing of the value of the documents had not been included as a cost in the sale contract price. The fact that it is stated that the L/C will be available for payment at the opening bank’s counters means that the beneficiary/seller has to present shipping documents to the opening bank in order to obtain payment. The seller may request the letter of credit to be advised to him by a bank other than the opening bank. This could be for several reasons. It could be because, irrespective of the fact that banks should be impartial when examining shipping documents for L/C negotiation, the beneficiary/seller feels that the opening bank as chosen by his buyer/applicant will best look after the interest of his buyer rather than his own interests, or alternatively, the fact that the beneficiary/seller is a resident of a different country than that of the applicant/buyer and the beneficiary does not want to send the shipping documents directly to the opening bank, preferring that his own bank, or at least a bank in his own country, checks the shipping documents before they leave his country of residence. The role of an advising bank, as mentioned above, is that of a bank which will advise the Credit to the beneficiary without engagement but that bank, if it does advise the Credit, shall take reasonable care to check the apparent authenticity of the Credit which it advises. The advising bank may check the shipping documents for the seller. However, it will not be the bank which decides whether the documents fulfil the terms and conditions of the L/C and, consequently, whether or not payment is made against those documents. Payment will only be made against the shipping documents after the opening bank/bank authorized to effect payment has examined the documents and found them in order. After the aforementioned conditions have been fulfilled, payment will be made in accordance with the instructions which accompany the shipping documents as presented to the L/C opening bank. If an advising bank is involved, it would be usual for payment to be made to that bank for the account of the seller. Chapter 16/page 11
Sugar Trading Manual It should be noted that usually L/Cs will be subject to UCP 500 (in this chapter it is to be assumed that all L/Cs are subject to UCP 500) which, as per Article 13, allows banks seven banking days following receipt of the documents to examine all documents stipulated in the Credit with reasonable care and ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. This same article goes on to state that documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit. If documents appear on their face not to be in compliance with the terms and conditions of the Credit, banks may refuse to take up the documents. It can therefore be taken for granted that the more banks involved in the examination/transmission of documents, the longer it will take for a beneficiary to obtain payment. However, banks are conscious of the fact that it is in their interest to look after a good client and to examine their shipping documents without undue delay. A buyer or seller may try to apply pressure on a bank in this respect but ultimately banks are fully aware of the terms of UCP 500 and, if they are overworked and/or short staffed, they may well use the full seven banking days as per their entitlement. Therefore, even if a beneficiary/seller presents shipping documents directly to the opening bank for negotiation, the opening bank is allowed seven banking days to examine the documents plus at least two banking days to effect payment for documents found in order. If an advising bank is nominated, this would add a further delay to the payment of the documents. However, an advantage for a beneficiary/seller who receives an L/C through an advising bank located in his own place or country of residence could be that, in the event that the advising bank finds discrepancies in the documents, it would almost certainly be quicker and easier to correct those discrepancies before the documents have been dispatched to the opening bank. On the other hand, the disadvantages could be that the documents take longer to arrive at the opening bank’s counters, the L/C would probably be expiring on a certain date at the opening bank’s counters, and the beneficiary may be relying on the opinion of the employees of the advising bank which may not necessarily exactly coincide with the opinion of employees at the opening bank. When all is said and done, it will be the opening bank that decides if the documents are in accordance or not with Credit terms and conditions. A buyer arranging for the establishment of a letter of credit in favour of a seller/supplier will usually prefer that that L/C be available for payment at his opening bank’s counters and not at the nominated advising bank’s counters, if any, for the following reasons: a buyer wants to avoid the financing of the documents while they are in transit to the opening bank; a buyer’s bank may insist that they are the negoChapter 16/page 12
Payment and documents tiating bank in order to best protect their interest; a buyer and/or his bank may not be 100% confident in the ability of some bank employees, especially those employed by banks located in the interior of recently developed or developing countries, to adequately examine a set of shipping documents. ‘Against presentation of usual shipping documents established in accordance with the requirements of the countries of destination and as per the Rules of the Refined Sugar Association.’ The documentary requirements for a purchase contract with delivery basis fob stowed that a buyer/applicant includes in the credit terms and conditions, and that the seller is required to establish and present to the negotiating bank for L/C negotiation/payment, are subject to Rules 17(a) and 17(d) of the rules of the RSA as stated above. ‘The letter of credit charges of opening bank in . . . . . . . . . . . . for Buyer’s account. All other L/C charges for Seller’s account.’ When a trader concludes a contract of purchase with payment terms by L/C the trader is engaging his company to open a L/C in the seller’s favour. Part of the negotiations leading up to the conclusion of a contract will concern who will pay for the establishment and negotiation of the L/C. In the current example, the bank charges of the opening bank are for the buyer’s account. If the seller presents the shipping documents directly to the opening bank, the buyer will incur all the bank charges attached to the L/C. These will include charges for the opening of the L/C and charges for the negotiation of the L/C. The trader negotiating to buy the sugar will need to know what those charges will be, or at least have an estimate of them, before concluding a contract. He will need to take account of those costings in the contract price and in the calculation of the value of the sugar. If the seller requests that the letter of credit be transmitted to him via an advising bank and the letter of credit passes through any other bank on its way from the opening bank to the advising bank, the charges of all those banks, if any, will be for the beneficiary’s/seller’s account. The issuance and negotiation of L/Cs is good business for banks, especially if the applicant/buyer requesting a bank to issue a L/C is creditworthy and the opening bank is one of the major banks. If the opening bank does not have worries about the creditworthiness and reliability of the orderer/applicant/buyer, issuing a L/C on behalf of such a client can be considered a low risk operation for which the bank can earn a good commission. On the other hand, if the applicant does a large amount of business with a bank he can perhaps negotiate preferential rates of commission from that bank. For the advising bank in the above example, if one is nominated by the seller, receiving a letter of credit from a major West European/US opening bank can be considered a low risk operation for which they, too, can earn a good commission. In this example, an advising bank Chapter 16/page 13
Sugar Trading Manual has only the role of an intermediary. It will transmit the L/C to the beneficiary without engagement and will not ultimately be responsible for deciding whether or not the shipping documents are in conformity with Credit terms or whether payment is due or not. If the opening bank is a major bank of good repute, the beneficiary/advising bank will not have too many concerns as to whether or not the funds will arrive from the opening bank or whether the opening bank will attempt to fabricate an excuse related to the shipping documents to delay payment by a few days. ‘The letter of credit to be opened by . . . . . . . . . . . . [date].’ The date by which the buyer/applicant has to open the L/C in the seller’s/beneficiary’s favour would be negotiated between the buyer and seller before the contract is concluded. The factors that will influence which date is decided upon will include the following: Firstly, the contractual period of delivery or the shipment period. A seller will want to receive the letter of credit as soon as possible after the contract has been concluded. The L/C is the seller’s security that payment will be made for goods shipped by him and for which he presents a good set of shipping documents for L/C negotiation. A buyer prefers to open a L/C as late as possible in order to reduce the charges that he has to pay to the issuing bank. (L/C charges are often charged on a quarterly basis for the period that the L/C is open.) Usually, an L/C will have to be open before the beginning of the contractual delivery period and before the vessel(s) commence loading. Secondly, whether the contract price is fixed at the time that the contract is concluded (fixed price) or whether the contract price is to be fixed according to a specified formula at a later date. The price fixing basis is established by SEO (seller’s executable orders), AA (against actuals) transaction or BEO (buyer’s executable orders). If the price is not fixed at the time that the contract is concluded and will be established according to one of the three aforementioned methods, the L/C will usually be opened after the final price has been determined. To open an L/C before the final price has been fixed would mean opening it at a provisional price which would have to be amended at a later date when the final price has been established. The provisional price will usually be agreed between the buyer and the seller and is often lower than the expected final price. This allows the buyer/ applicant to avoid being engaged to an irrevocable undertaking to pay to the seller/beneficiary an amount of money that is greater than the amount contractually due. On a letter of credit established basis a provisional price will be amended replacing the provisional price (and maximum value) with the final price (and value) when the final price has been established. Remember, that any amendment to an L/C can be refused by a beneficiary. Establishing an L/C which will have to be amended later involves a risk for the opener. Chapter 16/page 14
Payment and documents Thirdly, the beneficiary/seller may want to receive the L/C as early as possible if one of his banks, perhaps an advising bank if he has nominated one, agrees to make an advance payment to the beneficiary against receipt of the L/C. In such a case, the bank making such an advance would usually make the advance for a percentage of the value of the L/C and view the L/C as collateral against such an advance. Fourthly, the beneficiary may need to receive the letter of credit in order to demonstrate to the authorities in his country that he has a definite commitment to receiving foreign exchange at a later date and/or that he will utilize export licensees.
Example E This shows a letter of credit established for a purchase of white bagged sugar with parity fob stowed (load port). The example, once completed, is the instruction to be sent by a buyer to his opening/issuing bank. From: . . . . . . . . . . . . [buyer/applicant] To: . . . . . . . . . . . . [opening/issuing bank] Attn: Mr/Mrs . . . . . . . . . . . . Letter of credit department -URGENTHere is . . . . . . . . . . . . [applicant, usually buyer] Please open still today in full by telex an irrevocable letter of credit as follows: In favour of: . . . . . . . . . . . . . . . [beneficiary, usually seller] For account of: . . . . . . . . . . . . [usually applicant/buyer] To be advised to the beneficiaries by: . . . . . . . . . . . . . . [full style of advising bank] For an amount of: US dollars . . . . . . . . . . . . . . . [value for the L/C in figures and words] maximum The letter of credit is to be available for payment at sight at your counters in . . . . . . . . . . . . . [in the present example, the location of the opening bank] against presentation of the following documents: 1. Commercial invoice in 2 copies The sugar to be invoiced at the price of US$ . . . . . . . . . [usually contract price] per net metric ton, fob stowed . . . . . . . . . . . . . . . . . . . . . . . . [load port(s)] Covering: [contractual description of goods and packing] . . . . . . . . . . . [usually contract quantity] metric tons minimum/maximum white sugar of a fair average quality of the 1998/1999 crop year with minimum polarization Chapter 16/page 15
Sugar Trading Manual 99.8 degrees, maximum moisture 0.08% and maximum colour 100 ICUMSA units, all final at time of shipment. Packed in new polypropylene bags with polythene liner of 50 kilos net weight each. 2. Full set 3/3 originals clean on board ocean bills of lading plus 6 non-negotiable copies made out to order and blank endorsed. Notify party will be advised by amendment to the L/C. 3. Certificate of origin issued in 1 original and 5 originally signed copies by the chamber of commerce in . . . . . . . . . . [usually country of origin of the goods] certifying that the origin of the goods is . . . . . . . . . . . . [country of origin of the goods]. 4. Certificate of weight, quality and packing issued by an internationally recognised supervision company in 1 original and 5 signed copies certifying: • The gross weight, net weight and number of bags loaded. • That vessel holds were inspected before loading and found to be clean, dry and odourless and suitable for the loading of white bagged sugar. • That samples were taken at random throughout loading and that the samples were later analysed. • That the sugar is fit for human consumption • The analysis results for polarization, moisture, ashes and colour by ICUMSA. Special conditions for L/C negotiation: (i)
(ii)
(iii) (iv) (v)
(vi) (vii)
Bank charges of opening bank in . . . . . . . . . . for opener’s account. All other bank charges for beneficiary’s account. Documents to be sent from advising bank in . . . . . . . . . to opening bank in . . . . . . . . . . . . . by first available courier service at beneficiary’s cost. Documents to be negotiated within 15 days of bill of lading date. Partial shipment allowed, transshipment not allowed. This letter of credit is subject to Uniform Customs and Practice for Documentary Credits (1993 revision) International Chamber of Commerce publication 500. The letter of credit expires on . . . . . . . . . [date]. This letter of credit is valid for shipment between
Chapter 16/page 16
Payment and documents . . . . . . . . . . [date] and . . . . . . . . . . . [date], both dates included. (viii) Third party documents acceptable. (ix) Once shipping documents have been received at the counters of the opening bank and have been examined and found in order, reimbursement to be made to advising bank in . . . . . . . . . . within 2 banking days. Thank you and regards . . . . . . . . . . . . . . . . . . . . . . . SA. An analysis of the elements of the above L/C reveals: From: . . . . . . . . . . . . . . . . . [buyer/applicant] To: . . . . . . . . . . . . . . . . . [opening/issuing bank] Attn: Mr/Mrs . . . . . . . . . . . . Letter of Credit Department -URGENTHere is . . . . . . . . . . . . . . . . [applicant, usually buyer] Usually when sending a request to a bank to issue a letter of credit the instruction is sent including the L/C text to the bank by telex. Telex is the chosen method of communication for the following reasons: firstly, telex is a legal document according to English law. Fax and email are not. Secondly, when a bank receives a telex it can use the incoming message as the basis of the message it sends out to an advising bank, if nominated, or the beneficiary. It does not have to retype the whole message and therefore using telex as the means of communication saves time for the bank’s employees and reduces the chance of errors being introduced into the text by the opening bank. A bank receiving a message by fax cannot use the incoming message like this and the whole text would have to be retyped. E-mail does not yet appear to be in general usage by banks for official messages, perhaps for reasons of security. Thirdly, messages sent by telex do not suffer from loss of quality, as do faxes, during transmission or retransmission. Often letters of credit have to be opened by a particular date. Time can be of the essence. If it is required that a bank issues an L/C by a particular date, the request to the bank has to be transmitted to the bank in reasonable time to enable the bank to do its job without being subject to undue pressure. However, stating ‘URGENT’ in the message heading is advisable so that hopefully whoever receives the message will act on it without undue delay. Banks employ large numbers of staff and therefore it is expedient to address messages to the attention of a particular person. ‘Please open still today in full by telex an irrevocable letter of credit as follows.’ Irrespective of any deadline that may be agreed with a seller
Chapter 16/page 17
Sugar Trading Manual for the issuance of the letter of credit it is always advisable to state the above sentence. It appears to encourage bank employees to inform an orderer if they are busy and are unable to issue the L/C on the same day as received. The letter of credit is irrevocable. This is as per contract terms. ‘In favour of: . . . . . . . . . . . . . . . [beneficiary, usually seller] For account of: . . . . . . . . . . . . [usually applicant/buyer].’ During the preparation of an L/C text it is advisable to ask the seller to confirm in writing the full name and address of the beneficiary to be stated in the L/C. Failing that, the name and address of the seller under the purchase contract should be stated. Owing to the fact that the issuing bank may not be familiar with the beneficiary, it can be useful for the bank transmitting the letter of credit to the beneficiary if the beneficiary’s telephone number, telex number and fax number are stated along with his address. In the event that the seller does request that the L/C beneficiary be someone other than himself, the seller should be asked to confirm this in writing. Alternatively, a buyer could confirm any request, received by telephone, in writing to the seller. However, the seller’s written confirmation is preferable. If such a request is not confirmed in writing, and a request by telephone is relied upon, there is always the risk that a seller may deny the conversation at a later date and request a contractual L/C to be established in his favour after the buyer has already issued an L/C in favour of company X. The buyer would then be in the unenviable position of having an irrevocable undertaking in favour of beneficiary X while his seller maintains that he has not yet received the letter of credit that he is contractually due. The buyer would have an obligation to fulfil his contract terms with the seller while, at the same time, having to get into contact with company X to negotiate X’s return of the L/C issued in his favour. An L/C is usually issued for the account of the applicant which is the person or company who gives the instruction to the bank for the establishment of the L/C. This is usually also the contractual buyer of the goods. In the event that the buyer arranges for someone other than himself to be the applicant of the L/C, he should inform the seller of this in writing. If this is not confirmed in writing, the seller may be unaware that an L/C he receives is in fulfilment of a particular buyer’s contractual obligation. ‘To be advised to the beneficiaries by: . . . . . . . . . . . . . . . . [full style of advising bank].’ If the beneficiary had elected to receive the L/C via an advising bank, the full style of the advising bank is to be stated here. In the event that the beneficiary had not nominated an advising bank from which to receive the L/C it could be stated here ‘Yourselves’, meaning that the opening bank is to advise the L/C to the beneficiary directly. It could be that a bank requested to open an L/C in favour of Chapter 16/page 18
Payment and documents a beneficiary in a country other than the country in which the opening bank is located but, where no advising bank has been nominated, may choose to advise the L/C to the beneficiary via its branch in the beneficiary’s country. However, in this case the beneficiary would not be obliged to present the shipping documents for negotiation via the advising bank nor would the beneficiary be responsible for the charges of the advising bank. ‘For an amount of: US dollars . . . . . . . . . . . . . . . [value for the L/C in figures and words] maximum.’ This is the value of the letter of credit, in this case the tonnage multiplied by the price. When calculating the value of an L/C the following should be taken into consideration: firstly, if there is a tolerance or franchise on the quantity, that the value includes the maximum value of the tolerance. If there is a tolerance, in whose option is the utilization of that tolerance? Usually a tolerance stated in a letter of credit would be at the beneficiary’s option. If it were at the opener’s option then the exercising of such option would require the opener to effect an amendment to the L/C. Secondly, as per article 39 of UCP 500: the words ‘about’, ‘approximately’, ‘circa’ or similar expressions used in connection with the amount of the Credit or the quantity or the unit price stated in the Credit are to be construed as allowing a difference not to exceed 10% more or 10% less than the amount or quantity or the unit price to which they refer. Unless a L/C stipulates that the quantity of the goods specified must not be exceeded or reduced, a tolerance of 5% more or 5% less will be permissible, always provided that the amount of the drawings does not exceed the amount of the Credit. This tolerance does not apply when the Credit stipulates the quantity in terms of a stated number of packing units or individual items. Unless a Credit which prohibits partial shipments stipulates otherwise, or unless what was stated in the previous paragraph above is applicable, a tolerance of 5% less in the amount of the drawing will be permissible, provided that, if the Credit stipulates the quantity of the goods, such quantity of goods is shipped in full and, if the Credit stipulates a unit price, such price is not reduced. Thirdly, if the L/C covers a quantity of raw sugar, it should be considered whether the price basis is ‘tel quel’ (as is), are polarization premiums to be added to the price/value, and is the value of the L/C sufficient to cover the maximum possible level of any polarization premiums? Lastly, are there any other amounts that should be included in the value of the L/C, for example, the costs for a special type of packing or for bag markings? ‘The letter of credit is to be available for payment at sight at your counters in . . . . . . . . . . . . . [in the present example, the location of the opening bank] against presentation of the following documents.’ The Chapter 16/page 19
Sugar Trading Manual beneficiary has to present the documents, as requested in the L/C terms and conditions, to the opening bank at the specified address in order to claim payment/negotiate the L/C. After having examined the documents and finding them in compliance with L/C terms and conditions, within seven banking days of receipt of the documents, the bank is to make payment as per the beneficiary’s instructions or the instructions of the advising bank and in accordance with the terms and conditions contained in the L/C text. ‘1. Commercial invoice in 2 copies. The sugar to be invoiced at the price of US$ . . . . . . . . . [usually contract price] per net metric ton, fob stowed . . . . . . . . . . . . . . . . . . . . . . . . [load port(s)].’ This is the invoice that sellers/beneficiaries have to prepare and submit together with the other shipping documents covering the goods sold/for which the L/C has been opened. Not only when preparing an invoice, but also when preparing any documents for L/C negotiation the L/C instructions should be followed very carefully and precisely. The invoice that is submitted should appear to have been issued by the L/C beneficiary, i.e. on the beneficiary’s letterhead paper and must be made out in the name of the L/C applicant. The invoice issued on the beneficiary’s letterhead paper should indicate, in the letterhead, the identical name and address as the name and address of the beneficiary stated in the L/C terms and conditions. Likewise, the name and address of the applicant as stated in the invoice should be identical to the applicant’s name and address as stated in the L/C. The price and delivery basis/parity that is stated in the invoice clause of the L/C should also be stated in the identical way in the invoice. For a beneficiary presenting documents directly to the opening bank, it is advisable for him to state his payment instructions on his invoice. For a beneficiary presenting documents to an advising bank for onward presentation to the opening/negotiating bank, it is probably advisable for a beneficiary to state his payment instructions in his covering letter to the advising bank owing to the fact that the advising bank may have its own reimbursement instructions to give to the opening/negotiating bank. Unless it is a specific requirement of the L/C, the invoice does not have to be signed. It is reasonable to expect that all items relating to the establishment of the invoice would be stated in the paragraph or section for that document and similarly for all the other documents. Unfortunately this is not always the case. Therefore, before preparing any documents, or establishing instructions for others to use to prepare documents, every word of the L/C should be read very carefully. The description of goods as stated below has to be stated in the invoice, and what is stated in the invoice in this respect must correspond, exactly, with the description in the Credit. ‘Covering: [contractual description of goods and packing] . . . . . . . . . . . [usually contract quantity] metric tons minimum/maximum Chapter 16/page 20
Payment and documents white sugar of a fair average quality of the 1998/1999 crop year with minimum polarization 99.8 degrees, maximum moisture 0.08%, and maximum colour 100 ICUMSA units. All final at time of shipment. Packed in new polypropylene bags with polythene liner of 50 kilos net weight each.’ If the L/C states, as above, ‘covering’ or for example ‘description of goods’, the description of goods in the commercial invoice must correspond with the description in the Credit. In all other documents, the goods may be described in general terms not inconsistent with the description of goods in the Credit. For example: 1 If the other documents stated only ‘white sugar in bags’, this would not be considered inconsistent with the above description of goods and packing. 2 If the other documents stated ‘Brazilian white refined sugar in bags’ this, too, would not be considered inconsistent with the above description. 3 If the other documents did not state any description of goods, this would not be considered an inconsistency with the above description. However, if other documents stated ‘white sugar in bulk’, this would be considered an inconsistency with the above description of goods and packing. In the event that the L/C states something like ‘description of goods to be stated on all documents’, then the full description has to be stated very precisely on all the documents and, if this is not the case, the documents would be considered as discrepant and not in conformity with the L/C terms and conditions. It could be that it is not possible to state the full description of goods and packing on all the documents. Some organizations from which documents have to be obtained may refuse to state an extensive description on the documents that they issue. This could be due to any of the following reasons: 1 There is insufficient space on the documents. 2 The organization is not responsible for or interested in all the items it is being requested to describe. 3 The documents are issued on preprinted, standardized forms, the text of which cannot be altered. It is imperative to establish as soon as possible after the receipt of an L/C which, if any, of its terms and conditions are either unacceptable because the terms and conditions are not in accordance with the sale contract conditions, or cannot be complied with. In the event that amendments are required, the applicant/buyer should be contacted immediately in this respect. Alternatively, a L/C can be refused in its Chapter 16/page 21
Sugar Trading Manual entirety and, in such a case, the issuing bank should be informed about this accordingly without delay. Furthermore it should be noted that for a L/C which is received by a beneficiary/seller which is not in accordance with the terms and conditions of a sale contract but which the beneficiary accepts without either rejecting the L/C or informing the seller/applicant of amendments that are necessary, in order that the L/C be put in accordance with contract terms, the terms and conditions of the sale contract would probably be considered as changed and amended by the items in the L/C that were not in accordance with the original contract terms. In the event that a beneficiary requests several amendments to an L/C and the applicant/issuing bank makes one amendment covering some or all of the points that a beneficiary has requested to be amended, if, the amendment received in one message is not exactly according to what had been requested, the beneficiary can either accept or reject the amendment in its entirety. Partial acceptance of amendments contained in one and the same advice of amendment is not permitted by UCP 500. On the other hand, the beneficiary should give notification of acceptance or rejection of an amendment to the bank from which the amendment was received. If the beneficiary fails to give such notification, the tender of ‘shipping’ documents to the issuing bank that conform to the L/C and to a not yet accepted amendment is deemed to be notification of acceptance by the beneficiary of such amendments. ‘2. Full set 3/3 originals clean on board ocean bills of lading.’ As stated above, the original bill(s) of lading (B/L) is the receipt for the goods issued by the captain of the vessel on to which the cargo has been loaded. The original bill(s) of lading is also a negotiable document of title to the goods. After the goods have been loaded on to the vessel and the bills of lading issued and signed by the captain, they should be handed to the party whose goods have been loaded/is the owner of that cargo, i.e. the shipper. The bills of lading are handed to the shipper after completion of loading in exchange for mate’s receipts. Sugar is a rather slow commodity in as much as the loading and discharge operations of sugar in bags and bulk, particularly in bags, can take days or weeks and it is not unusual for typical voyages from load port to discharge port to take weeks or even a month or more. During loading mate’s receipts are issued and signed by the vessel captain on a daily basis and are handed to the shipper for the quantity loaded each day. Upon the completion of loading, the shipper presents all his mate’s receipts to the vessel captain in exchange for the bills of lading. The mate’s receipt is also a document of title. The holder of the mate’s receipt(s) is entitled to demand and receive the original bills of lading for the cargo covered by the mate’s receipt from the vessel captain/owner. Simply put, the holder of the original bill(s) of lading is entitled to receive the cargo covered by those bills of lading from the Chapter 16/page 22
Payment and documents vessel captain/owner. The original bills of lading are accepted as representing the value of the goods which they cover. Bills of lading can be lodged with a bank as security of a loan or overdraft. Although bills of lading are typically issued in sets of three originals, they can be issued in any number of originals. However, only one of those originals is required in order for the holder to be entitled to claim the cargo from the vessel captain/owner. Why are bills of lading issued in more than one original? There are two possible explanations: Firstly, before the days of air travel and reliable courier services, bills of lading were sent through the mail to the far-flung corners of the earth. In the hope that at least one original would arrive safely at the destination before the arrival of the cargo, the bills of lading would be issued in three originals. Each of the originals would be despatched in a separate envelope on consecutive days. With the advent of air travel, company employees would sometimes be despatched to either deliver or collect bills of lading/shipping documents. Time is money and every day for which a company is deprived of the use of B/Ls or the cargo covered by the B/Ls can be translated into hundreds or thousands of lost dollars. Since the 1970s and the advent of highly reliable courier services, the risk of loss or late delivery is viewed as minimal. Also, as a full set of originals B/Ls/shipping documents are required at destination to obtain payment of goods from a buyer, trading companies regularly send complete sets of original B/Ls/shipping documents in one envelope. However, it should never be forgotten that to send a full set of original bills of lading in one envelope is a risk. Even the most reliable courier service occasionally loses or mislays an envelope. Replacing a full set of original B/Ls would almost certainly be difficult and/or time consuming. Secondly, B/Ls are issued in more than one copy for historical reasons too. A merchant, residing, for example, in Northern Europe who had goods to sell would despatch the goods by a ship that would call at several ports on its journey south. The merchant would not know at which port of call the goods would be sold. He would therefore send one original bill of lading to an agent in each port of call with which a buyer after payment would be able to claim the cargo. ‘Clean on board’ means that the goods as received for loading and loaded on board were accepted by the captain as tendered and judged by the captain to be undamaged, in apparent good order and condition and fitting the description of goods that the shipper requests to be stated on the bills of lading. In the event that the captain judges the goods not to be in apparent good order and condition, i.e. damaged, the captain would ‘clause’ the bill of lading with a remark describing his observations and the bills of lading would be considered as ‘unclean’ or ‘dirty’. Usually a dirty bill of lading would be rendered non-negotiable Chapter 16/page 23
Sugar Trading Manual by such a clause and the buyer could require a discount to the contract price or demand some other form of guarantee from the seller. The fact that ‘ocean bills of lading’ are specified as being required implies that the vessel that is to be used for the carriage of the goods is to be an ocean going vessel and not, for example, a vessel specifically designed for the transport of goods on rivers or along coastal waterways. ‘Plus 6 non-negotiable copies.’ The non-negotiable copies are simply copies of the bills of lading and are usually marked ‘non-negotiable’. These copies serve the purpose of providing ready made copies of the bill of lading for the files of bankers or other people handling the bills of lading. The non-negotiable copies were probably of greater importance before the widespread use of high quality photocopier machines. ‘Made out to order and blank endorsed.’ Although the original B/L is considered the document of title to the goods covered by that B/L, depending on the way that the B/L is established, the party who has the best right of claim over the goods can vary. If a B/L is made out to order and blank endorsed this means that ‘to order’ is stated in the box marked ‘consignee’ (on what is usually considered the front of the B/L but is, in most cases, on page 2), the shipper’s name and address (the person or company whose goods are being loaded) is stated in the box marked ‘shipper’ and the shipper has signed (blank endorsed) the B/L (and usually added his name or company name in either typewritten form or by means of a rubber stamp) most commonly on the reverse of the document which is often marked page 1. The act of blank endorsing an original bill of lading as explained above transforms the B/L into an ‘open’ bearer document. When a original B/L is converted into a bearer document, the holder of the B/L, irrespective of whether or not he is the legal owner or contractual title holder of the goods, can use the B/L to claim the cargo from the vessel captain/owners. In the event that B/Ls are lost or stolen there is obviously some danger in having B/Ls made out in this fashion. However, before the shipper blank endorses an original B/L, or adds any other type of endorsement, it is a ‘closed’ document and the B/L is said to be made out to order of the shipper and the only party entitled to claim the cargo is the shipper. In other words, it can be said that the cargo loaded is only to be delivered to the order of the shipper against presentation of the original B/L to the vessel captain/owner. This is logical in as much as, until the shipper has presented the bills of lading, perhaps with other shipping documents, to his buyer for payment, the shipper is the owner of the goods. It is therefore correct that, until the shipper has received payment for the goods, he is the only party entitled to claim the cargo from the vessel. However, a closed B/L for cargo which can only be claimed by the Chapter 16/page 24
Payment and documents shipper is not of much interest to the shipper’s buyer. One possibility is to open the B/L as we have seen above. In such a case the shipper could blank endorse the B/L just before presenting shipping documents to his buyer for payment CAD or to a bank authorized to make payment under a letter of credit. The shipper is therefore trusting that his buyer or a bank employee will not steal the documents and claim the cargo for themselves before payment has been made. It now becomes apparent why, as a general rule, you only conclude a sale contract with payment terms basis CAD buyer’s location with highly trusted and reliable companies because, until a buyer has effected payment in favour of the seller, the buyer has both his money and the document of title to the goods. A less risky solution would be to endorse the original B/Ls to the order of your buyer or other party nominated by the buyer. For a B/L endorsed to the order of a buyer or a company nominated by a buyer, the original B/Ls would be made out in the same way as for B/Ls issued to order and blank endorsed except that the shipper would not only endorse the B/L as above, but also add near to the endorsement (normally above) ‘deliver to the order of . . . . . . . . . . . . . . [the name of the person or company to whom they are being endorsed]’. In this way only the person or entity to whom the B/Ls are endorsed has the legal right to claim the goods covered by them from the vessel captain/owner. In this manner the shipper is telling the vessel captain and vessel owners, please only deliver the goods to this person or company. If B/Ls so endorsed fall into the wrong hands, legally the hands into which they fall has no right of claim over the goods. Each company or person to whom the B/Ls are so endorsed can, in turn, endorse them to the order of another company or person. In this way the legal right of claim over the goods can be passed down a ‘string’ from one company or person to another. In the event that a buyer or a bank does not take up and pay for the shipping documents as received from a seller/shipper and the documents including the bills of lading are returned to the seller/shipper, the B/Ls which have either been blank endorsed or endorsed to a specific entity can be closed again by the shipper by the cancellation of the endorsement already made by that shipper. Another possibility, which unbeknown to many people is the most dangerous solution of the three elaborated here, is to have the B/Ls established at the time of issuance to the order of a party other than the shipper. In this case the name of the party to whose order the B/Ls are being made out will be stated in the consignee box. For B/Ls established in this way, from the moment that they are signed by the vessel captain, or vessel agents signing on behalf of the captain, the only party entitled to claim the cargo from the vessel is the party who is stated as the consignee, and this is irrespective of whether or not Chapter 16/page 25
Sugar Trading Manual the shipper, or any other party in a chain of buyers or sellers before the consignee, has received payment for the goods. Furthermore, it is only this consignee who can either blank endorse the bills of lading or endorse the bills of lading over to someone else’s order. From the time that the B/Ls have been signed, the shipper has renounced his title to the goods. There has been at least one case in English law where a B/L has been issued to the order of a consignee. The shipper or B/Ls holder did not receive payment for the goods either from the consignee or other contractual party in the string of buyers and sellers before the consignee. It was upheld that the only party that has a legal claim to the goods is the consignee. ‘Notify party will be advised by amendment to the L/C.’ The notify address or notify party is the party or parties that the vessel captain should contact upon arrival at discharge port to announce that the vessel/cargo has arrived at the discharge port. In the current example, the notify address is unknown by the L/C applicant/buyer at the time of establishment of the L/C. The reason the notify address is not stated or unknown could be because the goods are as yet unsold, the discharge port/destination is not fixed, or the applicant has not yet received this information from his buyer. The fact that the L/C states that the notify party will be advised by amendment to the L/C amounts to little more than the transmission of polite information to the opening and/or advising bank and the L/C beneficiary. The buyer should be aware that, if he does make an amendment to the L/C, adding the notify party to the L/C terms and conditions, the seller is within his rights to refuse such an amendment, which may be the case if such amendment is received after the B/Ls have been issued. Furthermore, in the event that the seller refuses such an amendment, or such an amendment is never made by the applicant/opening bank, B/Ls would be acceptable as per Credit terms, either which did not state a notify party, or that stated any notify party. In the current example, as above, it does not state, either with the B/L requirements or in any other part of the L/C, that charter party bills of lading are acceptable. Therefore, as per UCP 500, the negotiating bank will only accept B/Ls that contain no indication that they are subject to a charter party. Consequently, the type of B/L that would be acceptable would be a shipping company B/L which appears on its face to indicate the name of the carrier. Careful attention should be paid to this point by an L/C applicant/buyer, where the same applicant/buyer is also a beneficiary of an L/C opened in their favour by their buyer, in order to avoid being in a position whereby they will be receiving under their own L/C that they have established in their seller’s favour charter party B/Ls. On the other hand the L/C established by their buyer in their favour does not allow for the presentation of the same type/form of B/Ls. Chapter 16/page 26
Payment and documents In the bill of lading requirements of the current L/C nothing is specified regarding the signature of the B/Ls. Furthermore, there is no reference anywhere in the L/C text concerning the way the B/Ls have to be signed and therefore this will be governed by UCP 500, which states that banks will accept a bill of lading which has been signed or otherwise authenticated by: the carrier or a named agent for and on behalf of the carrier, or the master or a named agent for and on behalf of the master. Any signature or authentication of the carrier or master must be identified as carrier or master, as the case may be. An agent signing or authenticating for the carrier or master must also indicate the name and the capacity of the party, i.e. carrier or master, on whose behalf that agent is acting. Occasionally buyers and sellers agree that, instead of original bills of lading, original mate’s receipt(s) are supplied, together with a commercial invoice and other shipping documents, for payment. On yet other occasions, buyers request sellers to supply an FCR (forwarding agent’s certificate of receipt) in the place of either original bills of lading or original mate’s receipt(s). While original bills of lading are a negotiable document of title to the goods, and original mate’s receipt(s) are a document of title to the original bills of lading, an FCR, on the other hand, is a worthless piece of paper without commercial value. A forwarding agent’s certificate of receipt is just that, a certificate issued by a forwarding agent or stevedores/forwarding company, confirming that he has received goods for shipment. Therefore, anyone paying for goods against presentation of an FCR without any original bills of lading or original mate’s receipt(s) is taking a very great risk. Sometimes payments are made against warehouse warrants or warehouse receipts. Original warehouse warrants issued by a warehouse owner, like bills of lading, are accepted as negotiable documents of title whereas warehouse receipts are generally considered as without commercial value and are on a par with FCRs. ‘3. Certificate of origin issued in 1 original and 5 originally signed copies by the chamber of commerce in . . . . . . . . . . . . [usually country of origin of the goods] certifying that the origin of the goods is . . . . . . . . . . . . . [country of origin of the goods].’ This is a frequently requested document. Here below are some of the important clauses from UCP 500 relating to the establishment of shipping documents. Article 13 Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the credit. Documents not stipulated in the credit will not be examined by banks. Chapter 16/page 27
Sugar Trading Manual If they receive such documents, they shall return them to the presenter or pass them on without responsibility. If a credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them. (Banks often like/prefer such conditions to be stated/confirmed on the commercial invoice or on a separate certificate.) Article 20 Terms such as ‘first class’, ‘well known’, ‘qualified’, ‘independent’, ‘official’, ‘competent’, ‘local’ and the like shall not be used to describe the issuers of any document(s) to be presented under the credit. If such terms are incorporated in the credit, banks will accept the relative document(s) as presented, provided that it appears on its face to be in compliance with the other terms and conditions of the credit and not to have been issued by the beneficiary. Unless otherwise stipulated in the credit, banks will also accept as an original document(s), a document(s) produced or appearing to have been produced by reprographic, automated or computerized systems or as carbon copies provided that it is marked as original and, where necessary, appears to be signed. A document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication. Unless otherwise stipulated in the credit, banks will accept as copy(ies), a document(s) either labelled ‘copy’ or not marked as an original – copy(ies) need not be signed. Credits that require multiple document(s) such as ‘duplicate’, ‘two fold’, ‘two copies’ and the like will be satisfied by the presentation of one original and the remaining number in copies except where the document itself indicates otherwise. Unless otherwise stipulated in the credit, a condition under the credit calling for a document to be authenticated, validated, legalised, visaed, certified or indicating a similar requirement, will be satisfied by any signature, mark, stamp or label on such document that on its face appears to satisfy the above condition. Article 21 When documents other than transport documents, insurance documents and commercial invoices are called for, the credit should stipulate by whom such documents are to be issued and their wording or data or content. If the credit does not so stipulate, banks will accept
Chapter 16/page 28
Payment and documents such documents as presented, provided that their data content is not inconsistent with any other stipulated document presented. Even though shipping documents being supplied for payment under contracts with payment terms CAD would not usually have to be issued in accordance with UCP 500, it is often helpful to take the above articles into consideration when the documents are established. ‘4. Certificate of weight, quality and packing issued by an internationally recognised supervision company in 1 original and 5 signed copies certifying: • The gross weight, net weight and number of bags loaded. • That vessel holds were inspected before loading and found to be clean, dry and odourless and suitable for the loading of white bagged sugar. • That samples were taken at random throughout loading and that the samples were later analysed. • That the sugar is fit for human consumption. • The analysis results for polarization, moisture, ashes and colour by ICUMSA.’ This is another example of the type of document that is frequently requested. In this example, the certificate supplied is required to ‘certify’ some very specific details. If any of the requested details were not certified in the finally issued certificate, such omission would be considered a discrepancy and would preclude the beneficiary from making a clean negotiation of the L/C. As can be seen above, other details, in addition to those specified, may also be stated subject to those additional details not being inconsistent with L/C terms and conditions. If it was not a requirement for those very specific details to be stated on the above mentioned certificate, then the certificate could state anything as along as what was stated was not inconsistent with L/C terms and conditions and the other documents established for the same shipment. A general rule that can be applied with success to the establishment of any document, whether for the negotiation of a L/C or for presentation to a buyer on a CAD basis, is always to state as little as possible. Taking this reasoning to its logical conclusion, if an L/C or a set of documentary instructions received from a CAD buyer require only, for example, a ‘certificate of weight, quality and packing’, without any other requirement or qualification being stated either generally in the L/C terms and conditions/documentary requirements or specifically attached to the requirement for that document, then technically a blank piece of paper which stated simply ‘certificate of weight, quality and packing’ should be acceptable and deemed as fulfilling the L/C terms and conditions or a buyer’s documentary requirements. However, we live in the real world where each person has his or her own opinion as to the interpretation of rules and regulations – bankers are certainly no
Chapter 16/page 29
Sugar Trading Manual exception to this – and such interpretation may be influenced by other factors not immediately apparent. Even if it appears that such a document should be acceptable it may not always be found to be so. Taking into consideration the fact that nowadays some bank employees give the appearance that they are searching for reasons not to make payment under a L/C, if for no other reason than to demonstrate to their boss that they are doing their job correctly, there is justification for beneficiaries viewing an L/C as a way for the banker/applicant/buyer to avoid paying for documents rather than acting as security for the beneficiary/seller of payment of goods shipped. Of course a beneficiary who is legally wronged by a bank can always resort to the law. However, a beneficiary with unpaid goods in transit to a buyer, or perhaps goods arrived at their destination but not yet in the buyer’s possession, and with interest on the value of the goods accruing on a daily basis, will often look for a less than 100% satisfactory, but speedier, solution to a problem rather than resorting to the legal route. However, the legal route can always be taken up after payment has finally been made, but then the beneficiary runs the risk of upsetting a perhaps already reluctant source of finance. The successful negotiation of a letter of credit without the negotiating bank finding any discrepancies, real or imagined, in the documents presented is quite uncommon. ‘Special conditions for L/C negotiation: (i) Bank charges of opening bank in . . . . . . . . . . . for opener’s account. All other bank charges for beneficiary’s account.’ This is an important clause which specifies who pays the charges for the establishment and negotiation of the L/C. Usually this will mirror what is stated in the payment clause of the related contract. The charges vary according to many factors which include: 1 Which banks are involved and where those banks are located. 2 The value of the L/C and the length of time that the L/C will be open. 3 The general creditworthiness and financial standing of the applicant. In the event that the beneficiary does not nominate an advising bank through which to receive the L/C and therefore receives the L/C directly from the opening bank, the only bank charges relating to the establishment and negotiation of the L/C would be those of the opening bank, and therefore, in the current example, all the bank charges would be for the orderer’s/applicant’s account. Those charges would include the costs for both the establishment and the negotiation of the L/C. In the event that the beneficiary did elect to receive the L/C through an advising bank, the charges relating to the opening and negotiation of the L/C would still remain for the orderer’s/applicant’s account. However, the costs of advising the L/C to the beneficiary by the advising bank and Chapter 16/page 30
Payment and documents the charges of any other intermediary bank between the opening bank and the advising bank would be for the account of the beneficiary. Regarding bank charges, Article 18 of UCP 500 is important. This states that a party instructing another party to perform services is liable for any charges, including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions and, furthermore, that where a credit stipulates that such charges are for the account of a party other than the instructing party, and charges cannot be collected, the instructing party remains ultimately liable for the payment thereof. Article 18 also includes an important legal comment when it states that the applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages. ‘(ii) Documents to be sent from advising bank in . . . . . . . . . . to opening bank in . . . . . . . . . . . by first available courier service at beneficiary’s cost.’ If no advising bank was involved the beneficiary would present the shipping documents for L/C negotiation directly to the opening bank, and how he delivered the documents to this bank would be the sole concern of the beneficiary. In the event that the seller/ beneficiary had nominated a bank to act as an advising bank and presented the shipping documents to that bank for onward presentation to the opening bank for L/C negotiation, although the method for the transmission of the documents between the advising and opening banks is perhaps not of direct concern to the applicant/opening bank, unless something specific was agreed in the contract between the applicant/buyer and beneficiary/seller, the applicant may still have an interest in this matter. This is owing to the fact that he may be awaiting the shipping documents (original bills of lading) in order to be able to claim the cargo at discharge port upon arrival of the carrying vessel. Furthermore, the applicant may be awaiting the shipping documents within a certain deadline for onward negotiation of a L/C opened in his favour by his buyer. Therefore it can be seen that both the beneficiary and the applicant have an interest in the speedy transmission of the documents between the two banks – the beneficiary to obtain payment and the applicant either to be able to claim the goods shipped or to obtain payment from his buyer. In the event that the applicant/buyer has not sold the goods, he then has an interest in the shipping documents taking their time to arrive at the counters of the opening bank/bank authorized to make payment in order that he will take up and pay for the documents as late as possible. However, as a general rule, the seller has an obligation to pass the shipping documents to his buyer without undue delay. As per the rules of the RSA Rule 18: ‘The seller shall not be liable for charges incurred as a result of the goods arriving at the port of Chapter 16/page 31
Sugar Trading Manual discharge prior to the receipt of documents provided they have been passed on without delay.’ It would probably be difficult for a buyer to prove that the seller has not complied with the above mentioned rule. In the event that an advising bank is involved concerning the method employed to send the shipping documents from the advising bank to the opening bank, if nothing is stated in the credit regarding this subject, then it will be at the discretion of the opening bank as to what it adds to credit terms in this respect. This varies from bank to bank. The traditional way for documents to be sent from one bank to another is for them to be sent in two lots in two envelopes by consecutive airmails. If this is stated in the credit terms it may still be the case that the advising bank asks the beneficiary whether the beneficiary wants the documents to be sent by the advising bank to the opening bank by courier service in one lot. The advising bank is aware that it is to the beneficiary’s advantage for the documents to be sent by courier as they will both arrive at the opening bank and payment will be effected more quickly than if they were sent by post. If the beneficiary agrees to such a proposal from his bank, the bank could be expected to inform the beneficiary that sending the documents in one lot by courier will be at the beneficiary’s risk. Costs for the courier would be for the beneficiary’s account. ‘(iii) Documents to be negotiated within 15 days of bill of lading date.’ The number of days after the B/L date within which the shipping documents have to be negotiated under the L/C is usually specified in the L/C. This usually follows contract terms and conditions. In the event that nothing is stated in the L/C and the L/C is subject to UCP 500, then Article 43 will apply which states: In addition to stipulating an expiry date for presentation of documents, every credit which calls for a transport document(s) should also stipulate a specified period of time after the date of shipment during which presentation must be made in compliance with the terms and conditions of the credit. If no such period of time is stipulated, banks will not accept documents presented to them later than 21 days after the date of shipment. In any event, documents must be presented not later than the expiry of the credit. In order to apply some pressure to a seller/beneficiary to speed up the transmission of documents, a buyer/applicant may require documents to be negotiated within 15 days of the B/L date. The buyer/applicant may have to present documents for negotiation of his own buyer’s L/C where there is a 21-day time limit. A beneficiary may require a few days between receiving the documents and presenting them against a buyer’s L/C in order to complete various formalities.
Chapter 16/page 32
Payment and documents Bills of lading which are more than 21 days old are considered as ‘stale’ bills of lading. If a letter of credit states ‘stale bills of lading not acceptable’ or ‘negotiation of documents more than 21 days after the date of shipment not acceptable’ or does not state anything (in which case Article 43 applies), the beneficiary will require that the L/C be amended to allow for the negotiation of shipping documents more than 21 days after the date of shipment. An amendment covering this point will usually state: ‘documents presented for negotiation more than 21 days after the date of shipment, but within L/C validity, to be acceptable’ or, alternatively, ‘stale documents acceptable’ although recently the latter appears to have fallen out of fashion. The date of shipment is understood to be the date of the bill of lading and specifically the date by which the loading of the goods on board is completed. Careful attention should be paid when reading a transport document/bill of lading as the date by which the loading of goods is completed may be different from the date of issuance of the bill of lading. In the event that the shipment of a quantity of goods, loaded on one vessel, is covered by several sets of bills of lading, each with a different date of shipment, banks will consider the date of shipment as the latest shipment date. In a contract of sale with parity cost and freight free out (candffo or ciffo) it is usual to sell either for shipment, or arrival at destination by a latest specified date. In the case of the latter, as far as white bagged sugar is concerned, RSA Rule 8 states: Where the contract delivery period is a period for arrival, shipment must be effected to ensure that, in the ordinary course of events, the sugar will arrive at the port of discharge within the contract delivery period. In the event of concluding a sale contract for arrival at the destination by a latest date, in order to establish the latest date by which loading has to be completed, i.e. the latest shipment date, take the last date of the period of arrival and subtract the usual voyage time from the load port to the discharge port from that date. This is the latest shipment date to be stated in an L/C. However, for a contract of sale with parity fob stowed, matters are slightly more complicated. Usually contracts of sale with parity fob stowed are not concluded with an obligation for the seller to complete loading by a specified latest date. RSA Rule 7 states: The buyer having given reasonable notice, shall be entitled to call for delivery of the sugar between the first and last working day inclusive of the contract delivery period.
Chapter 16/page 33
Sugar Trading Manual If the vessel(s) has presented herself in readiness to load within the contract delivery period, and loading has not been completed by the last day of the period, the seller shall be bound to deliver and the buyer bound to accept delivery of the balance of the cargo or parcel up to the contract quantity. It can be ascertained from the above clause that the seller does not have an obligation to complete loading by a specified date. This is not unreasonable, as the seller has no control over when the vessel to be loaded arrives at load port. However, bankers habitually expect a latest date of shipment to be stated in a L/C, irrespective of whether it covers delivery of goods with parity fob stowed or cost and freight free out. This is because the shipment date is a fundamental element of a L/C to which the validity date for negotiation and the expiry date are linked in accordance with UCP 500 Article 43 as stated above. This can be circumvented by the seller/beneficiary and buyer/applicant agreeing a latest shipment date and validity date for negotiation, but the seller reserving his contractual rights to request these dates to be amended/extended in the event that shipment has not been completed and the L/C has not been negotiated within those specified dates. ‘(iv) Partial shipment allowed, transshipment not allowed.’ As per Article 40 of UCP 500, partial shipment and/or drawings are allowed unless a credit stipulates otherwise. This article states: Transport documents which appear on their face to indicate that shipment has been made on the same means of conveyance and for the same journey, provided they indicate the same destination, will not be regarded as covering partial shipments, even if the transport documents indicate different dates of shipment and/or different ports of loading, places of taking in charge, or dispatch. It is common in a L/C covering a quantity of sugar for transshipment, for unloading and reloading from one vessel to another vessel during the course of ocean carriage from the port of loading to the port of discharge, not to be allowed. ‘(v) This letter of credit is subject to Uniform Customs and Practice for Documentary Credits (1993 revision) International Chamber of Commerce Publication 500.’ It is usual for all L/Cs to be subject to the above referenced document. ‘(vi) The letter of credit expires on . . . . . . . . . [date].’ This date is usually fixed between buyer and seller and is specified in contract terms and is usually a date which is viewed as reasonable by both parties as a latest date by which the seller/beneficiary can present shipping Chapter 16/page 34
Payment and documents documents for L/C negotiation. If the Credit states that the documents are to be negotiated at the latest 15 days after date of shipment then it is logical that the L/C expires 15 days after the latest permitted date of shipment. As per Article 42 of UCP 500, all credits must stipulate an expiry date and a place for presentation of documents for payment, acceptance and a place for presentation of documents for negotiation (with the exception of freely negotiable credits). ‘(vii) This letter of credit is valid for shipment between . . . . . . . [date] and . . . . . . . . . . . [date], both dates included.’ The document of transport, or bill of lading, should prove that the completion of loading on board the transport/vessel was between these two dates. It is usually agreed between the seller/beneficiary and buyer/applicant as per the contract terms. In the event that a credit allowed for shipment at the latest by a specified date, the applicant should be conscious of the fact that shipment could take place at any time up to that latest date. This should be taken into consideration when opening a credit several months in advance of a contractually agreed shipment or delivery period. ‘(viii) Third party documents acceptable.’ As per UCP 500 third party documents, documents issued by parties other than the applicant or beneficiary, are acceptable owing to the fact that there is no specific article which states that they are unacceptable. This is logical as the beneficiary should not be expected to have to obtain something from the applicant in order to negotiate a credit, and it should not be expected that all other documents are established by the beneficiary alone. Therefore stating in a credit ‘third party documents acceptable’ is redundant. However, it is often stated in a credit text because many credit beneficiaries, and even some banks that are not fully cognisant with UCP 500, insist that it is stated in the L/C text. ‘(ix) Once shipping documents have been received at the counters of the opening bank and have been checked and found in order, reimbursement to be made to advising bank in . . . . . . . . . within 2 banking days. Thank you and regards . . . . . . . . . . . . . . . . . . . SA.’ The reimbursement/payment instructions specify the delay within which payment will be made by the opening/negotiating bank after it has examined the documents presented for L/C negotiation and found them in order.
Example F This is an example of a payment clause for a sale contract cost and freight free out (discharge port) (candffo) with a payment basis letter of credit: Chapter 16/page 35
Sugar Trading Manual Buyer to open an irrevocable letter of credit bearing the confirmation of a first class bank in . . . . . . . . . . acceptable to sellers. The letter of credit to be opened in favour of . . . . . . . . . . . . . . . . . . . . and cover the full contract quantity plus the . . . . . . per cent tolerance and must be available for payment at sight at confirming bank’s counters in . . . . . . . . . . . against presentation of the following shipping documents: 1 Commercial invoice. 2 Certificate of weight quality and packing. 3 Full set clean on board ocean bills of lading, consigned to order and blank endorsed. Charter party bills of lading are to be acceptable. 4 Certificate of origin. Third party documents to be acceptable. The letter of credit is to be valid for negotiation for one month after last day of shipment period and allows for negotiation of documents presented more than 21 days after date of issue. The letter of credit to be received by sellers in accordance with contract terms from the confirming bank latest . . . . . . hours after conclusion of business. In the event of delay in L/C opening, the seller at his sole discretion has the right to extend the shipment period by a number of days equal to delay in opening L/C or to cancel the contract with all costs and consequences for buyer’s account. All bank charges for buyer’s account. In the above example of a contract payment clause, the buyer has very specific obligations as to what he is to do and when. As per Incoterms 1990 (ICC publication 460): free on board means that the seller fulfils his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment and that the buyer has to bear all the costs and risk of loss of or damage to the goods from that point. Furthermore the seller has the obligation to clear the goods for export. The addition of ‘stowed’ means that the seller is responsible for arranging the stowage of the goods in buyer’s vessel. The buyer is responsible for the insurance of the goods during the sea voyage, and usually the terms and conditions on which the insurance is to be effected by the buyer are specified in the contract of sale. It should be noted that the risk attached to the goods often passes from the seller to the buyer before the title or ownership of the goods. For this reason the seller has a strong interest in ensuring that a good insurance cover is taken out for the goods from the time they have left his possession and for the duration of the sea voyage. In summary, the seller loads his goods on to the buyer’s vessel and it could be some Chapter 16/page 36
Payment and documents days or even weeks before the seller obtains payment from the buyer for his goods against presentation of his shipping documents either by CAD or L/C basis. Cost and freight means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs owing to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment. In the same way as for free on board, the seller is required to clear the goods for export and the buyer is responsible for the insurance of the goods during the sea voyage. The terms and conditions on which the insurance is to be effected by the buyer are usually specified in the contract of sale. As for free on board, the risk attached to the goods often passes from the seller to the buyer before the title or ownership of the goods and the seller therefore has a strong interest in the type of insurance cover taken out by the buyer for the goods for the duration of the sea voyage. However, although the goods may be out of the seller’s possession, having been loaded on a vessel which the seller probably does not own, the seller may still maintain control of the goods via the charter party (contract) he or his seller, as charterer, has with the vessel owner. Frequently, sales contracts with parity candffo are concluded between a buyer and seller located in different countries. It may well be that the seller may not have accurate knowledge of the financial situation of his buyer or his buyer’s bank. As a result the seller may be reluctant to send shipping documents, including documents of title to the goods, to either his buyer (CAD) or his buyer’s bank (L/C available for payment at the opening bank’s counters). There are two important considerations for a seller with payment terms basis L/C. Firstly, which bank will decide whether his shipping documents are in accordance with the terms and conditions of the L/C that a buyer will open in his favour? Secondly, how sure can he be that, once the negotiating bank does find that his documents are in order, he will receive payment for those documents? A seller may hope that such worries would be circumvented by the first paragraph of the payment clause shown in Example F. ‘Buyer to open an irrevocable letter of credit bearing the confirmation of a first class bank in . . . . . . . . . . acceptable to sellers.’ The fact that the L/C to be opened by the buyer has to bear the confirmation of ‘a first class bank in . . . . . . . . . . acceptable to sellers’ means that the bank whose sole decision it will be as to whether the seller’s/beneficiary’s shipping documents fulfil the credit terms, and will also make payment to the seller/beneficiary against those documents, will be a bank in a location that will be agreed and specified, often a bank in the Chapter 16/page 37
Sugar Trading Manual seller’s country/city and also, above all else, a bank acceptable to the sellers. It is common that the bank adding its confirmation to a credit will be a bank located in the seller’s country/city. In any case, seller and buyer will both want to choose the bank that will represent their own interests. It is quite likely that, even before the contract is concluded, the buyer and seller discuss which bank is likely to be the opening bank of the L/C – the choice of which the seller/beneficiary could not expect to influence – and which bank acceptable to seller, if any, would be prepared to add its confirmation and at what cost to a credit issued by the indicated opening bank. The reason for such discussions taking place is to check/estimate in advance the costs attached to the credit, especially confirmation charges, and therefore include those charges in the contract price, and also not to waste time and money over lengthy negotiations only to find out later that a bank acceptable to the seller that is willing to add its confirmation to the credit cannot be found. Article 9 of UCP 500 states that a confirmation of an irrevocable credit by another bank (the confirming bank) upon the authorization or request of the issuing bank constitutes a definite undertaking to pay by the confirming bank, in addition to that of the issuing bank, provided that the stipulated documents are presented to the confirming bank and the conditions of the credit are complied with. By adding its confirmation to an L/C opened by and received from a particular opening bank, the confirming bank is taking upon itself the risk of payment under the L/C. For such a service the confirming bank charges a fee, which varies from bank to bank and for bank to bank, depending on the amount of risk involved as judged by the confirming bank and also probably how difficult it is to find a bank willing to confirm an L/C issued by a particular opening bank. Before a bank would agree to confirm a credit issued by another bank, several factors would be taken into consideration: Firstly, the confirming bank might set itself a limit on the risk it is ready to accept for a particular bank or country. It may not have sufficient unutilized capacity. Secondly, even if a bank agrees in principle to add its confirmation to a credit it is due to receive from a particular bank, the confirming bank would only give its final agreement after having received the L/C and examined the text. It is often the case that L/Cs from particular banks/countries follow fairly standardized texts and the main concern of a confirming bank would be that they can obtain reimbursement under the L/C from the issuing bank as per the instructions included in the L/C text. As added security for L/Cs coming from high risk destinations, some banks will only agree to confirm an L/C because they have sufficient funds or other collateral deposited with them from the issuing/opening bank. However, this would probably be a matter that Chapter 16/page 38
Payment and documents bankers would be reluctant to discuss openly and very likely will only be alluded to vaguely. Thirdly, the L/C would have to allow for tt (telegraphic transfer) reimbursements. This means that the L/C would have to contain a phrase not too dissimilar to ‘the advising bank may claim reimbursement on . . . . . . . . . (bank) for value . . . . . . banking days after having confirmed to us (the opening bank) by tested telex that all the terms and conditions of the L/C have been complied with and that documents have been sent to us in two lots by registered airmail/sent to us by first available courier service.’ Lastly, the L/C would have to contain a clause similar to ‘advising bank to add its confirmation to the L/C’ or ‘advising bank to add its confirmation to the L/C at the beneficiary’s request’ or ‘all bank charges are for the applicant’s/opener’s account’. However, it could be that the charges of the advising bank are to be for the beneficiary’s account, in which case another variation on the above would be ‘advising bank to add its confirmation to the L/C at beneficiary’s request and cost’. It would be unusual for a bank to be willing to add its confirmation to a L/C if the L/C did not contain a request or instruction for this to be done. In the event that a bank did so agree it would be considered as adding its ‘silent confirmation’ to the L/C and it would probably be a condition of a bank agreeing to add its silent confirmation that the beneficiary agrees not to inform the applicant/opening bank of this fact. In such cases it can be taken for granted that the cost of the silent confirmation would be for the beneficiary’s account. In the event that a credit allowed for tt reimbursements, but was not confirmed by the advising bank, in the normal course of events the advising bank would only make payment to the beneficiary after having received payment from the opening bank. When a bank does add its confirmation to a credit, not only is the confirming bank taking the risk of obtaining reimbursement from the opening bank, but also the bank usually will make payment to the beneficiary before having received payment itself. The fact that the confirming bank has to be acceptable to sellers implies that the seller has the veto as to which bank adds its confirmation and that it is taken for granted that the acceptable bank is one in which the seller has complete trust and confidence. For example, a seller may exercise its veto and inform a buyer that ‘Joe Blogg’s Bank’ is not acceptable to him and therefore sending the L/C to that bank with a request for it to add its confirmation is not only not in accordance with the contract terms and conditions but also a waste of time. ‘The letter of credit to be opened in favour of . . . . . . . . . . . . . . . . .’ This sentence specifies who will be the beneficiary of the L/C that the buyer, as applicant, opens. This is usually, but not always, the seller. ‘and cover the full contract quantity plus the . . . . . . per cent Chapter 16/page 39
Sugar Trading Manual tolerance. . . . .’ This payment clause is taken from a contract where there is a tolerance/franchise on the quantity that has been sold, and this phrase emphasizes the fact that the letter of credit has to cover the maximum quantity/maximum application of the contractual tolerance that it is possible to deliver against the tolerance. For example, if the quantity to be delivered was 12 000 metric tons 5% more or less at the seller’s option, the L/C would have to be opened for a value to cover the possible delivery by the beneficiary of up to 12 600 metric tons. The minimum quantity that could be delivered would be 11 400 metric tons. For the sake of clarity it would be helpful to state in the L/C that the tolerance/franchise is at the beneficiary’s option. In the event that nothing is stated in this respect, then the negotiating bank would accept documents evidencing the shipment of goods within the limits stated. If the option was for the applicant, after having exercised this option, the applicant would have to make an amendment to the L/C which, if correct and in accordance with the contract terms, the beneficiary should accept but, if he wanted to, could refuse. Of course in the latter case the beneficiary may be in default of contract terms. ‘and must be available for payment at sight at confirming bank’s counters in . . . . . . . . . . .’ Although this clause specifies that the L/C is to be available for payment at sight and at which bank’s counters the payment is to be available, it does not state within how many days of shipping documents being found in order that payment will be made. As stated above, this usually should be within two banking days. ‘against presentation of the following shipping documents: 1 Commercial invoice. 2 Certificate of weight quality and packing. 3 Full set clean on board ocean bills of lading, consigned to order and blank endorsed. Charter party bills of lading are to be acceptable. 4 Certificate of origin. Third party documents to be acceptable.’ These are the shipping documents that should be specified in L/C terms as required to be presented for L/C negotiation. ‘The letter of credit is to be valid for negotiation for one month after last day of shipment period and allows for negotiation of documents presented more than 21 days after date of issue. The letter of credit to be received by sellers in accordance with contract terms from the confirming bank latest . . . . . . hours after conclusion of business.’ If the shipment period in the contract is, for example, ‘March/April 1999 at seller’s option’ then the L/C has to be valid for shipment during the same period and valid for the negotiation of shipping documents up to 31 May 1999. This means that, in the event that the seller/beneficiary completes loading and, for example, bills of lading are dated Chapter 16/page 40
Payment and documents 30 April 1999, which is the last day of the shipment period, the seller/beneficiary therefore has 31 days from this date during which to present shipping documents to the confirming bank for L/C negotiation. Usually 31 days should be a sufficiently long enough period for this task. The time required for the issuance of shipping documents varies according to: 1 How complicated the required documents are. 2 Which country the documents are being prepared in. 3 How the documents are delivered to the confirming bank’s counters. Sometimes documents which are required (other than the bills of lading/transport document) can be prepared while a vessel is being loaded. This, of course, should shorten the period from the completion of loading until the documents arrive at the counters of the confirming bank. Article 22 of UCP 500 states that, unless otherwise stipulated in the credit, banks will accept a document bearing a date of issuance prior to that of the credit, subject to such document being presented within time limits set out in the L/C and in other articles. In this example the L/C is to allow for the presentation of stale documents within L/C validity and the date by which the L/C is to be opened would be specified. ‘In the event of delay in L/C opening, the seller at his sole discretion has the right to extend the shipment period by a number of days equal to delay in opening L/C or to cancel the contract with all costs and consequences for buyer’s account.’ A credit is meant to be a security for the seller that he will obtain payment for goods shipped from his buyer. After the conclusion of a sale contract, the seller wants to receive his document of security as soon as possible, and usually a wise seller will not ship the goods until he has this security in hand. It is often said that, although a contract may be signed by both parties, a seller is never sure whether he really has a firm commitment from his buyer until he has received the contractual L/C. This begs the question(s) that until the contractual L/C has been received: 1 Should the contract be hedged in the futures market? 2 Should the physical sugar be purchased if it had not already been bought before the sale was concluded? 3 Should investigations be made in the freight market for a vessel to be chartered for the carriage of the goods to the port of destination? Therefore, in order to maintain some flexibility in the event that the L/C is received late, the seller retains the sole right to extend the shipment period by a number of days equal to the delay in the receipt of the L/C or to cancel the contract. If this was not stated and if the L/C was Chapter 16/page 41
Sugar Trading Manual received late, the seller could declare the buyer in default of contract terms but would have to negotiate with the buyer any extension to the shipment period. By including the above phrase directly in contract terms, the buyer is already on notice of what the consequences of a failure on his part would be. Sellers should be aware that if a buyer opens a letter of credit in his favour that is not exactly in accordance with the terms of the relevant sale contract, but the seller accepts the letter of credit and does not ask the opener/buyer to amend the L/C to bring it in line with sale contract terms, the legal interpretation in the event of a dispute relating to the terms and conditions of the L/C-sale contract would probably be that the contract terms were viewed as having been amended with regards to the clauses of the L/C which are at variance with the sale contract terms. ‘All bank charges for buyer’s account.’ In this case all the bank charges are for the buyer’s account. Another not uncommon possibility would be that all the bank charges of the confirming bank are for the seller’s account and all other bank charges are for the buyer’s account.
Bid bonds (BB) and performance bonds (PB) and guarantees The government buying organizations of countries of destination frequently fulfil their sugar buying requirements at tenders which they hold at an announced time and at a specified location. The idea behind such a procedure to buy sugar is that all offers are received and opened at the same time and therefore the process of buying is transparent to everyone. This is the theory. What happens in practice may be slightly different. Companies wishing to participate and make an offer at a tender usually have to fulfil very specific requirements set out in a set of tender terms and conditions. One prerequisite for participation is often that the company opens a bid bond (BB) in favour of the government buying organization. The BB will be issued by a bank and is usually established for a value that represents a specified percentage of the value of the intended offer. This is usually 2, 3 or 5%. The BB has to be received by the buying organization before the tender date and acts as security for the tendering organization that in the event of a contract being concluded, the seller will open a performance bond (PB) in favour of the buyer. In the event that the seller does not open a PB in favour of the buyer, the buyer would cash the BB. A PB performs the role of security for the buyer that the seller will execute a contract in accordance with contractual terms and conditions. Usually the PB is for a greater value than the BB for 5 or 10% of the maximum value of the contract of sale. A BB is, in the normal course Chapter 16/page 42
Payment and documents of events, open for a matter of a few days only and is released by the buyer soon after the tender if the company making the offer has not been awarded a contract or, for a company which does conclude a contract, shortly after the receipt of a PB. However, a PB usually has to remain open until the contract has been completely executed to the buyer’s satisfaction and usually until after the settlement of all matters relating to the contract. The actual wording of BBs and PBs is usually dictated by the buying organization and the wording is specified in the tender terms and conditions. Even very slight deviations from the specified text often results in the case of BBs with participation at a tender being prohibited or, in the case of a PBs, a delay in the opening of the buyer’s credit or, in the worst case, a seller being declared in default resulting in the encashment of his BB. It is very common for the texts of most BBs and PBs to amount to little more than a blank cheque. What this boils down to is that payment is to be made under such bonds or guarantees against a buyer’s simple demand without any justification whatsoever. The fact that an expiry date is stated in such bonds amounts to little more than a cosmetic touch in as much as, if the buyer/beneficiary makes a request under the bond before the expiry date has passed either for payment of the value of the bond or for the validity period of the bond to be extended, the opener has little choice but to extend. It is easy to see how a seller can quickly accumulate sizeable long outstanding commitments which engender a reluctance to sell further quantities to the same destination. There is an International Chamber of Commerce publication covering demand guarantees. This is publication 458, URDG 458. However, it is not usual for BBs and PBs to be subject to this publication. This is because, as stated above, the text of these guarantees is specified in tender terms and the buyers are not disposed towards having anything stated in those guarantees that may in any way protect the seller.
Example G This is an example of a bid bond. To: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [usually seller’s/applicant’s bank] Attention: . . . . . . . . . . . . . . . . . . . . . [usually guarantees department] Please open the following bid bond to be immediately telex remitted to . . . . . . . . . . . . . . . . . . . . . . . . . [usually beneficiary’s bank in beneficiary’s location] The bid bond to be opened on behalf of . . . . . . . . . . . [applicant] Chapter 16/page 43
Sugar Trading Manual and to be in favour of: . . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary’s bank] should immediately advise beneficiary of the opening of this bid bond as the bid bond has to be with them at the latest on . . . . . . . . . . . . . . . . . . . . . [a date before the tender date]. It could be that the BB includes an instruction, as follows, which would be arranged so that the applicant can be absolutely sure when the bond has been handed to the beneficiary. It could be that the bid bond has to be presented with the offer to sell at the tender. The original bid bond to be handed to: Mr: . . . . . . . . . . . . . . . . . . . . . . . [applicant’s representative in beneficiary’s location] Passport number: . . . . . . . . . . . Of: . . . . . . . . . . . . . . . . . . . . . . . . . . [address] Phone: . . . . . . . . . . . . . Fax: . . . . . . . . . . . . . . . . . Telex: . . . . . . . . . . . . . . . . . Bid bond text: ‘Form of bank guarantee: Name of bank: . . . . . . . . . . . . . . . . . . . . . Address of bank: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [in beneficiary’s country] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary’s name and address] Letter of guarantee no . . . . . . . . . . . . . . . . . . Dear Sirs, Whereas . . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary/buying organisation] has under tender no. . . . . . . . . . . . . . . . . . [reference] dated . . . . . . . . . . . . . . . . . . . . . [date that the tender was announced] for supply of approximately . . . . . . . . . . . . . metric tons of white sugar, agreed to waive the requirement of call deposit/pay order/bank draft receipt of USD . . . . . . . . . . . . . . . . [United States Dollars] for import of the said quantity of white sugar to be supplied by . . . . . . . . . . . . . . . . . . . . . . . . . [seller/applicant] on terms and conditions governing the said tender and whereas the said tenderer has requested us to issue a guarantee for an amount of USD . . . . . . . . . . . . . . . . . . only in consideration aforesaid. We, the . . . . . . . . . . . . . . . . Bank of . . . . . . . . . . . . . . . . . . . . [beneficiary’s bank] hereby undertake and guarantee due Chapter 16/page 44
Payment and documents performance of the tender by the tenderer and we unconditionally and absolutely bind ourselves: i) To make payment of USD . . . . . . . . . . . . . . . . . . . only to the [beneficiary] or as desired by the . . . . . . . . . . . [company holding the tender] immediately on receipt of demand from the said . . . . . . . . . . . . [company holding the tender] in writing without any question whatsoever, (without justification/on demand) ii) This guarantee will remain valid up to . . . . . . . . . . . . [one or two weeks after the tender date and the theoretical expiry date] and extendable for further period if so required by the company holding the tender [if you don’t extend when we ask then we will claim payment]. This guarantee is unconditional and is expressly understood that the sole judge for deciding whether the tenderer has performed the obligations of the tender and fulfilled the terms and conditions of the tender will be the said company holding the tender. Our commitment under this guarantee is limited to an amount of USD . . . . . . . . . . . . . . iii) It is specifically stipulated and understood by us that any grant of time or indulgence to the tenderer without reference to us shall not in any manner tend to absolve us from our liabilities to make payment as stipulated above under this guarantee. Yours faithfully, Dated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank [beneficiary’s bank]’
Please advise your reference number of this bid bond. Kindly advise by return the time/date your telex was sent to [beneficiary’s country] and to which telex number transmitted. The bid bond to be issued under the full responsibility of beneficiary’s bank. Thank you and regards . . . . . . . . . . . . . . . . . . . . SA The last sentence of the BB above states ‘to be issued under the full responsibility of beneficiary’s bank’. This is a key phrase in the language of guarantees. It has a similar impact on a guarantee to that of adding a confirmation to a letter of credit. However, there is a difference. If a bank adds its confirmation to a credit issued by another bank, the confirming bank takes the risk of obtaining payment from the opening/issuing bank. The confirming bank trusts the issuing bank, or Chapter 16/page 45
Sugar Trading Manual at least the bank on which the confirming bank has been instructed to claim payment when the time of payment falls due to pay. In the case of a bid bond, performance bond or bank guarantee, the applicant’s issuing bank will usually transmit the text of the bond or guarantee to the beneficiary’s bank under whose responsibility it is to be issued and will give its counter guarantee to that bank. The counter guarantee could be a sentence added at the end of the bond or guarantee text stating: ‘we hereby counter-guarantee you for any and all claims that may be made upon you arising under this guarantee. Our counter-guarantee is valid until . . . . . . . . . . . . [usually 15 days after the expiry date of the bond or guarantee] to allow mailing time for claims.’ Alternatively, the counter guarantee required by the beneficiary or his bank may be a lengthy text worded as per its very specific requirements. In either case, the applicant will usually be required by his bank/the opening bank to sign a legally binding document by which he is engaged to honour any claims received at the opening bank’s counters.
Example H This is an example of a performance bond. From: . . . . . . . . . . . . . . [applicant] To: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [usually seller’s/applicant’s bank] Attention: . . . . . . . . . . . . . . . . . . . . . [usually guarantees department] Please open the following performance bond to be immediately telex remitted to . . . . . . . . . . . . . . . . . . . . . . . [usually beneficiary’s bank in beneficiary’s location]. The performance bond to be opened on behalf of . . . . . . . . . . . . . . . . [applicant] and to be in favour of: . . . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary] . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary’s bank] should immediately advise beneficiary of the opening of this performance bond as the performance bond has to be with them at the latest on . . . . . . . . . . . . . . [a date usually specified in contract/tender terms which would be before the contractual deadline for the buyer to open a letter of credit covering the contract in the seller’s favour]. It could be that the PB includes an instruction, as follows, thus eliminating any excuse by the beneficiary that they are not in a position to Chapter 16/page 46
Payment and documents establish the L/C that the seller is due to receive from them because they have not received the seller’s PB. The original performance bond to be handed to: Mr . . . . . . . . . . . . . . . . . . . . . . . [applicant’s representative in beneficiary’s location] . . . . . . . . . . . . . . . . [phone . . . . . . . . . ./ fax . . . . . . . . . . . /telex . . . . . . . . . . . . . .] Performance bond text:
Example I Form ii ‘Form of bank guarantee for performance bond: Name of bank: . . . . . . . . . . . . . . . . . . . . . [beneficiary’s/buyer’s bank] Address of bank: . . . . . . . . . . . . . . . . . [in beneficiary’s country] .......................
Letter of guarantee no. . . . . . . . . . . . . . . . . . . Dear Sirs, Wheareas . . . . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary/buyer] has accepted tender no. . . . . . . . . . . . . . . . . . . . . . . . . . . [reference] for supply of . . . . . . . . . . . . . . . . Mt 10 pct m/l white bagged sugar to be supplied by . . . . . . . . . . . . . . . . [seller] hereinafter referred to as the ‘Supplier’ on the terms and conditions governing the purchase order and whereas the supplier has requested us through . . . . . . . . . . . . . [beneficiary’s bank] to issue a guarantee for an amount of USD . . . . . . . . . . . . [United States Dollars] only being 10 pct CANDF value of contract in consideration of aforesaid we, . . . . . . . . . . . . . . . . . . . . [beneficiary’s bank] hereby undertake and guarantee due signing, acceptance and performance of the contract by the supplier and we unconditionally and absolutely bind ourselves: i) To make payment of USD . . . . . . . . . . . . . . . . . . . to the . . . . . . . . . . . . . [buyer] or as directed by the said . . . . . . . . . . . . [buyer] in writing without any question whatsoever. ii) To keep this guarantee valid and in force 3 (three) months after arrival of the total quantity of contracted goods at . . . . . . . . . . . . . . . . . . . . . . . . . . . [port of destination] and extendable for further period if so required by the said . . . . . . . . . . . . . [buyer/beneficiary] the guarantee is Chapter 16/page 47
Sugar Trading Manual unconditional and it is expressly understood that with regard to a drawing under the performance bond the sole judge for deciding whether the supplier has performed the contract and fulfilled the terms and conditions of the contract will be the said . . . . . . . . . . . . . . [buyer] our commitment under this guarantee is limited to an amount of USD . . . . . . . . . . . . . . . . . . [US dollars] only. iii) It is specifically stipulated and understood by us that any grant of time or indulgence to the suppliers without reference to us shall not in any manner tend to absolve us from our liability to make payment as stipulated above under this guarantee. Yours faithfully, Dated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank [buyer’s/beneficiary’s bank]’
The performance bond to be issued under the full responsibility of . . . . . . . . . . . . . . . . . . . . [buyer’s/beneficiary’s bank]. Validity date for performance bond 3 months after arrival is . . . . . . . . . . . . . . . . . . . . [theoretical expiry date]. Please advise your reference number of this performance bond. Kindly advise by return the time/date your telex was sent to . . . . . . . . . . . . . [beneficiary’s country] and to which telex number it was transmitted. Thank you and regards . . . . . . . . . . . . SA. The text of the above example performance bond is not too dissimilar to the example of the bid bond.
Example J This is an example of the type of bank guarantee that could be requested by a trading company from a private company/individual as security. To: . . . . . . . . . . . . . (bank) [applicant’s bank] Attn: . . . . . . . . . . . . . . [guarantees department] Please establish still today in full by telex the following irrevocable guarantee: The text of the message that is to be transmitted to the bank in . . . . . . . . . . [beneficiary’s city] (which is acceptable to . . . . . . . . [beneficiary] and also prepared to establish such a guarantee under their full responsibility on behalf of applicant’s bank) by applicant’s bank is to be as follows: Chapter 16/page 48
Payment and documents ‘Please issue under your full responsibility an irrevocable guarantee in favour of: . . . . . . . . . . . . . . . . . . . . . . . . . . . . [beneficiary]. The guarantee to be immediately advised to . . . . . . . [beneficiary] as the guarantee has to reach them by . . . . . . . . . . . at the latest and to be worded as follows: Regarding the contract concluded on . . . . . . . . . . . between . . . . . . . [beneficiary] (the seller) and . . . . . . . . . . . . . . (the buyer) for the delivery of . . . . . . . . . . metric tons of white bagged sugar . . . . . . . . . . . . . . . [contractual parity]. At the request of . . . . . . . [buyer’s bank] and for the account of . . . . . . . . . . . . [buyers], we, [the bank in . . . . . . . . . . . . . . . .] acceptable to the [beneficiary] herewith irrevocably undertake to pay you irrespective of the validity and the effects of the above mentioned contract and waiving all rights of objection and defence arising there from, any amount up to: USD . . . . . . . . . . . . . . . . [United States Dollars] Upon receipt of your duly signed request for payment stating that . . . . . . . . . . . . . . [buyers], have failed in the due and proper execution and performance of the contract. The total amount of this indemnity will be reduced by any payment effected hereunder. Your claim will be considered as having been made once we are in possession of your written request for payment or the telex or cable or swift to this effect at our above address. Our indemnity is valid until . . . . . . . . . . . . . . . and expires in full and automatically if your claim or claims have not been made on or before that date, regardless of such date being a banking day or not. This indemnity is governed by . . . . . . . . . law, place of jurisdiction . . . . . . . . . . . . . . . Signed . . . . . . . . . . . . [beneficiary’s bank in . . . . . . . .] acceptable to . . . . . . . . . . . . [beneficiary]’ Regards . . . . . . . . . . . . . . [beneficiary] The major difference between this last example of a guarantee and the bid bond and performance bond above is the addition of the law which will govern. It would probably be the case that the law governing the bid bond or performance bond – if not specified in the bond text – would be mentioned in the counter-guarantee and would probably be the law of the country in which the bank under whose responsibility the bond or guarantee being issued is located.
Chapter 16/page 49
17 Accounting Simon O’Mahony Sucre Export London Ltd
Commercial approach Special features of sugar accounting Narrow margins Forward trading of physical contracts Futures trading Volatility Positions Documentation
Accounting principles Matching Accruals Prudence Control Presentation
Futures margins Original margins Variation margins
Positions Contract pricing Fixed price Against actuals or exchange for physicals Executable orders (EO) Average pricing
Vessel accounting Futures accounting
Despatch and demurrage Currencies Internal markets Quotas and licences Quotas EU licences Certificates of quota exemption (CQEs)
Commercial approach In many companies, and in many countries, the accounts department lives in an office down a corridor a long way from the trading departments that make or lose the money. They are mainly concerned with preparing the numerous reports required by government agencies. Regular management accounts are prepared as an afterthought. This chapter takes a commercial approach to accounting. These are the days of computers and international accounting standards. Tax returns and statistical reports are not the main purpose of accounting departments. In recent years, many banks and trading companies have been damaged by trading activities poorly understood, and poorly controlled. The accountants left major financial functions to unqualified (and often non-independent) persons. This chapter is about well-established, practical and effective methods of accounting and control that have been developed over the years for this very specialized industry.
Special features of sugar accounting As in all businesses, sugar accounting does have some special features. These can be characterized as: 1 2 3 4 5 6
Narrow margins. Forward trading of physical contracts. Futures trading. Volatility. Positions. Documentation.
Narrow margins These margins are spectacularly low by the standards of other businesses. Traders justify negligible, zero or negative margins by the opportunities that become available to well capitalized businesses with a large portfolio of flexible contracts. To account for these contracts, one needs precision and a sound understanding of the cost calculations.
Forward trading of physical contracts Commodities are traded far in advance of the date of shipment and often well in advance of being grown and harvested. The contracts are legally binding, which means that the choice of business partners is Chapter 17/page 1
Sugar Trading Manual crucial. Part of the accountant’s job is to assess, as part of routine bad debt exercises, if these contracts will be fulfilled.
Futures trading There are several major sugar futures markets (see Chapters 13 and 14). Sugar traders use these markets actively to hedge their profit margins and to speculate. Part of the accountant’s job is to make sure that the accounting for futures is correct and consistent with the accounting for physical contracts.
Volatility The price of sugar is extremely volatile (see Chapter 7). There are few markets of any kind that display the same extremes of price behaviour – from around 7 cents a pound in 1977 to 40 cents in 1980, then down to 3 cents a few years later. This creates a variety of risks, principally of default by weak trading partners, and of cash flow crises brought on by margin calls on a poorly structured futures book.
Positions The main tool used by traders is the position sheet which records all the contractual obligations of the traders. Part of the accountant’s job will be to make sure to account for everything on the sheet – but first one had better ask how one knows it is right! One of the more interesting features of the business is that the trading departments prepare a lot of the financial information and documents that will be needed. The accountant’s responsibility consists very largely of control.
Documentation Most of the accounting documentation one needs will have already been prepared to comply with contractual requirements. The accountant’s job involves making the correct use of this paperwork to prepare reliable accounts. The documents one needs are not usually made available, but they can often be found hidden in someone’s desk!
Accounting principles Matching This is undoubtedly the most important aspect of commodity accounting. The general accounting principle of matching is that costs must be matched to revenues. This means that profits and losses on physical Chapter 17/page 2
Accounting trading have to be matched up to losses and profits on futures; profits and losses in the bank have to be matched to losses and profits on contracts still to be executed. This means that profits and losses on forward business have to be recognized (at least to some extent), even though this violates another principle – that profits are only booked on delivery of the goods.
Accruals The basic principle of accrual is that costs and revenues have to be recognized in full at the time of booking transactions. What this means in practice is that the accounting records must be arranged to permit one to scrutinize the execution of contracts; in this way one will be able to detect costs that have to be accrued and income that still has to be billed. To do this one needs to consult the records of the execution departments and compare the costs with the estimates prepared at the time of making the contract, often many months before. Frequently a review of management accounting records can help the execution department by providing reminders of unpaid or ‘uninvoiced’ amounts. A good accounts department has to work closely with the trading departments, while retaining an independent attitude.
Prudence A good sugar accountant must always remember that the principle of prudence was invented for a good reason. The world of international sugar trading is full of problems: defaults, cashflow problems and piracy. Forward unsecured profits have to be viewed with scepticism.
Control In a conventional business it is possible to make sense of the profit and loss by reference to the gross sales margins. In commodities this is difficult to do because the margins simply are not there. In practice it is easier to prepare the balance sheet and ‘plug’ the profit and loss account. The way the business operates means there are very strong controls on the balance sheet items and it is part of the accountant’s job to maintain and strengthen those controls.
Presentation The balance sheet of a sugar trading company consists of items which may be categorized as either: 1 Physical. 2 Financial, including futures. Chapter 17/page 3
Sugar Trading Manual 3 Forward or contracted for some time in the future. 4 In progress or in process of execution. 5 Completed, with cash in the bank or recognized as a debtor or creditor. One has to prepare the accounting records accordingly. There follows at the end of this chapter worked examples of what a set of management accounts might look like for a sugar trading company. The examples show the development of the accounts period by period. A new accounting topic is introduced in each new accounting period. The examples ignore overheads, although in practice it is difficult to get sugar traders to work for nothing! Each accounting period begins with figures brought forward from the previous period. This is followed by a description of the trading activity for the period. Next, the accounting is divided into firstly, the valuation of the open contracts and, secondly, the calculation of the balance sheet items. New topics will be introduced into the examples but old topics will be repeated, so the volumes of accounting entries will increase. As will be explained, the complete execution of most contracts takes a long time. As one piece of business is executed, another one begins. The general effect is of repetition and accumulating complexity. The part of the example that is hardest to understand is the rationalization of the profit, which explains in commercial terms where the money is made or lost. This is the part that does not appear in conventional published accounts. In practice this is prepared on the back of an envelope and is controversial! A conventional profit and loss account is presented in Table 17.1 at the end of this chapter. Tables 17.2 to 17.11, also at the end of this chapter, show the calculations to produce the accounts, accounting period by accounting period.
Futures margins From a financial point of view, the important feature of futures contracts is that they carry a high level of security. The other side of the coin is that the market’s security is provided by the traders in the market. Traders have to make two types of margin payment: 1 Original margins. 2 Variation margins.
Original margins These provide a cushion of protection. The rules vary from market to market, but a typical original margin calculation might look like this: Chapter 17/page 4
Accounting
March
Long Lots Short Lots 100
May August October Total Smaller Total Spread
Comments Spot position
Rate $ 500
Amount $ 50 000
250 100
25 000 27 000
100 120 250 370 100 270
100
Outright position Spread position
Total original margin calculation Previous days original margin calculation Original margin to pay
102 000 77 000 25 000
Variation margins These constitute a payment, to or from the market, of losses or profits incurred since the last variation margin payment. A typical calculation might look like this: Month Previous day March New business New total May August October Variation margin to pay Original margin to pay Total margin to pay
Lots Previous Long Short Value $ 50 107 50 100 100 120 250
111 115 119
Variation Trade New Price $ Value $ Margin $ 105 -5 000 110 105 -12 500
105 113 117
-30 000 12 000 25 000 -10 500 -25 000 -35 500
Traders who are members of a clearing arrangement pay margins through a clearing house; non-clearing members pay margins to the brokers who hold their futures accounts (see Table 17.3, Worked example 2, at the end of the chapter).
Positions A position can be defined as a measure of exposure to price movements in the market. This is generally expressed in metric tons or in lots. The simplest type of position is the so-called flat price position which is exposure to the general level of the market. Other types are now described: Chapter 17/page 5
Sugar Trading Manual A trader buys 1000 tons at $100. He will profit by $1/mt by every $1 upwards movement in the market; he will lose $1/mt for every $1 downwards movement in the market. He has a long position of 1000 mt. The trader now sells 2000 tons at $105. He has profited by $5/mt on the upwards move in the market and has now closed out his long position. He now has a short position of 1000 mt. He will profit by $1/mt for every $1 the market falls, and vice versa. The trader now buys 1000 tons at $102. He has made a profit of $3/mt on the downwards move in the market. He has closed out his short position and is square. There are also spread positions, premium positions and cash positions. You can make up your own. A trader buys 1000 mt March at $100 and sells 1000 May at $100. He is now long 1000 mt of the March/May switch. He will make a profit of $1/mt for every $1 by which March appreciates relative to May. March falls to $90 and May falls to $88. The trader sells 1000 March and buys 1000 May at market. He loses $10/mt on the March contract and gains $12 on the May. His net profit is $2/mt. He has closed out his switch position and is now square. A premium position is one where a position in one market offsets a position in another. For instance, long of the London white sugar futures contract offsetting an equal short in the New York raw sugar futures contract is called a long premium position. A cash position is where a cash sugar/physical position offsets an equal position in a futures contract. For instance, long of EU sugar against an equal short in the London white sugar futures contract is called a long cash position. An unpriced position is one where a contract exists without a price. This avoids the obvious flat price risk but sometimes creates a different set of risks. Hedging physical contracts with futures contracts can lead to a mismatch of maturities. Profits and losses on futures are payable immediately, but profits and losses on physical sugar are payable on delivery. Traders must be aware of the impact this can have on cash flow. The effects of market movements on cash flow and risk might look like this:
Physical purchase
MT 5000
Sale of futures -5000 Position 0 P/L $ Chapter 17/page 6
Contract Market $ Price $ Value $ P/L $ Comments 250 300 250 000 Possible performance risk
260
300 -200 000 Pay out variation margin $50 000
Accounting In addition, losses on futures have to be paid; profits on physical contracts give the counter-parties a motive for default. See Table 17.4 at the end of the chapter for a worked example.
Contract pricing There are many ways to fix the price of a contract. 1 2 3 4
Fixed price. Against actuals or exchange for physicals. Executable orders. Average pricing.
Fixed price This means that the price of the contract is fixed at the time of purchase or sale. This is commonly the case with contracts made with end-user customers, e.g. A sells to B at $250 per metric tonne (PMT).
Against actuals or exchange for physicals Fixed price contracts create price risk so business between traders is usually on a swap basis whereby a physical sale from Trader A to Trader B involves a sale of futures from B to A. The price is negotiated in terms of the difference between the futures price and the physical price (the cash premium or discount), e.g. A sells to B at London white sugar March 1999 plus $5: Day 1 Day 2
Contract made AA Posted at Premium Price
$250 $5 $255
A sells at A buys futures
$255 $250
B buys at B sells futures at
$255 $250
The ‘AA’ futures trade is established on the futures market by a recognized and legally regulated standard procedure.
Executable orders (EO) The price is expressed as a premium or discount to futures. The customer gives orders to the trade partner to sell or buy futures. If the trade is executable according to the rules of the relevant exchange, then the orders are deemed to be executed. The average of the deemed trades, plus or minus the cash premium/discount, gives the physical price, e.g. Chapter 17/page 7
Sugar Trading Manual A sells 5000 mt to B by Sellers EO 100 lots (each of 50 mt) London white sugar March 1999 plus $5:
Day Day Day Day Day Day Day Day
1 2 3 4 5 6 7 8
Order Lots Price 5 250 25 255 25 255 25 260 25 270 25 280 25 290 3 300
Comment Sold on market Market traded 250–252 Priced but did not sell futures Thin market, sold 17 lots only Market traded 269, but priced anyway Market traded 270–275 Sold on market Market traded 290–292, but this was the last day for pricing on the contract. In this instance the contract specifies that the balance will be priced at the official closing price. Premium Contract Price
Priced Lots Price $ 5 250.00 25 17 25
255.00 260.00 270.00
25
290.00
3 100
290.00 269.15 5.00 274.15
Average pricing The price is expressed by reference to a quoted market price averaged over a period of time, plus or minus a premium or discount, e.g. A sells to B at the average of the official closing price for London white sugar March 1999 during the first five days of January 1999, less $5:
Day 1 Day 2 Day 3 Day 4 Day 5 Average Discount Price $
Official Close $ 250.00 255.00 234.00 240.00 244.00 244.60 5.00 239.60
The implications of having unpriced contracts are the same regardless of the pricing method. At the time of contract there is no price risk but there is a risk associated with the physical premium/discount. As the contract is priced, the flat price position gradually changes, e.g. return to the example where A buys 5000 mt sugar by EO 100 lots (each of 50 mt) March plus $5. At the accounting date (close of day 4) the Chapter 17/page 8
Accounting contract is partly priced. The value of the physical sugar is now March plus $7, and the official closing price of the futures is $260: Lots Futures Price $ Contract Market Priced Unpriced Average Closing Prem $ Prem $ 47 256.27 260.00 5 7 53
260.00
5
7
Total Cost $ Market P/L $ 261.27 267.00 13 466 Projected 265.00 267.00 5 300 18 766
In this example, the trader has profited by $2 pmt because of the increase in the cash premium. He also profited by pricing without selling. He finally completed his hedging by selling 53 lots at $285: Day Day Day Day
3 5 8 10
Pricing without selling futures Pricing without selling futures Pricing without selling futures Selling futures without pricing Lots
Lots Price 25 255 25 270 3 290 53
Lots Price
53 53
285
$ -318 750 -337 500 -43 500 755 250
P/L $
374 250
See Table 17.5 at the end of the chapter for a worked example.
Vessel accounting The frame of reference for accounting for physical sugar is the vessel or venture. This is because it enables accountants to control the entries and ensure the correct matching of tonnages and expenses. After contracts have been assigned to a shipment, they can be valued back-to-back as part of the valuation of open contracts at the end of any accounting period. This makes the valuation process more precise: V-1
M/V ‘Yellow River’ MT Price FX Rate $ P-1 5000 Fob P-2 3000 Fob EUR 200 1.3000 8000 S-9 8000 C&F 320.00 Freight 35.00 Commission 1.00 L/C costs 0.75 Supervision 0.50 Open valuation
Open Valuation Price $ Value $ 245.00 -$1 225 000 260.00 -$780 000
282.75
$2 262 000 $257 000
Chapter 17/page 9
Sugar Trading Manual All costs relating to a particular shipment are posted to a vessel account: V-1 Payment Date 1-Mar-99 3-Mar-99 Accrue 4-Mar-99
M/V ‘Yellow River’ Name Supplier Freight Freight Supplier
MT 5000
3000
Vessel Account
Narrative CCY Paid in full $ 95% freight $ freight balance $ Paid in full EUR
Amount $ -1 225 000 -266 000 -14 000 -600 000 -750 000 -2 255 000 Amount
While the shipment is in progress, the accounting entries are held in a suspense item on the balance sheet. This is called provisional billings or shipments in progress or some similar name. In the above two examples, the relevant balance sheet figures would be: Open valuation Provisional billings Accruals
$257 000 $2 255 000 -$14 000
When the shipment is considered complete it is realized, which means that the contracts are removed from the open valuation and the payments and receipts are removed from shipments in progress. Legally, a shipment is completed at the moment of presentation of documents. In practice accountants can use whatever point is convenient, usually when all the significant payments have been made. See Table 17.6 at the end of the chapter for a worked example.
Futures accounting The volume of futures is so vast that grossly simplified accounting systems must be used to stop paperwork overwhelming the system. In practice individual lots do not need to be treated in detail at the end of each accounting period. Computers can be used to track positions by lot and position value, for example, London white sugar March 1999 futures contract: Day 1
2
3
Lots of 50 MT 5 -7 3 -10 20 -15 4
Chapter 17/page 10
Position 5 -2 1 -9 11 -4 Square
Price $ 200 205 210 211 205 220 217
Trade Value $ -50 000 71 750 -31 500 105 500 -205 000 165 000 -43 400
Position Value $ -50 000 21 750 -9 750 95 750 -109 250 55 750 12 350
Accounting Payments of margins to brokers are treated as debtors/creditors. Debit or credit notes for futures offsets are deducted from total value: Day Item Broker A/C $ Bank A/C $ 4 Broker sends credit 5 000 for $5 000 5 Broker sends credit 12 350 for $7 350 6 Broker pays $12 350 Zero 12 350
Position Value $ 7350 Zero
When preparing management accounts, it is commercially realistic to set variation margins off against debtors and creditors: Debtors $ Without offset Value of open futures contracts Value of open physical contracts Original margins Variation margins With offset
Value of open physical contracts Original margins
Creditors $ 750 000 50 000
100 000 750 000 50 000 100 000
See Table 17.7 at the end of the chapter for a worked example.
Despatch and demurrage There are two specific problems with despatch and demurrage: 1 The practical difficulty of calculating, agreeing and paying Despatch & Demurrage, often several years after completion of the voyage. 2 The difficulty of calculating, matching and controlling large volumes of small (and not so small) balances a long time after all other accounting matters have been put to bed. This is where a clear system of vessel accounting pays dividends. The objectives of a demurrage accounting system are: 1 2 3 4
To record all payments clearly. To record all the despatch and demurrage being claimed. To record accurate estimates of the final amounts payable. To be able to summarize the amounts vessel by vessel and customer by customer. Chapter 17/page 11
Sugar Trading Manual In the following example, the tonnages are matched and the amounts involved are very similar:
Example 1 Purchases Date MT P-1 01-Mar 5000 P-5 1000 Accrue Sales S-5 Accrue 6000
Fob/Fob transaction Notes Agreed and paid Claimed but not paid Realistic estimate
Calcs Accounts $ $ -5000 -1500 -1300
Calculated but not yet invoiced
6200
The next example shows how the letter of the contract is not always the same as the commercial reality: Example 2 V-137 Purchases Date MT P-7 01-Mar 6 000 P-11 Accrue 6 000 Sales S-15 Write off 12 000
Fob/Fob Transaction M/V ‘Silver Cloud’ Notes Payment in lieu of despatch Agreed Customer bankrupt
Calcs Accounts $ 1.50
$ -9000 -7000
18 000
0
The following is a more complex example. Note how the accounting entries are based mainly on calculations and telexes. There will be few conventional accounting documents available. Note also how the despatch/demurrage balance with owners interacts with the amounts due for freight. Example 3 V-225 Ref Date MT P-15 01-Apr 5 000 P-17 Accrue 7 000 Accrue
Fob/C&F Transaction M/V ‘Blue Skies’ Notes Payment agreed Payment demanded Realistic estimate Load despatch due from owner
31-Mar Accrue Accrue Accrue
Provisional freight paid Final freight balance due Broker commission Overage insurance
$
$ -3 000
-8 000 -7 000 11 000 -386 000 -14 000 -5 540 -7 567
Disport demurrage due to owner -31 500 12 000 Demurrage calculation 30 000 Accrue Customer haggles and offers 14 920
Accrue S-55
Calcs Accounts
Chapter 17/page 12
Accounting Eventually the system should build up a listing of accrued demurrage and despatch balances: Year 1995 1996 1997
1998
Vessel V-110 V-256 V-288 V-326 V-336 V-374 V-425 V-448 V-448
Customer P Goriot & Cie F Krull GmBH P Goriot & Cie F Maus AG Marley & Scrooge F Maus AG Marley & Scrooge F Krull GmBH Gepetto SpA
Item Demurrage Despatch Demurrage Despatch Demurrage Overage Insurance Demurrage Demurrage Despatch
DR $ 15 000 5 436 15 326 4 567 15 000
CR $
26 000 7 654
62 983
12 000 7 532 45 532
See Table 17.8 at the end of the chapter for a worked example.
Currencies The operating currency of a trading operation is the currency in which risks and profits are measured. This will be determined by the market environment. To take a simple example: if an American bank in London is trading German stocks and bonds, the operating currency is euros, regardless of the nationality of the bank, the location of the office or the fact that the head of the trading desk is Brazilian! The operating currency of sugar is generally taken to be US dollars. This is the currency in which most business is done and profits measured. There are important exceptions. In the European Union the level of the market is maintained at a level predetermined in euros. This is done by duties calculated by reference to a US$ world market, converted at a euro/$ exchange rate. Profits and losses on internal trade inside the European Union are therefore denominated in euros. Many countries have internal markets that are in effect dollarized. For instance, Russia operates a system of duties calculated as a fixed percentage on world prices. This means that the Russian market operates as a multiple of the world market price, moving up and down with the world market. The operating currency for traders in Russia is therefore the US dollar. Sugar traders will run currency positions in the same way as they run sugar positions. In principle contracts made in currencies other than the operating currency (‘FX’) will have to be hedged back to the operating currency. In physical business the exact timing of payments is uncertain so this will often give rise to a mismatch of maturities. A sugar Chapter 17/page 13
Sugar Trading Manual accounting system has to be able to perform conversions and valuations of all contracts and balances expressed in FX, and control the FX position: 01-Mar
P-1 P-2 P-3
MT 5 000 7 000 -2 000 10 000
Contract Date March April March
X-1 Bank 1 Bank 2
Euro position and illustration of Euro values converted using forward rates for P/L Fwd Dollar Est. Euro Euro Sugar Amount Val $ Euro/$ Amount Date Price 15-Mar 250 -1 250 000 270 1.3250 15-Apr 280 -1 960 000 270 1.3350 31-Mar 250 500 000 270 1.3300 Value FX Rate
FX 31-May
1.3000
3 500 000
01-Mar 01-Mar
-1 000 000 200 000
Euro FX Position
-10 000
Loan Balance Cash P/L
1.3400
P/L $ -306 250 -726 600 125 000 140 000
1.3200 -1 320 000 1.3200 264 000 -1 056 000 -767 850
Sometimes a business will operate in markets with different currency bases. It is important that the different trading books are kept separate with different FX positions. For instance, a world price trading book will be hedged back to US dollars; an EU trading book will normally be hedged back to euros. The question often arises – how to hedge profits? For instance, does a French company hedge world price dollar profits back to euros? The question is more correctly one about asset allocation. If a company has made a profit, whatever the currency, it will have to decide what to do with the money. In practice, for the sake of convenience, it may convert profits back to whatever it considers its home currency. What it considers to be its home currency will be a matter of preference. For instance, Greek shipowners probably use the US dollar. See Table 17.9 at the end of the chapter for a worked example.
Internal markets Discussions of commodity markets generally assume that trades take place in a world market. This is an environment in which the goods and services being traded are free of local taxes and regulations. Usually this is because the goods in question are physically on the high seas in international waters, or custom-cleared on borders. The concept has been extended to free zones and to tax-privileged instruments such as futures.
Chapter 17/page 14
Accounting However, commodity trading also takes place in domestic (or internal) markets. These operations are subject to domestic laws and taxes. The price behaviour of internal markets depends on the mechanisms used to protect or isolate that market from the world. States which charge a flat percentage duty on all sugar imports will be in effect world price markets. This is because the duty becomes a normal cost which can be calculated by traders. States which charge variable duties will have unique price characteristics. Business in such states must be isolated in separate trading books. Large sugar trading companies will typically have a world price trading book, and possibly EU, US and other books. See Table 17.10 at the end of the chapter for a worked example.
Quotas and licences In our earlier discussions we covered the concept of different trading books or markets and different currency bases. These arise principally because of tariff restrictions created by sovereign governments. The most important non-world price markets are the EU and the USA. These markets are controlled by quotas; the EU regime is also managed by licences.
Quotas Certain countries possess privileged rights to import specified tonnages of sugar into the USA or EU on payment of zero or reduced tariffs. For accounting purposes, the point here is that quota sugar is part of the USA or EU books and not part of a world price book:
Ref MT 100 10 000 101 5 000 102 3 000 105 -15 000 110 25 000
Position effect MT Sugar type CCY Price/MT EU USA World Internal French EUR 4000.00 10 000 Export French $ 250.00 5 000 Mauritius ACP EUR 3500.00 3 000 Brazil US Quota $ 395.00 -15 000 US Export sugar $ 225.00 25 000
EU licences Licences are issued by the EU which carry an entitlement to export subsidy. For accounting purposes, the point is that a licence carries a legal obligation to export and therefore a licence is a world price item,
Chapter 17/page 15
Sugar Trading Manual not a domestic item. However, because the cost of export, net of subsidy, is expressed in euros, and the world price market is expressed in dollars, there is an associated FX risk which has to be hedged. The amount is calculated as the estimated cost of the domestic sugar, less the value of the subsidy:
Ref MT Sugar type 200 5000 French export 201 -7000 French export 202 2000 French domestic 205 2000 Export licences 299 FX Hedge
Position effect MT P/L$ CCY Price/MT EU World EURO FX $ 250 5000 0 -1 250 000 $ 255 -7000 0 1 785 000 EUR 600 2000 0 EUR 400 -2000 2000 -400 000 EUR 1.3000 400 000 -520 000 15 000
Certificates of quota exemption (CQEs) These have much the same accounting effect as EU licences. A CQE can be applied to world price sugar from the relevant origin to convert it into more valuable US quota sugar. CQEs have a value and can be bought and sold:
Ref MT 300 5 000 301 7 000 310 5 000 315 -12 000
Position effect MT Sugar type Price$/MT US World P/L$ Brazil raws world-price 175.00 5000 -875 000 Brazil US Quota raws 395.00 7 000 -2 765 000 CQEs 200.00 5 000 -5000 -1 000 000 US Quota raws 400.000 -12 000 4 800 000 160 000
See Table 17.11 for a worked example.
Chapter 17/page 16
Accounting Table 17.1 Profit and loss account Worked example
Profit & loss
Workings Sales
V-1 V-2 V-3
Accounting periods 1 to 10
$ 1 800 000 1 822 500 1 830 000
Cost of sales Profit
5 452 500 4 844 824
AP1 AP2 AP3 AP4 AP5 AP6 AP7 AP8 AP9 AP10
26 000 90 000 -27 000 -11 000 31 500 -30 000 32 093 28 745 225 648 241 690
Balance sheet
$
Debtors
1 871 600
Bank
Stock
9 210 880
Creditors
443 070 11 525 550
607 676
Period 10
$
Value of open contracts
$
Profit
10 900 552 17 322 607 676 11 525 550
Chapter 17/page 17
Sugar Trading Manual Table 17.2 Worked example 1 Accounting period 1 Activities Reference Purchase 1 Futures 1 Futures 2
Lots -200 -40
Tons 12 000 EEC No. 2 -10 000 No. 5 -2 000 No. 5
-240
Price $/MT 240 fob 242 243
Dunkirk
0 Closing:
March April
Date Apr 99 Mar 99 Mar 99
Position 12 000 -10 000 -2 000
C/F
0
Futures Cash
$250 $250
Accounting Value of open contracts Lots Tons Ref Purchase 1 12 000 Futures 1 Futures 2
-200 -40
-10 000 -2 000
Position
-240
0
P/L rationalization Profit on Purchase 1
Cost $ 240
Value $ 250
242 243
250 250
P/L $ 120 000 Margin $ -80 000 -14 000
-94 000 26 000 $
Tons 10 000 2 000
Purchase $ 240 240
Sale $ 242 243
20 000 6 000 26 000
Balance sheet Open contracts
Chapter 17/page 18
$ 26 000
P/L
$ 26 000
Accounting Table 17.3 Worked example 2 Accounting period 2 Activities Clearing house called variation margin Clearing house called original margin
-$94 000 -$24 000
240 lots @$100
-$118 000 Ref B/F Sale 1
Lots -240
Price $
Tons -6 000 EEC No. 2
300 C&F -40 Costs est
Alexandria
Date B/F Apr 99
Position 0 -6 000
Mar 99
6 000
260 Net Futures 3
120
6 000 No. 5
-120
245
0
0
Sale 1 Cost estimates L/C bank charges Freight vessel V-1 Supervision – ICCS
$ 1 Closing: 38 1
March April
Futures Cash
$275 $275
$40 Accounting Value of open contracts Tons Lots Ref V-1 (M/V ‘Blue Lagoon’) Purchase 1 6 000 Sale 1 -6 000
Purchase 1
6 000
Futures 1 Futures 2 Futures 3
-200 -40 120
-10 000 -2 000 6 000
Position
-120
0
Price $
Costs $
240 300
-40
Cost $ 240
Value $ $275
242 243 245
P/L $ -1 440 000 1 560 000
120 000
210 000 Margin $ -330 000 -64 000 180 000
$275 $275 $275
-214 000 116 000
Plus variation margins already paid
94 000 210 000
Debtors Original margin
$ 24 000
Bank overdraft Borrowed from bank
$ 118 000
P/L rationalization Profit on Sale 1
MT 6 000
Hedge $ 245
Sale $ 260
B/F
AP1
$ 26 000 90 000 116 000
Balance sheet Debtors Open contracts
$ 24 000 210 000
Bank overdraft P/L
234 000
$ 118 000 116 000 234 000
Chapter 17/page 19
Sugar Trading Manual Table 17.4 Worked example 3 Accounting period 3 Activities Clearing house called variation margin less already paid Clearing house called original margin less already paid
-214 000 -94 000 -120 000 -12 000 -24 000
120 lots @$100
12 000 -108 000
Reference B/F Sale 2
Lots -120
Futures 4
180
Price
Tons -6 000 EEC No. 2
350 C&F -45 Costs est
Tartous
Date B/F Apr 99
Position 0 -6 000
305 Net 9 000 No. 5
60
307
Mar 99
3 000 Closing:
V-1
Vessel started loading
Accounting Value of open contracts Lots Tons Ref V-1 Purchase 1 6 000 Sale 2 -6 000 Futures 1 -200 -10 000 Futures 2 -40 -2 000 Futures 3 120 6 000 Futures 4 180 9 000 Position
60
9 000 3 000
Cost $
Value $
240 305 242 243 245 307
$302 $302 $302 $302 $302 $302
March April
Futures Cash
$302 $302
P/L $ 120 000 372 000 18 000 -600 000 -118 000 342 000 -45 000 -421 000
3 000
89 000 Plus variation margins
214 000 303 000
Debtors Original margin
$ 24 000 -12 000
AP2 AP3
Bank overdraft Borrowed from bank
AP2 AP3
12 000
$ 118 000 108 000 226 000
P/L rationalization Loss on Sale 2
MT 6 000
Hedge $ $307
Sale $ $305
Loss on futures spec
3 000
Cost $ $307
Value $ $302
B/F
AP2
$ 116 000 -12 000 -15 000 89 000
Balance sheet Debtors Open contracts
$ 12 000 303 000 315 000
Chapter 17/page 20
Bank overdraft P/L
$ 226 000 89 000 315 000
Accounting Table 17.5 Worked example 4 Accounting period 4 $ -421 000 -214 000 -207 000
Activities Clearing house called variation margin less already paid Clearing house called original margin less already paid
-6 000 -12 000
60 lots @$100
6 000 -201 000
Reference B/F Purchase 2
V-1 V-1
Lots 60
Tons 3 000 5 000
Pricing (mt)
60
8 000
-5 000
-5 000
Completed Paid for sugar & freight
Accounting Value of open Ref V-1 Purchase 1 Purchase 2 Sale 2 Futures 1 Futures 2 Futures 3 Futures 4 Position
contracts Lots Tons
-200 -40 120 180
6 000 5 000 -6 000 -10 000 -2 000 6 000 9 000
60
8 000
Price May + 2 EEC No. 2
fob Dunkirk
Date B/F Apr 99
Position 3 000 0 3 000
Closing:
Pricing (mt)
Pricing $
-5 000
May + $2
March May April
Futures Futures Cash
Cost $
Value $
$240 $301 $305 $242 $243 $245 $307
$300 $300 $300 $300 $300 $300 $300
$300 $299
Switch $1 $300
P/L $ 120 000 360 000 -5 000 30 000 -580 000 -114 000 330 000 -63 000
-5 000
-427 000 78 000
Plus variation margins
421 000 499 000
Debtors Original margins Stock V-1 Goods 6 000 Freight
$ 6 000 240 38
Bank overdraft Borrowed from bank Margins V-1
1 440 000 228 000
AP3 AP4
1 668 000
2 095 000
P/L rationalization Loss on Purchase 2
MT 5 000
Loss on spec position
3 000
Cost $ May + $2 Cost $ 302
$ 226 000 201 000 1 668 000
Sale $ May + $1 Value $ 300
B/F
AP3
$ 89 000 -5 000 -6 000 78 000
Balance sheet Debtors Stock Open contracts
$ 6 000 1 668 000 499 000
Bank overdraft P/L
$ 2 095 000 78 000
2 173 000
2 173 000
Chapter 17/page 21
Sugar Trading Manual Table 17.6 Worked example 5 Accounting period 5 $ -427 000 -421 000 -6 000
Activities Clearing house variation margin less already paid Clearing house called original margin less already paid
-6 000 -6 000
60 lots @$100
0 -6 000
Reference Lots B/F 60 Sell long position: Futures 5 -20 Futures 6 -40 Pricing: Priced P-2 Futures 7 -100 Sale of physical sugar: Sale 3 Futures 8 100 Switching: Futures 9 100 Futures 10 -100
Tons 8 000
Pricing (mt) -5 000
-1 000 -2 000
0
Date B/F
-1 000 -2 000
$303 March $304 March $301 $299 May
(May + 2) AA for P-2
5 000 -5 000
-5 000 5 000
eur 270 April $302 March
fob Dunkirk (Cover S-3)
-5 000 5 000
5 000 -5 000
$298 May $300 March
5 000
0
0
euros 30 Apr 99
1 350 000 1.1300
X-1
Sold Value
V-1
Presented documents
Tons 6 000 5 000 -6 000 -5 000 -10 000 -2 000 6 000 9 000 -1 000 -2 000 5 000 -5 000
(Switch) (Switch)
Switich $2 C/F
Closing March May April Euro
eur price
FX rate
270
1.2000
Cost $ $240 $301 $305 $324
Value $ $311 $311 $311 $311
$242 $243 $245 $307 $303 $304 $302 $300
$310 $310 $310 $310 $310 $310 $310 $310
-100 100
FX
0 Currency Euro
$310 $308 $311 1.2000
P/L $ 426 000 50 000 -36 000 65 000 -680 000 -134 000 390 000 27 000 -7 000 -12 000 40 000 -50 000 -426 000
-5 000 5 000
$299 $298
0 Position
5 000 -5 000 0
Futures Futures Cash FX
0 May: Futures 7 Futures 9
Position 3 000
-5 000
0
Accounting Value of open contracts Lots Ref Purchase 1 Purchase 2 Sale 2 Sale 3 March: Futures 1 -200 Futures 2 -40 Futures 3 120 Futures 4 180 Futures 5 -20 Futures 6 -40 Futures 8 100 Futures 10 -100
Price
$308 $308
-45 000 50 000 5 000
0 Amount -1 350 000
-421 000 84 000
Plus variation margins Rate Value 1.1300 1.2000
427 000 -94 500 416 500
Chapter 17/page 22
Accounting Table 17.6 (cont.) Venture V-1
Accounting Inv 1 Inv 2 Accrue Accrue Inv 3
Date paid AP4 AP4 Creditor Creditor Debtor
mt 6 000
Price $240 $38 Freight Commission L/C costs $300
-6 000
$ -1 440 000 -228 000 -6 000 -6 000 1 800 000 120 000
Debtors Original margins V-1
$ 6 000 1 800 000
Bank overdraft Borrowed from bank AP4 Margins AP5
1 806 000
$ 2 095 000 6 000
Due to bank
2 101 000
Creditors V-1
12 000
P/L rationalization Future 5 Future 6 Sale 3 Switch
MT 1 000 2 000 -5 000 5 000
eur 270
1.1300
Cost $ 300.00 300.00 305.10 1.00
Val $ B/F 303.00 304.00 302.00 2.00
$ 78 000 3 000 8 000 15 500 5 000
AP4
109 500 Balance sheet Debtors
$ 1 806 000
Open contracts
$ 2 101 000 12 000 109 500
Bank overdraft Creditors & accruals P/L
416 500 2 222 500
2 222 500
Table 17.7 Worked example 6 Accounting period 6 $ -421 000 -427 000 6 000
Activities Clearing house called variation margin less already paid Clearing house called original margin less already paid
No. lots
0 -6 000
6 000
To receive Reference B/F
Lots 0
Tons 0
12 000 Price
$
Futures broker sends debit note for March & May Futures broker sends debit note for commission
-421 000 -5 000
(1 000 lots of futures altogether at $5 PMT)
-426 000
Date B/F
Chapter 17/page 23
Position 0
Table 17.7 (cont.) V-1 Customer pays for documents V-1 Customer sends despatch bill for despatch at discharge Futures jobbing (August No. 5) 10 500 $300 -11 -550 $310 25 1 250 $298 -100 -5 000 $301 -76
-3 800 Closing
Accounting Value of open contracts Lots Ref Purchase 1 Purchase 2 Sale 2 Sale 3 August futures -76 -76
Position
FX
Currency Euro
Tons 6 000 5 000 -6 000 -5 000
eur price
FX rate
270
1.2200
-3 800
-17 322 -150 000 170 500 -372 500 1 505 000
500 -550 1 250 -5 000
1 153 000 C/F
-3 800
August April Euro
$305 $307 1.2200
Cost $ $240 $301 $305 $329
Value $ $307 $307 $307 $307
1 153 000
$310
Futures Cash FX
P/L $ 402 000 30 000 -12 000 112 000 -25 000
-3 800
Amount -1 350 000
-25 000 507 000
Variation margins Rate Value 1.1300 1.2200
0 -121 500 385 500
Venture V-1
Accounting Invoice 1 Invoice 2 Accrue Accrue Invoice 3 D-1 Accrue
Date paid AP4 AP4 Creditor Creditor AP6 Creditor Debtor
mt 6 000
-6 000
Price $240 $38 Freight Commission L/C costs $300 Disport despatch Despatch due from owner
$ -1 440 000 -228 000 -6 000 -6 000 1 800 000 -17 322 17 322 120 000
Debtors Original margins V-1
$ 0 17 322
Bank overdraft Borrowed from bank From customer
AP5
17 322
Margins
AP6 Due to bank
Creditors Futures commissions V-1
$ 2 101 000 -1 800 000 -12 000 289 000 5 000 29 322 34 322
P/L rationalization B/F Futures commission (Make a note to accrue in future) Futures jobbing
AP5
$ 109 500 -5 000 -25 000 79 500
Balance sheet Debtors Open contracts
$ 17 322 385 500 402 822
Chapter 17/page 24
Bank overdraft Creditors & accruals P/L
$ 289 000 34 322 79 500 402 822
Accounting Table 17.8 Worked example 7 Accounting period 7 $ -25 000 0 -25 000
Activities Clearing house called variation margin less already paid Clearing house called original margin less already paid
-7 800 0
78 lots @ $100
-7 800 -32 8000
To pay Reference B/F
Lots -76
Tons -3 800
Price
$ 1 153 000
Sale 3 V-2 Purchase 1
Customer calls forward sugar for M/V ‘Black Sea’ Reference assigned to M/V ‘Black Sea’ Call forward 5 000 mt
V-1
Invoice owners $16 500 disport despatch in accordance with C/P
Futures (August No. 5) 50 17 100 50
2 500 850 5 000 2 500
141
7 050
$305 $300 $303 $301 (Switch)
Date B/F
Position -3 800
-762 500 -255 000 -1 515 000 -752 500
2 500 850 5 000 2 500
-3 285 000
7 050
762 500
-2 500
-1 369 500
750
Futures (October No. 5) -50
-2 500
15
750
$305 (Switch)
Closing
Accounting Value of open contracts Lots Ref Purchase 1 Purchase 2 Sale 2 V-2
P-1 S-3
Tons 1 000 5 000 -6 000 5 000 -5 000
eur price
FX rate
270
$240.00 $342.90
August October April Euro
Cost $ $240 $301 $305
Futures Futures Cash FX
Value $ $303 $303 $303
P/L $ 63 000 10 000 12 000 -1 200 000 1 714 500
Futures August
141
7 050
-2 132 000
$302
-2 900
October
-50
-2 500
762 500
$300
12 500
Position
91
4 550
FX
Currency euro
Amount -1 350 000
$302 $300 $303 1.2700
514 500
9 600 609 100
Variation margins Commission accrual 337 lots @ $5 Rate Value 1.1300 1.2700
25 000 -1 685 -189 000 443 415
Chapter 17/page 25
Sugar Trading Manual Table 17.8 (cont.) Venture V-1
Accounting Invoice 1 Invoice 2 Accrue Accrue Invoice 3 D-1 D-2
Date paid AP4 AP4 Creditor Creditor AP6 Creditor Debtor
mt 6 000
-6 000
Price $240 $38
$ -1 440 000 -228 000 -6 000 -6 000 1 800 000 -17 322 16 500
Freight Commission L/C costs
$300 Disport despatch Despatch due from owner
120 000 Debtors
$
Original margins V-1
7 800 16 500
Bank overdraft Borrowed from bank Margins
24 300
$ AP6 AP7
289 000 32 800
Due to bank
321 800
Creditors Futures commissions V-1
5 000 29 322 34 322
P/L rationalization B/F Futures commission accrual Futures jobbing
$ 79 500 -1 685
AP6 B/F C/F
$6 pmt profit on 50 Aug/Oct switches = $15 000 $19 600 profit on jobbing August from the short side Loss on despatch on V-1
-25 000 9 600
34 600 -822 111 593
Balance sheet Debtors Open contracts
$ 24 300 443 415 467 715
Chapter 17/page 26
Bank overdraft Creditors & accruals P/L
$ 321 800 34 322 111 593 467 715
Accounting Table 17.9 Worked example 8 Accounting period 8 $ 9 600 -25 000 34 600
Activities Clearing house paid variation margin less already paid Clearing house called original margin less already paid
-9 100 -7 800
91 lots @ $100
-1 300
To receive Reference B/F
V-2 P-1 S-3 P-1 S-3
Lots 141 -50
Tons 7 050 Aug -2 500 Oct
33 300 Price
$ -2 132 000 762 500
Position 7 050 -2 500
$300 $295 $299
2 250 000 -221 250 89 700
-7 500 750 -300
2 118 450
-7 050
-712 500
2 500
36 450
0
M/V ‘Black Sea’ completes loading Pay supplier for 5 000 mt Customer pays eur 1 350 000 Agree and pay $1.50 in lieu of despatch Invoice customer $10 500 despatch.
Futures (August No. 5) -150 15 -6
-7 500 750 -300
-141
-7 050
Futures (October No. 5) 50
2 500
0
0
$285
Closing
Accounting Value of open contracts Lots Ref P-1 P-2 S-2
August October April Euro
Tons 1 000 5 000 -6 000
Cost $ $240 $301 $305
Value $ $307 $307 $307
$300 $288
Futures August October
0 0
0 0
-13 550 50 000
Position
0
0
36 450
FX
Date B/F
Currency euro
Amount -1 350 000
Futures Futures Cash FX
$300 $288 $307 1.3500
P/L $ 67 000 30 000 -12 000 -13 550 50 000
Variation margins Commission accrual 337 lots @ $5 Rate Value 1.1300 1.3500
36 450 121 450 9 600 -2 790 -297 000 -187 940
Venture V-1
Accounting Invoice 1 Invoice 2 Accrue Accrue Invoice 3 D-1 D-2
Date paid AP4 AP4 Creditor Creditor AP6 Creditor Debtor
mt 6 000
-6 000
Price $240 $38
Freight Commission L/C costs
$300 Disport despatch Despatch due from owner
Chapter 17/page 27
$ -1 440 000 -228 000 -6 000 -6 000 1 800 000 -17 322 16 500
Sugar Trading Manual Table 17.9 (cont.) V-2
Inv-15 Inv-16 Inv-17 Accrue
AP8 AP8 AP8 Debtor
5 000 -5 000
$240 eur270 Load despatch Load despatch
Debtors Original margins V-1 V-2
$ 9 100 16 500 10 500
Bank overdraft Borrowed from bank Margins Paid on V-2
36 100 Bank V-2
Eur
$ eur $ $
$ 321 800 -33 300 1 207 500
AP7 AP8
Due to bank
1 496 000
Creditors Futures commissions
1 350 000 1 822 500
-1 200 000 1 350 000 -7 500 10 500
5 000
V-1
29 322 34 322
P/L rationalization B/F Futures commission accrual Futures jobbing
$ 111 593 -1 105
AP7 B/F C/F
9 600 36 450
Gain on despatch on V-2
26 850 3 000 140 338
Balance sheet Bank deposit Debtors
$ 1 822 500 36 100
$ 1 496 000 34 322 187 940 140 338
Bank overdraft $ Creditors & accruals Open Contracts P/L
1 858 600
1 858 600
Table 17.10 Worked example 9 Accounting period 9 $ 36 450 9 600 26 850
Activities Clearing house paid variation marginless already paid Clearing house called no original margin already paid
0 -9 100
9 100
To receive Reference B/F
Lots 0 0
Tons 0 Aug 0 Oct
35 950 Price
Old matters: Futures Broker pays all futures profits less commission FX eur 1 350 000 FX contract matures @ 1.13 V-1 Pay commission V-1 Bank charges L/C costs on V-1 $6 000 plus $600 stamp duty V-2 Customer contests despatch, claiming only $9 000 due
Chapter 17/page 28
$ -13 550 50 000
Date B/F
$7 600 $1 525 500 $6 000 $6 600 $9 000
Position 0 0
Accounting Table 17.10 (cont.) Shipment execution: S-2 Customer calls 6 000 mt for M/V ‘Crimson Lake’ V-3 Reference allocated for M/V ‘Crimson Lake’ P-1/P-2 Call forward remaining sugar for M/V ‘Crimson Lake’ European business: EP-1 Bought 5 000 mt French sugar @ eur 64/100 kg ex-factor ES-1 Sold 4 000 mt sugar @ eur 67/100 kg delivered Germany
Euro MT 5 000 -4 000 1 000
Refining contract: P-10 Buy 28 000 mt raw sugar cif Strackenz, Ruritania Price to be fixed by AA 551 March Nyk + $31 F-27 Post AA 551 March at 10.00 cents/lb = $220.46 + $31 = $251.46 S-22 Sell raw sugar to Factory ‘R Hentzau AG’ without payment P-11 Buy white sugar ex-factory ‘R Hentzau’ without payment S-23 Sell 13 000 mt white sugar at $420 pmt ex-factory F-28/F-30 Hedge transaction by buying New York futures NB Ruritania charges 25% duty on world sugar value NB Ruritania charges no income taxes NB Ruritania charges 1% sales tax NB Cost of discharge/transport from Strackenz to factory Futures (March New York) F-27 -551 F-28 239 F-29 30 F-30 26 -256
-27 991 AA 12 141 Hedge 1 524 Hedge 1 321 Hedge -13 005 Closing
Accounting Value of open contracts European domestic book: Ref EP-1 ES-1
Price c/lb 10.00 9.95 9.90 9.98
Tons 5 000 -4 000
White sugar Tax
28 000 -27 991 27 991 -28 000 23 000 -13 000
$20
6 171 200 -2 663 416 -332 640 -290 618
-27 991 12 141 1 524 1 321
2 884 526
-3 005
Hentzau 1.00%
Futures
New York March
FX
Eur/$
$415.00 4.15
99
$410.85 9.97 1.33
Value E 64.00
Price E 64.00 67.00
1 000
Cash Pricing Pricing Cash Cash Cash
P/L eur 0
64.00 Trucking
2.00
66.00
40 000 40 000
Euro World price book: Lots Ref P-10 Duty Logistics P-11 S-23
Refined Product
Tons 28 000 25.00% -28 000 23 000 -13 000
Sales tax V-3 P-1 P-2 S-2
M/V ‘Crimson Lake’ 1 000 5 000 -6 000
$420.00 4.20
40 000
at euro/$
1.33
$/mt 251.46 62.87 20.00
$/mt
Value $
415.80
P/L $ $53 200
334.33 -9 361 240 410.85
9 449 550
410.85
64 350
152 660
Price $ Cost $ $240 -240 000 $301 -1 505 000 $305 1 830 000
Chapter 17/page 29
85 000
Sugar Trading Manual Table 17.10 (cont.) Futures Mar Nyk
-256
-13 005
Position
-256
-3 005
Value c/lb 9.97
Val $ 2 858 598
Cost $ 2 884 526
25 928 316 788
Variation margins
0
Commission accrual
846 lots @ $5
-4 230 312 558
Venture V-1
V-2
Accounting Inv-1 Inv-2 Inv-99 Inv-101 Inv-103 Inv-3 D-1 D-2
Date paid AP4 AP4 AP9 AP9 AP9 AP6 Creditor Debtor
Inv-15 Inv-16 Inv-17 Accrue
AP8 AP8 AP8 Debtor
Debtors Original margins V-1 V-2
mt 6 000
-6 000
Price $240 $38
$ -1 440 000 -228 000 -6 000 -6 000 -600 1 800 000 -17 322 16 500
Freight Commission L/C costs Stamp duty
$300 Disport despatch Despatch due from owner
5 000 -5 000
$240 eur270
$ eur $ $
Load despatch Load despatch
$ 0 16 500 9 000
Bank overdraft Borrowed from bank AP8 Margins AP8 V-1 costs AP9 Futures commissions Euro contract matures
-1 200 000 1 350 000 -7 500 9 000 $ 1 496 000 -35 950 12 600 7 600 -1 525 500 -45 250
25 500 Creditors V-1
17 322 17 322
P/L rationalization B/F Trading in European internal market Futures commission accrual Futures commission reduction on August & October No. 5
Refining operation V-1 V-2
Futures Physical
$ 140 338 53 200 -4 230
AP8
Billed Accrued Agreed 25 928 152 660
5 000 2 790 -7 600
190 178 588 -600 -1 500
Stamp duty Loss on despatch
365 986 Balance sheet Bank Debtors Open contracts
$ 45 250 25 500 312 558 383 308
Chapter 17/page 30
$ Creditors & accruals P/L
17 322 365 986 383 308
Accounting Table 17.11 Worked example 10 Accounting period 10 $ 25 928 0 25 928
Activities Clearing house paid variation margin less already paid -25 600 0
Clearing house called original marg 256 lots @ $100/lot already paid
-25 600
To receive Reference B/F
Lots -256
328 $ 2 884 526
Tons -13 005 March
B/F
10 000 whites
Position -13 005 10 000 -3 005
Old matters: V-1 Owner offers to pay V-2 Customer settles and pays despatch Shipment execution: V-3/P-1 Pay for 1 000 mt sugar V-3/P-2 Pay for 5 000 mt sugar European business:
$16 000 $9 750 -$240 000 -$1 505 000 B/F
EL-1 FX-99 ES-5
Took 1 000 mt export licence at euro 45/100 kg Bought euro 190 000 @ eur/$1.3200 (eur 64-45) ¥ 10 ¥ 1 000 mt Sold 20 March No. 5 at $280
euro mt 1 000 -1 000
1 000
$280 000
-1 000
0 Refining business: V-4 Reference allocated to M/V ‘Purple Cloud’ (raws to Ruritania) V-4/P-10 Pay for 28 000 mt raw sugar @ $251.46 = $7 040 880 V-4 Ruritanian customs reduce duty owing to lower market level V-4 Pay import duty $57.50 pmt = $1 610 000 V-4 Pay logistics costs $20 pmt = 560 000 S-24 Sell 3 000 mt white sugar at $425 pmt ex-factory Cash F-40 Hedge transaction by buying New York furtures B/F $2 884 526 Price c/lb Futures (March New York) F-40 60 3 048 Hedge 9.90 -665 280 F-41 58 2 946 Cover short 9.91 -643 754 -138
5 994
-3 000
3 048 2 946
$1 575 492 -10
Closing
White sugar Tax
Hentzau 1.00%
Futures
Nyk
March-99
FX
eur/$
Futures
No. 5
White sugar
$420.00 4.20
$415.80 9.90 1.35
March-99 Cash premium fob eu
282.00 3.00 $285.00
Chapter 17/page 31
Sugar Trading Manual Table 17.11 (cont.) Accounting Value of open contracts European domestic book: Ref EP-1 ES-1
Tons 5 000 -4 000
Price E 64.00 67.00
1 000
Value E 64.00
P/L eur 0
64.00 Trucking
2.00
66.00
40 000 40 000
Euro World price book: Tons Licences El-1 1 000 Est cost
40 000
Subsidy 45 64
19
Ref P-10
Lots
$/mt 251.46 57.50 20.00
Duty Logistics Refined
-28 000
P-11 S-23
Product
23 000 -13 000
-7 010
Position
-138
-10
-20
-1 000
March No. 5 Position
New York No. 5
7 000
Licences
1 000
256.50
$285.00
$28 500
$5 700 Value $ -9 210 880
328.96
9 563 400
415.80
415.80
420.75
415.80
14 850
Value c/lb 9.90
Val $ 1 530 144
Cost $ 1 575 492
45 348
Market val $ 282
Val $ 282 000
$280 000
-2 000
-7 010 -1 000
Whites
1.3500 $
425.00 4.25
Sales tax
-138
Value $/mt
415.80
-3 000
Futures Mar Nyk
Equiv $
420.00 4.20
Sales tax S-24
eur/$
Value 1.3500
Tons 28 000
S-22
1.35
-$25 000
Fobbing cost $25/mt Amount Cost 190 000 1.3200
FX eur
P/L $ $54 000
at eur/$
Variation margins Commission accrual
367 370
43 348 473 918 -25 928 -4 920
984 lots @ $5
443 070
-10 mt Venture V-1
V-2
Accounting Inv-1 Inv-2 Inv-99 Inv-101 Inv-103 Inv-3 D-1 D-2 Inv-15 Inv-16 Inv-17 Inv-99
Date paid AP4 AP4 AP9 AP9 AP9 AP6 Creditor Debtor AP8 AP8 AP8 AP10
Chapter 17/page 32
mt 6 000
-6 000
5 000 -5 000
Price $240 $38 Freight Commission L/C costs Stamp duty $300 Disport despatch Agreed despatch $240 eur270
$ -1 440 000 -228 000 -6 000 -6 000 -600 1 800 000 -17 322 16 000 $ eur
Load despatch $ Load despatch $
-1 200 000 1 350 000 -7 500 9 750
Accounting Table 17.11 (cont.) V-3
V-4
Inv-101 Inv-105
AP10 AP10
1 000 5 000
240.00 301.00
$ $
-240 000 -1 505 000
Inv-110
Debtor
-6 000
305.00
$
-1 745 000 1 830 000
Inv-111 Inv-113 Inv-118
AP10 AP10 AP10
28 000
$ $ $
-7 040 880 -1 610 000 -560 000
$
-9 210 880
Sugar 57.50 Duty 20.00 Logistics Shrink
-5 000 Stock Debtors Original margins V-1 V-3
23 000 $ 25 600 16 000 1 830 000
Bank overdraft Balance AP9 Margins AP10 V-2 AP10 V-3 AP10 V-4 AP10
$ -45 250 -328 -9 750 1 745 000 9 210 880
1 871 600
10 900 552 Creditors V-1
17 322 17 322
P/L rationalization B/F AP9 Change in $ value of eur P/L – domestic market AP9 AP10 Trading in European domestic market – 1 000 mt for export
$ 365 986 53 200 54 000 28 500 -25 000
FX Futures
800
3 500 5 700 -2 000
7 200 -690 -500
Futures commission accrual V-1 Loss on despatch V-2 V-4
AP9 price Gain on despatch Gain on duty $62.87 Gain on sale $420.75 Gain on stock unsold $415.80 Gain on opening short position: Lots Covered 60 Covered 58 Uncovered 138
AP10 price
mt
$57.50 $410.85 $410.85
28 000 3 000 7 000
150 360 29 700 34 650
214 710
AP9 price AP10 price 9.97 9.90 9.97 9.91 9.97 9.90
$ 4 704 3 898 10 819
19 421
750
256 -1
Roundings (New York calculations are to nearest 10 cents)
607 676 Balance sheet Debtors Stock V-4 Open contracts
$ 1 871 600 9 210 880 443 070 11 525 550
Bank Creditors & accruals P/L
$ 10 900 552 17 322 607 676 11 525 550
Chapter 17/page 33
18 Finance and risk management Roger Bradshaw Rabobank, London
Primary production financing Farms Plantations The future
Financing sugar factories and mills Currency matching Short-term finance Long-term finance
International sugar trade Trade houses Payment instruments Tolling Counter-trade Bid bonds and performance bonds Fraud Changes to the capital adequacy requirements of banks – Basel II Basic approach IRB Foundation approach IRB Advanced approach
Managing risk
Sugar production and trading involves three main areas of financing: primary or crop finance; financing of production such as factories, and the capital investment required; and the trading of sugars internationally. The profiles of finance differ in each case, depending on whether the purpose is for the short term, is trade driven, for the long term or for equity. This chapter sets out some of the typical structures relevant to the sugar industry that are in use, the financial risks inherent in sugar, and methods of mitigating and controlling those risks from the standpoint of both companies and financial institutions.
Primary production financing The key driver in sugar production is the availability of raw material. Provided that the price of cane or beet is acceptable to growers and producers, and the conditions are reasonably conducive, farmers will grow sugar as a cash crop. Many sugar operations fail because farmers find the price for cane or beet unacceptable and because insufficient attention is paid to agricultural development. In Indonesia, for example, many planned projects have failed to get off the ground. Aside from the issue of raising capital, most planned projects rely on plantations for their source of raw material. This is an expensive and capital-intensive exercise that requires a significant period to clear land, prepare it and plant to cane. As a viable alternative, encouraging outgrowers to grow cane can often be a more practical solution. Financing any primary industry involves risks that are often outside the control of banks. These include weather, disease, market-related risks and the possibility that, at the end of the day, the mill will not be able to pay for the sugar. This has happened in a number of countries, most notably India, and has resulted in cane being diverted to noncentrifugal sugar production such as gur. In the case of sugar cane or sugar beet, at least some comfort can be derived by the banks owing to the relative hardiness of the crop and resilience to adverse conditions. The first question to ask is, what are the needs in crop financing? The basic requisites normally consist of funding for land preparation, seed cane or beet seed, fertilizer, the cost of irrigation water and labour during the growing season and harvesting and transportation costs. In general, these can amount to between 20 and 30% of the final price for the crop, although if the crop is predominantly for export or world market, then that amount as a percentage of the final price can be a lot higher. In addition, many farmers or farmers’ co-operatives will have invested in mechanization and other equipment to farm cane or beet. This is also a component of rural finance and total exposure to farmers, but typically the financing would consist of an equipment Chapter 18/page 1
Sugar Trading Manual leasing structure rather than loans from a bank. Equipment leases are also for longer tenures than crop financing and reflect the life of the equipment and a terminal value for it. For primary production, banks prefer to lend for no longer than 12 months, which is well suited to sugar production, more so than, say, fruit or coffee cultivation, which requires long-term investment and financing before the trees mature and produce cash crops. In order to reference the target price for sugar cane or beet, many countries set a provisional price for cane or beet at the start of the season, which gives the farmers a means of determining what the likely revenue will be. Cane sugar production in most countries adopts a revenue-sharing system whereby around 60% of the benefits accruing from the sale of the sugar will be distributed to farmers and the balance goes to the mill. When it comes to lending, banks are essentially looking to mitigate the risk as far as possible, a theme that you will find recurs in this chapter. What basically are the risks involved in primary lending and how does a bank mitigate them?
Farms The first risk is the scale of the farming. In order to be efficient, a bank will have to be able to deal with farmers or farmers’ co-operatives with critical mass controlling large land areas planted to sugar cane or sugar beet. In places such as Australia, it is relatively easy for a local branch of a rural credit bank to monitor the few hundred cane farmers or so in their area with large tracts of land planted to cane. In Europe and the United States, the same holds true. In developing countries, the problem of lending becomes more difficult. Many of the farmers have smallholdings of less than three hectares and often smaller than one hectare. This makes farming more akin to the strip farming that was prevalent prior to the agricultural revolution in England in the nineteenth century and, consequently, extremely difficult for a bank to control or service. In this regard the role that developmental and multilateral agencies can play is potentially very significant. Sugar in many emerging market economies represents an opportunity for poor subsistence farmers to produce a cash crop. Very often funds are available for rural credit, and the trick is finding a vehicle through which they can be disbursed and a take-out, such as a sugar mill, that can be identified that will repay the farmers. Not only can this money be used to make advances for crop inputs, but it can also be applied to research and development funding and extension services to farmers. In some cases the funds can be used to operate the hospitals, clinics and schools on the estates, which serve not only the employees, but Chapter 18/page 2
Finance and risk management also, very often, the whole local community. By doing this, the socioeconomic responsibilities are handed over to professional independent groups that do not have to rely on the ups and downs of the sugar market to ensure that they operate effectively. While economic development is at its most powerful when it provides a means whereby people can escape from subsistence living, developmental assistance is a necessary catalyst in the process of change. The areas outlined above are tangible ones where development aid can interface with commercial investments. Opportunities to use developmental aid are very often overlooked, and greater application of such funding needs to be made in the future. One method by which this funding can also reach small independent farmers has been through the resurgence of interest in micro credit. In this system, smallholders are mobilized into joint liability savings and loans groups or co-operatives. They will then deposit as a group a token amount with the bank, in return for receiving a loan to purchase seed cane or fertilizer. Being in a joint liability group, the members guarantee each other so as to honour the loan. If one farmer fails to repay, the others are obliged to cover his debts. From the bank’s point of view, instead of dealing with dozens or even hundreds of small farmers or growers, it can now deal with larger groups and therefore can deal more efficiently with making and recovering any loan. In most cases, the recovery rate, i.e. the amount of loans repaid to banks through such micro credit schemes, is in the order of 99%. This is a much higher rate than on commercial loans to companies. One organization that is seen as a benchmark for rural credit and extension services is the South African Sugar Association, which has a highly developed scheme for financing farmers. Typical to all borrowers is the need to pledge some form of security to banks. This can be in the form of a mortgage over the land or a chattel mortgage over equipment. The bank can lend against this security based on the needs for the farmer to finance his crop and on the ability that he will be able to sell his crop to the mill or factory. In most countries, the sugar factories will issue cane or beet purchase contracts to farmers at the beginning of the season; these will agree to purchase the cane or beet and process it with the revenues in the contract being paid to the farmers. Provided that the factory is of good financial standing, banks can and often do lend to farmers against these contracts, without further collateral from the farmers themselves. Another means of financing farmers is for the mill to lend directly to the farmer. This again is done largely in emerging markets where growers tend to have only smallholdings and there is not a banking system that is geared to providing rural credit. This is dealt with later in the chapter under the section on Financing sugar factories and mills. Chapter 18/page 3
Sugar Trading Manual Weather and disease-related issues are significant risk factors. A bank will therefore look at the measures farmers take in ensuring the prevention of disease and weather-related damage if at all possible. Crop insurance when and where available does provide some comfort, and banks would normally investigate, particularly in high-risk areas, whether crop insurance is feasible. However, long-term investments for coffee or fruit trees are more likely to be insured because of the higher investment and time taken to mature. Generally the amount that a bank prefers to lend is equal to approximately 20% of the final estimated income for the crop. This is in order to ensure coverage from the proceeds of the crop. Normally the mill will credit the bank the proceeds. In countries where sugar is well developed, such as Australia, cane farmers are sufficiently cash rich not to require loans. However, if new farmers were to require financing, banks could typically lend up to 50% of the estimated sugar pool prices against mill contracts. Market price is a risk that affects mainly cane growers in countries that are heavily dependent on export to the world market of sugar, such as Thailand or Brazil. The ultimate price paid to the farmers depends on the ability of the miller or refiner to have sold on that sugar into the world market. A risk in financing to smallholder farmers is also the question of honouring cane contracts with the factories. Thailand over the years has suffered particularly from the problem of cane being sold to other factories by farmers at higher prices despite cane contracts having been established between the farmer and the original mill. This is a systemic problem resulting from the high capacity of Thai mills versus insufficient cane development to supply them. At harvest time, some mills pay significantly higher prices for cane in order to gain economies. Measures are taken in most countries to ensure cane zoning. However, in many countries, zoning does not exist and this makes lending by banks against cane contracts, whether direct to farmers or through the mill, more problematic. The solution here has to be resolved by millers and growers, working together in both good and bad times. The issue of diversion is specific to cane; beets have no alternative use apart from as animal feed, and the contractual arrangements between beet farmers and factories are, in any event, of a good and co-operative nature. Also beet growers tend to work on a larger scale than individual cane growers. The relationship between the beet grower and the factory is much more of a partnership. There is the further benefit to the farming community of beet pellets being produced by the factory, and this somehow seems to create a closer mutual relationship than often occurs in cane farming. If a bank is providing credit and has sufficient security over land or other chattels, it is usual for the bank to be paid back directly by the Chapter 18/page 4
Finance and risk management grower. In such a case, the loser is the mill, which may not be able to access its raw material supply. The mill could also be out of pocket for the prefinancing of the crop and could, finally, get hit by having to join in the scramble to purchase farmers’ cane. Banks can sometimes fall into the trap of overlooking the alternatives to sugar farming. Generally speaking, sugar is a good cash crop. However, there is sometimes a tendency to overstate the returns to farmers – particularly in growing sugar cane versus corn, rice or peanuts. Even if the income for farmers looks good, it should be remembered that sugar cane is an 11–14-month crop and there are many other crops that can be produced twice a year. Beet is not affected in this way because it has a shorter growing cycle. It is, therefore, important to look closely at the comparative revenues. Financing agriculture requires not only a risk analysis based on lending criteria, but also a high degree of understanding of the socio-economic composition of the farming or rural community. Banks are often the first to spot the changes that will impact a few years down the track. Telltale signs include less fertilizer and seed cane being purchased or interest being shown in other crops, even if only on an experimental basis in the first instance. Rural credit is an activity only for domestic banks, preferably with a strong commitment to the agriculture sector. Agriculture is a vital part of a country’s economy – whether for the purposes of self-sufficiency or for export earnings – and sugar as a crop in most countries is politically highly sensitive. A measure to help determine the risk involved in financing either investment or trading is the government’s commitment to the sugar industry, also to determine whether the hosting environment appears conducive to establishing investment or trading opportunities. Sadly, many banks do not take the care to study the risks and issues in financing primary agriculture and are therefore prone to take drastic steps when an external event takes place. Banks, therefore, usually, prefer to direct their finance through the factory rather than directly to the primary sector. While this does have certain benefits in that one is dealing with a single entity, which then acts as banker to hundreds of others, the strategy can go wrong. We will discuss this in the section on factories. Given the important role that Brazil plays in the world trade of sugar, it is worth noting an instrument that is widely used for financing coffee and soya beans, but until now has not really been applied to sugar. This is the ‘Cedula de Produto Rural’ (CPR), which translates approximately as an identity card for rural produce, and came into being around 1994, mainly for domestic products, but is also now applied to exports. Under the scheme, a producer who intends to grow sugar issues a Chapter 18/page 5
Sugar Trading Manual CPR. He then goes to the local offices of the Brazilian bank to register this. The information then becomes part of the public domain, thus giving people the ability to check on the amounts of crop pledged or mortgaged. The producer is then in a position to take the CPR to his local bank to avalize the CPR in order to raise prefinance or to sell the sugar. From this point, the bank is obligated in the event of non-performance to deliver goods of equivalent quality, and in effect works in a similar way to a bill of exchange. As it has transpired, traders have found the system too complicated. As a result, Banco do Brasil has agreed to issue to other banks or traders their own performance guarantee, and to in turn keep the CPR. The advantages to this are that it maintains prefinance borrowings in local currency, and allows small to medium-sized mills greater access to prefinance. On the reverse side, the need for traders to scrutinize each mill with which they wish to enter into contractual agreements is reduced, while contractual performance can be assured through the banking system. Risk on the individual producer is also greatly mitigated given the fact that some 70% of cane in the Centre-South is owned or leased by the mill owners.
Plantations The previous discussion has focused on financing as it relates to outgrowers and large-scale farmers, but there is also the question of plantations. Plantations are typically considered part and parcel of the sugar mill or vice versa, but this is not always the case. For historic reasons plantations have needed to be developed in order to achieve a critical mass of planted sugar cane under the direct control of the mill. In addition to the large number of employees needed to cultivate the cane, many large plantations provide socio-economic services such as schools, hospitals and other community services. The question is, are plantations still relevant or are they a relic of the nineteenth century? The answer must be that plantations – or estates – still have a role to play, but to a more limited extent. That role is to ensure that you have a stable reserve or top-up of cane to achieve critical mass for the factory. The Philippines and Vietnam are two countries that could benefit from the development of estates for sugar cane farming. However, on the whole, if you have the ‘buy in’ of local farmers to grow cane, then the need to produce it oneself becomes less essential. In fact, in most cases where outgrower and plantations are compared, outgrower cane often proves to be of higher yield, partly because of the tender loving care lavished on it by the farmer. Ask yourself the question, if you were living in rented accommodation or owned Chapter 18/page 6
Finance and risk management accommodation, on which are you most likely to carry out home improvements? It might also prove to be sound financial sense for sugar companies with estates to do one of two things – either to privatize the estates, as is the trend in South Africa, or to separate the estate from the mill, and transform the estate into a separate land company that sells cane to the mill rather than a fully integrated company. This would have the effect of shortening balance sheets and reflecting more accurately the value of the cane cultivation versus milling process to the company.
The future As economies develop and economies industrialize, the desire to work in fields diminishes accordingly. This trend has caused the dismemberment of a number of sugar producers in past years from the Caribbean and Hawaii to Taiwan. There is a story of a sugar company that bought an estate in Puerto Rico in the early 1960s. When the person went to conduct the requisite due diligence he came back with a negative report, which the company chose to ignore. Unfortunately for the company he was proved right. What he had seen on his way through the fields were dozens of Chevrolets and other assorted cars. These belonged to the canecutting families. He assumed rightly that people who drove cars would not be enticed to remain employed as cane cutters in the future. In turn the mill shut down. Today, we also see an increase in the shift to mechanization of harvesting, albeit slowed down by the lower world market prices. Mechanical harvesting will continue to make inroads. Greater development of agricultural leasing in sugar producing countries will probably be a major opportunity to finance in the coming years. These then are some of the considerations to be taken into account for the financing of raw material supply. Obviously, most of this is more relevant to cane than beet. The latter relies less on the world price and therefore has the advantage of a more stable price for farmers to identify in their income streams and for banks to feel more comfortable with. Where we now follow in the process flow is with the factories themselves.
Financing sugar factories and mills Commodity processing is a difficult area for many banks to finance and can be cyclical. Faced with this, banks have tended to turn their backs on primary and agriculture industry finance in favour of more industrial, property and high technology financing opportunities. They feel generally more comfortable with potentially stable growth prospects in Chapter 18/page 7
Sugar Trading Manual industry rather than the cyclical commodity world, which is unstable. Here it has to be remembered that banks are risk averse. It could be that banks are the wrong partners to have in something as unpredictable as commodities and, maybe in the future, insurance companies could play a greater role in providing finance to the industry given their appetite for risk. Factories are financed normally through a mixture of different types of capital. These include: equity, mezzanine finance such as subordinated debt, long-term debt and short-term working capital and leasing of plant and equipment. The general rule of thumb for investment in a new cane factory is to assume that for each 1000 metric tonne per day of designed crushing capacity installed, the cost or investment will equate to between US$12 and US$15 million. These costs are somewhat lower in the Indian subcontinent, and higher in more developed countries. From a banking perspective, the solvency or net worth of any industrial processor should be reasonably high. There are risks involved in what is essentially commodity processing, and banks take comfort from well-capitalized businesses, which are then less susceptible to irregular cashflow as a result of erratic world markets and commodity cycles. Generally, the starting point for debt to equity would be 60 : 40 as a minimum. That is to say, 40% equity and 60% debt. More commonly, equity and debt rank at least at 50 : 50. The recent Asian turmoil has witnessed many companies coming close to the edge of bankruptcy owing to high gearing in their business as well as using funds for property or real estate development that have, of course, fared badly. Banks have little chance of recovering their money in the immediate future but realize that to recover their loans in full is not a realistic option. The moral of the story therefore applies to sugar production as well as to other industries, namely not to lend only on the basis of company name and reputation. The banks in Asia did in a profligate fashion. It is an understatement to say that nobody could have foreseen the depth and impact of the financial crisis, but a large part of the security that banks relied on is hopelessly unenforceable and, as we discuss later, the valuable security is the inventory and other current assets. In order to support a factory or refinery, the debt provided should be of two clear and very distinct types: long-term debt, which mirrors the capital investment in the plant and equipment, and short-term debt, which mirrors the asset conversion cycle of the factory. Many companies are suffering or have suffered during financial crises from mismatches in their financing, generally as a result of borrowing too much money short-term against long-term liabilities. In an inflationary scenario, such as often happens following a currency devaluation, companies with short-term debt struggle to service their loans especially when set against long-term investment. Chapter 18/page 8
Finance and risk management Currency matching A risk or issue surrounding financing in recent years has been the mismatching of currencies. Ideally, the currency borrowed should be the one that is required for the day-to-day activities, or alternatively the currency in which you will be paid for your sugar. Part of the cause of mismatches becoming a more serious risk has been that, as economies boomed, governments allowed more and more foreign banks to operate in the local markets and provide foreign currency loans, often with better service and better rates than their local competitors. As displayed in Thailand and Brazil, many companies borrowed in US dollars to finance their operations. Many banks saw no wrong in this as they knew that there was an export revenue stream from these mills that repaid in US dollars. Unfortunately, most of the banks failed to check that these sales of sugar and molasses married up to match the amounts that were being lent. In truth, you cannot necessarily apply such hard currency loans against hard currency exports and, if not approximately precisely matched, there can be a serious risk arising. For instance, many offshore banks have, in the past, lent a factory preexport finance of 70% or 80% of the value of the sugar in the hard currency. What are the hard currency requirements for the company? Not for raw materials, which are sourced in local currencies, with the exception of Chile where beet prices are settled in US dollars. Not the labour costs of the workers either, nor the transport of cane to the factory or sugar to the port. So the bank runs a risk that the factory does not take out adequate foreign exchange cover on the transaction and, in the event of a devaluation, is unable to repay the loan. What is the main incentive for offshore loans? Generally a play on high domestic versus often cheaper offshore interest rates. There is no real way of preventing companies from looking at such attractive financing. In the future, the real answer is to allow banks to participate in locally funded financing, which incidentally was a cornerstone of the IMF’s policy in dealing with the Asian crisis.
Short-term finance What are the key drivers or needs for the use of short-term finance by sugar companies? Generally speaking, sugar has a two-year asset conversion cycle. This is how the two-year cycle breaks down: At the beginning of year one in the cycle, there is a need to finance beet seed or seed cane purchases by the farmer. Farming is not unlike other businesses, so the farmer is obviously keen to derive the maximum benefit and therefore looks for an incentive to grow the crop in the form of Chapter 18/page 9
Sugar Trading Manual loans or subsidies from the factory, assuming they are not available from a local rural banking network. Therefore the factory will have to provide some 20–30% of the final estimated price to the farmer as crop financing. In the case of beet, the cycle is somewhat shorter for the growing period, as you are looking at 12 to 14 months for the planting season and, say, 11 months for ratoons. Let us say you are financing this part for 11 to 14 months, then further financing is required for the harvest and transport to the factory plus, in most cases, a further 50% of the cane price. Best and standard practice in the industry generally allows for payment of the balance of the crop at the end of the season once the final commercial cane content (ccs), or polarization in cane or whatever measure is used to establish a final price. You now have sugar stocks building up in your warehouse. In the meantime you have to finance the factory costs for chemicals, coal in the case of beet factories, bags and workers. Generally, working capital demand peaks towards the end of the season or campaign when factory stocks are at their highest and then decreases as the sugar is disposed of over the year. Therefore you have sugar as following a two-year cycle from start to finish. How does a factory provide the security to obtain financing or credit for its operations, i.e. short-term credit? This would be in the form of short-term money market lines for up to one-year maturity. A large-scale and profitable factory will normally be able to raise funds based on its own creditworthiness, by issuing a corporate guarantee to the bank that appears as a contingent liability on the company’s balance sheet. That is to say, it is an event or liability that may or may not occur in the future. Typically, together with the corporate guarantee, the loan agreement will contain certain relevant covenants and conditions. These will include requirements such as an undertaking by the shareholders not to dispose of their shares in the company without the bank’s approval, otherwise known as a negative pledge. There could also be a condition governing the current ratio, or the current assets divided by the current liabilities. Normally this should be greater than one, and serves for the bank to feel that the company can liquidate its short-term assets with a greater value than the companies’ liabilities. Given the liquid nature of sugar and molasses, these are normally achievable for any good factory unless it has mismatched its long-term and short-term debt. An alternative to raising funds through issuing guarantees is for companies to pledge their assets to the banks. These assets could include taking a charge over sugar and molasses stocks, but equally well payments from purchases of the sugar by reputable buyers such as major soft drink bottlers or wholesale stores. The key ability to provide this type of finance requires the bank involved to have the ability to verify the value of the assets on a regular Chapter 18/page 10
Finance and risk management basis and to have a collateral inspection team, to appraise the value of sugar stocks and marking them to market on a regular basis, which did not appear to have been the case illustrated below. This example of the need to maintain regular monitoring of commodities and marking to market sugar stocks came to light in Thailand in 1999. In this instance, most of the Thai sugar mills received preexport finance from banks in the form of packing credit. In this case, a letter of credit or other instrument is opened in favour of the exporter with a provisional price for the sugar. The prices used in this case for the advance of funds proved to be higher than the export price when shipment time came around. The result was that the mills were ‘reluctant’ to ship given that they would then have had to meet the significant price difference in the amount that they had borrowed and the value of the sugar to be exported. There was no intention to defraud, but simply that the banks involved failed to be alert to a falling market and seek guidance on price movements, while the mills were not going to point out the drop in values given their poor cashflow position. Against long-term financing needs, the factory could mortgage the land, buildings and equipment to the banks. In this situation the bank’s collateral inspection team could go in and value the assets being pledged, or alternatively this could be done by outside experts. This having been said, while valuations of equipment can be made, there is a correlation in the value of sugar market prices and the sale value of sugar mills, which plays a significant element in valuing sugar mills as opposed to trying to value the assets themselves on the basis of purchase price less depreciation. In the low markets of 1999, it was hard to imagine that a sugar factory, no matter how modern, would fetch more than 25% of its replacement cost. In a bull market, however, values tend to move in the other direction and are often out of proportion to the fair value. Many of the larger and more sophisticated sugar companies are turning to more structured products and derivatives. Given that sugar, particularly in developed markets, normally benefits from protected prices, they have much stronger solvency, owing to retained cash earnings, and better liquidity than sugar producers in developing countries. They are also often large public companies with full treasury and corporate finance capabilities. There is a wide variety of products and solutions for corporations to use. For short-term funding, these include commercial paper in the US market, borrowings from banks or syndicated working capital loans backed by corporate guarantees and, more recently, ‘securitization’. This is an attractive concept to sugar producers and buyers of securitized deals given the fungible and homogeneous nature of sugar and, in protected markets, stable cash flow. It also allows the producer to shorten his balance sheet, which translates into better returns for the shareholders. Chapter 18/page 11
Sugar Trading Manual Long-term finance In terms of long-term financing, the choices tend to be fairly similar. Long-term financing could consist of a bond issue floating rate or medium-term notes or it could consist of a three- or five-year syndicated loan depending on the purpose of the funds and the standing or creditworthiness of the company. As in other industries, sugar companies, particularly publicly listed ones, are increasingly aware of the need to return shareholder value. This is a term that has gained greater emphasis over the last few years. Basically what is meant is that the shareholders not only get a positive return on their investment but also that the company continues to build improvement into the value of the company. In this respect, companies look to shorten the balance sheet wherever possible. One way of doing this is to include equipment leasing, or sale and leaseback of offices or other fixed assets. Another solution, especially with start-up situations, is share warehousing or taking the shares off the balance sheet. This is particularly attractive vehicle for companies with operations in which they have invested, and realize that, in the early years, there will be losses that affect the balance sheet. Share warehousing cushions the corporate company from this effect for a few years until the new operation is profitable. Another form of off-balance sheet financing for long-term financing is project finance. Project finance is suited to investments where the partners have unequal financial power, but provide different elements of the project, be it agriculture or technical design or operation. There can also be advantages from a taxation point of view, as the assets could remain unconsolidated in the balance sheet of the parent company. Finally, there is the advantage that the investment will be off the balance sheet. Typically the financiers require support from the shareholders or sponsors during the building and initial operation of the factory. These supports can include guarantees to complete the project and to provide funds covering cost overruns. The principal requirement therefore is to see strong sponsors with deep pockets who are prepared to stand by the project in the difficult early years. These guarantees would normally lapse once the factory passes a financial completion test, which would be based on parameters such as tonnes of cane crushed or beet sliced in a given period of time, as well as a financially strong position, such as the debt service coverage ratio being above a certain level for a given period of time, and/or a current ratio as mentioned earlier that is above 1 or even 1.5. Providers of debt in project finance effectively take many of the risks of equity participants, in that they rely on the direct cashflow coming from the project for repayment, and not on guarantees from shareholders. The cost of such financing is correspondingly higher than more traditional forms of Chapter 18/page 12
Finance and risk management financing, which reflects the higher risks. Some financial institutions will take equity kickers or other forms of mezzanine finance to capitalize on the upside of the investment. The demand for shareholder value has created a whole industry to help companies take almost everything off the balance sheet. These products continue to develop. Financial institutions, for instance, recognize the importance of this, and have developed a number of derivative products tailored for the sugar sector. The use of options and other risk mitigants is also growing in importance, but the need for options to be used only by sophisticated companies with a knowledge and understanding of options pricing and risk remains paramount. With regard to the risk of financing of sugar operations, one factor that has become more apparent is the divide between banks providing long-term and short-term debt. As discussed earlier, short-term financing is an essential part of the financing required. Sugar, as discussed, is also a very liquid commodity. If a company encounters financial difficulties, there is little that banks can do except to maintain them as going concerns, unless there are ready buyers for the assets, and invariably the level of debt accumulated means that the chances of a bank or banks being able to liquidate the company without taking a ‘haircut’ are extremely slim. The inequality that can arise here is that a bank that exclusively provides long-term financing is disadvantaged against a bank that provides working capital or a combination of working capital and long-term funding. The bank with short-term working capital is in a position to try to recover some of its funding because it can structure the finance so that it has a take-out against the sale of sugar. The bank with only long-term debt can only hope that some form of restructuring will be possible, as in the meantime it will be unlikely to have its debt serviced in a timely or proper manner. While not strictly relevant to the issue of financing, the overcapacity in sugar production should not be overlooked in the future. In many producing countries, the economies of scale do not make sugar production viable. There will therefore in the years to come be a need for consolidation. In this regard, banks will have a role to play in assisting the process through advisory services and benchmarking to ensure that companies can achieve the same results with one or two mills as they previously did with three or four. The increasing trend for mills to sell directly to traders and end destinations ensures that companies can be financially and operationally viable.
International sugar trade This leaves us to address the issues surrounding the international sugar trade. The trade has evolved over the years but is still Chapter 18/page 13
Sugar Trading Manual characterized by a need to maintain a high standard of communication, research and long-term relationships. In addition and increasingly over the last 15 years, there has also been a much deeper requirement to finance not only the trading operations, but also, to some considerable extent, those of its suppliers and end-users as well. In effect, the physical sugar trade consists of three distinct segments: the pre-shipment, shipment and post-shipment phases. The main factors that relate to the former and the latter are country risk of origin or destination, and the performance risk of the supplier or enduser. In recent years, the transparency in the market between buyers, sellers and traders, and the fragmentation of the market as state selling and buying monopolies have been dismantled, have led to thinner margins in trading. The adage of ‘trying to get between the wallpaper and the wall’ applies more and more and, in an effort to increase income, many companies now take higher risks than they had previously ever contemplated. The downside for many traders is that the rewards have not been commensurate with the risks and, as such, the risk has forced many companies to downsize or exit from the business altogether.
Trade houses Trade houses are involved in trading that generally consists of transactions being liquidated within 12 months. The net worth of trade houses invariably is relatively low as a percentage of total assets as there is no major investment in fixed assets. The closest that many companies would come to this is if they owned their own offices, and this is the exception rather than the rule. Therefore, by contrast with processors, there is a minimal requirement for long-term debt, and so only short-term financing is usually sought. The security that a bank will seek is based largely on the success of the trade house it is involved with. If the company has a sound track record, and a reliable position in the sector, then it is very possible that a bank or financial institution will lend on the basis of a corporate guarantee. What the bank or banks would be looking for in that respect is the company’s approach to managing its funds, its level of sophistication in treasury activities and its reliance on, say, sugar. Typically a company with broader-based trading activities than just one principal commodity would be more likely to benefit from such corporate loans on the basis that it is therefore better placed to ride out the bad times if it has good trading results being produced from other markets. Given the opportunistic nature of trading, therefore, it is apparent that banks only want to look at providing structured financing with recourse to the underlying assets. In some instances, companies tend to resent this. They see it as an unwarranted interference in their business. They Chapter 18/page 14
Finance and risk management can feel that the bank does not understand what they are trying to do and, if the company does try to educate the bank, then the bank might become so nervous that it decides not to proceed with the financing. Unfortunately, this perception remains a negative factor in trading companies who confuse confidentiality, to which a bank is committed as part of its fiduciary duty, with transparency. If you find that you cannot communicate your intentions to your bank and get a sympathetic hearing, then it is probably time that you start to shop around for another one. Similarly, if a bank cannot have an open dialogue with the company and satisfy itself that it is fully informed by the company, then maybe it is appropriate not to lend to that company. While this might all sound a bit of a no-brainer, it is strange how often the problems arise.
Payment instruments In most cases, trade houses will negotiate documents between other trade houses on a cash against first presentation of documents basis. Normally this is done in one of the major sugar trading centres such as New York, London or Paris. Depending on the location of one or both companies, other locations might be used. Prefinance to suppliers takes place in two ways: one is by the trade house providing a loan to a supplier; the other is through the banking system. The most common form of prefinance is by issuing a letter of credit. The letter of credit can be opened in a variety of forms. The standard instrument is a sight letter of credit that calls for negotiation at sight of the documents; that is to say, when the shipping or other documents for negotiation are presented by the supplier to the advising bank in the country of origin. Variations include red clause and green clause letters of credit. These allow the beneficiary, i.e. the supplier, to draw certain percentages of the value of the letter of credit prior to the shipment of the sugar. Whether it is a red clause or green clause letter of credit depends on whether the draw-down is done on a clean basis or with the goods in a warehouse covering the pre-payment. Generally banks will aim to open the letter of credit via their own branch in the country in order to keep the transaction within their control. In many cases this is not practical owing to no presence or a limited one in the country or local regulations. In this event, the bank will aim to route the letter of credit through its correspondent bank with which the opening bank will normally maintain bank lines. It should be borne in mind that letters of credit are irrevocable so that, once opened, payment must be made against the relevant documents. With this in mind, the letter of credit has a value to the recipient. The factory can then take this and either discount the proceeds with a Chapter 18/page 15
Sugar Trading Manual local bank or use it, as discussed, in Thailand and other origins for packing credit. Another way for companies to finance suppliers, especially with limited hard currency convertibility, is through the banking system. The way that this can work is for a company to request its bank to provide prefinance against its purchase contract. In turn, the offshore bank would approach its correspondent bank with a deposit or guarantee expressed in US dollars. Against this, the local bank issues a promissory note to the offshore bank against the deposit or guarantee. This note is backed by the contract from the supplier. The local bank then advances local funds to the company. Given the local bank can access foreign currency, it means that the interest rate will be considerably lower than had it been a straight commercial financing conducted by a local bank. Upon shipment, the company presents shipping documents to the local bank. The bank then sends these to the offshore bank for negotiation with its counterpart, or is authorized to negotiate them on behalf of the offshore bank. Once the documents are confirmed to be in order, the international trade house pays the offshore bank, which then authorizes the local bank to pay the balance to the supplier. Sugar is a commodity over which buyers cannot exercise as much control as, for instance, coffee or cocoa. In these markets there is, from time to time, what is termed a carry, i.e. the spread between the month liquidating and a month further forward is sufficient to pay the cost of storage, financing and insurance. This allows the buyer to take delivery and put the commodity into a warehouse and deliver the produce on the next delivery month. In the case of sugar, no such carry exists, as the main futures markets preclude the possibility. In the case of the European white sugar markets, this is partly owing to export licences issued by the intervention board, which generally last for five months. If the goods are not customs cleared and physically exported within that time frame, then the seller is subject to heavy penalties. There is therefore always a necessity for the company holding the export licence to ensure that the sugar is shipped. In the case of the main raw sugar exchange, New York, the option to store does not exist in the rules either. Terms are fob stowed and trimmed, therefore the trader is obliged to negotiate with exporters or producers to pre-pay the sugar against warehouse receipts. In a transaction such as this, a bank will want to satisfy itself that the sugar is in a public or bonded warehouse with independent supervision. The reason for this is to ensure that sugar does not disappear from the shippers’ or the mill’s own warehouses. Bulk raw sugar is difficult for banks to finance in warehouse, as it is difficult to separate and to identify. Therefore banks will invariably take greater comfort from financing Chapter 18/page 16
Finance and risk management either bagged raws or bagged whites, which, if bags are marked, can be more easily identifiable and physically segregated from other sugars. Sight letters of credit remain the most common type of banking instrument in trade transactions. These are straightforward and require simply that documents are presented and are in conformity with documentary instructions. There are some dangers attached to letters of credit that could include the following two scenarios. Firstly, in the case of a fob stowed supplier, it could be feasible for a supplier to prepare documents and present them to the bank without a vessel having been presented to load. This is highly unlikely in today’s market, but there is always a risk attached and, in the case of fraudsters, has been known to happen. Another risk is that the bank in the country of origin fails to check the documents accurately and pays the supplier, having informed the opening bank that the documents are in order. However, in such a case, the opener of the letter of credit would have recourse against the bank. Secondly, there is the fraudulent amendment of documents. This occurred to Woodhouse Drake & Carey on a parcel of sugar from Mombassa to Mogadishu in Somalia. In that case the bags were 100 kg each. Somebody in the chain changed the documents so that extra noughts were added, which increased the size of the cargo manifested. Previously, the regulations regarding negotiation of documents stipulated that banks were only to look at the documents relating to the transaction. This meant that unless there was suspicion that it was a fraudulent transaction, banks had to rely solely on the documents and, provided they were in order, the bank had to pay. Nowadays, under the regulations, banks are obligated to pay more concern to the underlying transaction. Aside from inter-company transactions, which, as we have mentioned, are principally cash against documents, the other side of the coin is the buyer. In raw sugar trading, buyers tend to be sizeable refining businesses, and again a significant number of transactions are conducted on a cash against documents basis. However, state importers, buyers with domestic regulations controlling payments of foreign exchange, new markets and countries with high risk will tend to be obliged either by the laws in their country or by the terms of trade to open a letter of credit. Depending on the country or the quality of the buyer, the trade house selling the sugar might decide to have the letter of credit confirmed. This means that the trade house’s bank undertakes to pay the trade house against the documents if the documents are good, whether the local bank authorizes payment or not. Confirmations suffer from a bad press, largely because a company’s expectations do not always match the results. Companies get frustrated with the slow speed at which many confirming banks remit funds Chapter 18/page 17
Sugar Trading Manual after receiving documents. The reason for this in fact is that, if a confirming bank suspects that the local bank will be slow to pay or that authorizations for foreign exchange payments are difficult to come by, then they do not want to be exposed to the risk. This creates annoyance with the confirming bank and frustration about the supposed confirmation not being an undertaking, as was thought, to pay immediately. This is often the result of poor communication to companies as to what they can expect through a bank adding its confirmation and partly through some unrealistic expectations of clients who pay confirmation fees that they automatically receive payment from what are risky buyers if the need to confirm letters of credit is considered in the first place. What often happens in principle is that, faced with the confirmation of a letter of credit, many banks will scrutinize documents more closely than usual, and even the most minor or seemingly minor typographical error may lead certain banks to delay or withhold payment. Therefore, the advice is to make absolutely sure what are the obligations that your confirming bank is proposing in order to avoid unnecessary stress later on. What also proves problematical is what some banks refer to as a silent confirmation. Typically this is a case where a country will require its banks to open letters of credit with the instruction not to add a confirmation to their letter of credit. Much of this stems from wishing to make the point that the country or the bank’s creditworthiness is so strong that it would be considered an insult to ask for confirmation. Some banks will offer to add a silent confirmation to such letters of credit. This means officially it is not confirmed, but unofficially they will pay against presentation of good documents. While this should work, it is always extremely difficult to provide documents that are perfect in every sense of the word. Murphy’s law applies to documents just as much as to any other sphere. The main risks affecting any form of payment by an importing country are the performance risk, which comes down to knowing your buyer. In addition there are the risks of convertibility, i.e. the local company not being able to exchange its local currency for hard currency; the transfer risk, whereby the central bank in the importing country refuses to remit foreign currency out of the country; and the political risk of doing business in that country. The trader, prior to doing business, should normally factor in these risks. Often this is not done, nor is there any leeway in the price to do this. This is where companies seek the comfort of having letters of credit confirmed as described above. However, it is worth looking into the merits of insuring the performance risk of buyers. This is a growing market and, in addition to government export credit agencies, such as Britain’s ECGD, and Australia’s EFIC, there is the World Bank, which
Chapter 18/page 18
Finance and risk management offers credit insurance through its daughter organization, MIGA, and a number of private insurance companies that will look at political risk insurance. What should also be borne in mind is that even after documents are successfully negotiated by a bank, there is still scope for a bank to recover its funds. In the mid-1980s there was a landmark ruling on this subject in the case between J.H. Rayner (Mincing Lane) Limited and Banque Indosuez. In that case, J.H. Rayner contracted to sell a parcel of sugar to a buyer in Djibouti, who opened a letter of credit through Banque Indosuez. The terms of sale were cost and freight liner to Djibouti. The sugar was duly shipped out of Antwerp and the supplier presented documents to J.H. Rayner. When these were in turn presented to the bank, the bank felt that the documents were claused as the master had marked on the bill of lading that, as the bags had not been marked, the shipping line was not responsible. Banque Indosuez viewed the documents as claused and therefore not clean bills of lading. This was despite no request for the bags to be marked by the buyer. It was also noted, as the sugar came from multiple suppliers in the EU, some certificates of origin referred to it as of French origin, some as of EEC and some as of Belgian. Banque Indosuez paid against the documents ‘under reserve’ then sent the documents for collection. The buyer elected not to accept the documents. The result was that Banque Indosuez claimed back the funds it had paid out, and won the court case, with the judge finding for Banque Indosuez and agreeing that the bills of lading were claused, and that the certificates of origin from different EEC countries had no link to the origin required, namely the EEC. The above serves as a cautionary tale in the negotiation of documents and points out the existence of such a legal test case under English law. The reverse side of red and green clause letters of credit is the usance letter of credit. This allows buyers to pay, up to 180 days after receipt of documents, the principal plus the interest accrued. Again in this regard, the onus is on the seller in one sense to ensure that the sugar, once imported, will not drift away and to analyze the credit risk on the buyer. Other deferred payments such as these are most commonly discounted through banks, and for the bank then to take the performance risk on the letter of credit issuing bank. The discount rate will invariably reflect the risk profile of both the issuing bank and the country. Another way trading companies, especially brokers, operate is through using back-to-back letters of credit. This also serves as a method of reinvoicing and allowing the trader to take his margin out of the transaction. In a back-to-back transaction, the importer will open a letter of credit
Chapter 18/page 19
Sugar Trading Manual to the trader or intermediary in a third country. The trader can take the letter of credit to his bank and request it to open an identical letter of credit to his supplier, with the exception of the beneficiary name, invoice value and unit price. In the normal course of events, the sugar will be shipped, the bank will pay the supplier for the goods against clean documents and present the same, with the exception of the invoice, which will be modified for the different value to the importer. Again this sort of transaction requires sufficient bank lines on banks issuing the import letter of credit and a knowledge of the underlying trade and insight into the transaction.
Tolling There are occasions when raw sugar is shipped to port refiners for tolling into white sugar and re-export. Normally this is against a tolling fee paid. The financing in this case is usually for the raw sugar delivered up to the point where the white sugar is re-exported. Generally the trade house will ask the bank to finance the raw sugar after shipment until the whites are delivered and the transaction is liquidated. The bank’s main concern is title over the documents and enforceability in the country where the tolling takes place, therefore, typically, it will take an assignment over the sugar and insist on insurance cover, also assigned to the bank. Financing is made, invariably to the trader, and thus the onus is on the trader to ensure that he receives white sugar in repayment. Normally the trader should require a promissory note from the tolling refinery to repay with the sugar.
Counter-trade Counter-trade was a hot item in the 1970s and, in effect, was the basis by which the COMECON trading bloc was supposed to function. The late 1970s and early 1980s spawned a flurry of counter-trade activities. Possibly the best-known deal involving sugar was between Brazil and Iran and Iraq. All three parties were hit in the mid-1970s by the commodity markets – Brazil because it had to pay high prices for oil, Iran and Iraq because they had to pay high prices for sugar. The Brazilians therefore entered into counter-trade deals whereby they sold sugar to both Iran and Iraq at fixed prices and the latter sold oil at fixed prices, as both oil and sugar then proceeded to decline steeply over the following years. This effectively killed the idea of counter-trade, which was more akin to simple barter. In today’s financial markets with tighter liquidity, there is growing interest for structured counter-trade. One example of this is to purchase one leg and sell the product. This could be crude oil, cotton or any other Chapter 18/page 20
Finance and risk management item. The proceeds are then paid into a bank account in escrow. Sales of sugar are then made to the counter-party at prevailing market prices out of funds in the escrow account. A further means of financing is through the supply of equipment to companies against which the sugar company repays in the form of sugar. In most cases the bank will finance the supplier of the equipment and look for its repayment from the sale of sugar.
Bid bonds and performance bonds Further financial products that are most commonly required include bid bonds and performance bonds. Bid bonds are opened at sugar tenders, and the successful offer is then required open a performance bond. This is normally an amount equivalent within a given time to 5% of the value of the sale until such time as the importer, normally a state entity, is satisfied that the seller or occasionally the buyer has performed its obligations. The problem with performance bonds is that the beneficiary holds most of the cards and, as performance bonds are opened by ministries, which tend to be fairly bureaucratic, there is a reluctance to sign them off and return them. This means that these outstanding amounts can hang over the opener like the proverbial sword of Damocles. There is little way of avoiding this process if a company is positioning itself to sell into certain markets. Some of the more enlightened tender boards waive the requirement in the case of well-established and reputable sellers or buyers. In certain high risk cases, it is simply easier to factor the 5% into the offered price.
Fraud No chapter on the sugar trade would be complete without reference to the issue of fraud. A number of sugar trade frauds have been highlighted in the past. In these cases the main attraction, not surprisingly, is greed. The modus operandi is to offer a large quantity of sugar at a big discount to the market. These offers generally have certain characteristics, such as the description of the sugar or misspellings of the specifications. As an incentive to the buyer, and an act of ‘good faith’ the seller even offers to open a performance bond of around 2%. Potential buyers of the sugar are tricked by this ploy and go ahead to open a letter of credit. The result is that fraudulent documents are presented to the bank and money is wasted. Traders are often pestered by these sorts of enquiries. The market is sufficiently transparent for people in the trade to realize that there Chapter 18/page 21
Sugar Trading Manual are never any free lunches. The only case of a genuine below-market offer was from an organization in Brazil. On further checking, it transpired that it was a genuine charity and that the old single selling desk in Brazil, the IAA, had made available two cargoes of white sugar to the charity at cost price, and anything it made above the cost price, it could keep for the charity. This sort of situation is very much the exception.
Changes to the capital adequacy requirements of banks – Basel II There is now greater clarity on proposals under proposed changes to the capital requirements for banks under BIS II. These are due to be implemented by the end of 2006, although most banks are already implementing changes and adjusting their lending portfolios. The principal models for determining this are: economic capital (EC), economic value added (EVA) and risk adjusted return on capital (RAROC). The critical issue in the run-up to this will be for countries to agree to the implementation of the capital requirements. Reservations have been made by a number of banking bodies, notably in the US and Britain. However, assuming that BIS II is implemented, the ramifications are likely to be felt most by trade houses. Under the proposed changes, the capital requirement of banks will depend on the risk of the borrower, the underlying transaction and the quality of risk measurement and risk management. This means that highly rated companies will require less capital while unrated and leveraged companies will require significantly more. Also, a more sensitive treatment of emerging market risk will replace the current distinction between OECD and non-OECD risk. Finally, the structure of the transaction can and will have a significant impact on the financing risk. The cost of borrowing will be determined largely by two factors: probability of default (PD), and loss given default (LGD). PD will be considered in the light of the following: • • • • •
leverage volatility of assets volatility of income emerging market risk higher risk activities. LGD will be determined by:
• • • •
level of collateral cover legal title market liquidity for the commodity off-take contracts
Chapter 18/page 22
Finance and risk management • price risk hedging • legal jurisdiction. Under BIS II there will be three approaches: • Basic • IRB Foundation • IRB Advanced. The key differences are as follows. Basic approach • Determined by external ratings and predetermined PD categories for corporate risk. • LGD is determined in broad categories: strong, good, satisfactory, weak and default. • Generally suitable only for strong companies with no emerging market risk and tight collateral management. IRB Foundation approach • Based on internal ratings to determine PD. • Predetermined LGD (45%) with provision for a reduction in cases of over-collateralization and/or tight collateral management. • If criteria not met, risk-mitigating structures are not taken into account, and capital requirement will be higher. • Despite eventually meeting the criteria, capital requirements will be high in comparison to Advanced approach. IRB Advanced approach • Based on internal ratings to determine PD and LGD. • Internal ratings require sufficient data over a minimum of seven years and sophisticated rating tools to comply with central bank requirements. Obviously traders operating with general bank lines face high probability of default scores and consequently high borrowing costs if they continue to borrow on an unsecured basis. Table 18.1 illustrates the costs involved. Typically banks maintain their existing financing to trade houses, then lending will require margins of between 300 and 600 basis points in order to break even. In order for companies to manage the cost of borrowing, it will become necessary for traders to consider adapting the advanced or specialized lending available under BIS II. Specialized lending looks to Chapter 18/page 23
Sugar Trading Manual Table 18.1 Basic approach Rating Country risk Commodity Sponsor strength Trading controls & Hedging policy Security package Rating grade Risk slot Required return (RoC 20%) Realistic case? Feasible case?
AA or above None Sugar Excellent
BBB
BBB
B
C
Low Sugar Good
High Sugar Good
High Sugar Sufficient
High Sugar Sufficient
Strong
Good
Good
Good
Sufficient
Strong
Strong
Good
Good
Sufficient
Strong Good 50–75% 75–100% 0.8–1.2% 1.2–1.6%
Satisfactory 150% 2.4%
Weak 150% 5.6%
Weak 350% 5.6%
Very low Yes
Medium Maybe
High No
High No
Low Yes
loans being repaid from the cash flow generated by the underlying asset, and therefore the credit risk is dependent on the quality and the risks associated with that cash flow. Specialized lending will only be given such fair treatment under the Advanced approach. Table 18.2 gives an example of the differences. Under a specialized lending structure, the cost could be significantly improved along the following lines using the Advanced approach (see Table 18.3). BIS II will therefore have a significant impact on lending activities in world trade, and a much closer degree of integration between the interested parties, i.e. shippers, lenders, borrowers and supervision companies. Given the beneficial treatment under the Advanced approach, it is forecast that the number of banks active in the filed of commodity finance will most likely decrease. It will be imperative for both trade houses and banks to review where they need to position themselves in preparation for BIS II.
Managing risk In the case of corporate backed loans and general financing, banks are reliant to a great extent on the transparency of the company. Most of the problems affecting sugar companies and, as a result, banks, have resulted from a lack of clear insight into the company. The financial Chapter 18/page 24
Finance and risk management Table 18.2 Tentative example of the effects of BIS II on a trader pricing Trader
Value
Finance
Cost
Cost
BIS I
BIS II
300 000
80% unsecured debt 1 200 000
1.25%
2.0%
20% equity Cash & Inv. receivables Insured (90%) First class Rest Commodities Fixed assets
1 500 000 8 000 000 8 000 000 2 000 000 37 000 000 5 000 000
1 600 000 1 600 000 400 000 7 400 000 1 000 000
6 400 000 6 400 000 1 600 000 29 600 000 4 000 000
1.25% 1.25% 1.25% 1.25% 1.25%
2.0% 2.0% 2.0% 2.0% 2.0%
Total
61 500 000
12 300 000
49 200 000
615 000
984 000
Table 18.3 Improvements under BIS II using the Advanced approach Trader
Value
Finance
Finance
Cost
20% equity 1 500 000
80% debt
1 500 000
BIS II 3%
8 000 000 8 000 000 2 000 000
800 000 800 000 2 000 000
7 200 000 7 200 000
0.75% 0.75% 3.0%
Cash & Investments receivables Insured First class Rest Commodities Sugar emerging markets Sugar shipped Sugar in OECD Fixed assets
7 000 000
4 200 000
2 800 000
3.0%
10 000 000 20 000 000 5 000 000
2 000 000 1 000 000
8 000 000 20 000 000 4 000 000
1.0% 0.75% 1.0%
Total
61 500 000
12 300 000
49 200 000
462 000
turmoil in Asia showed the danger of lack of insight into company activities and the threat posed to credit by name lending and pressure to book assets or be left behind. In order to feel comfortable, and to derive the best out of financing, it is essential for banks to be party to company strategy instead of the master/servant approach that typifies some relationships. It should be remembered that commodities hold a certain fear for banks, especially if they treat the company as another corporate account. The result is that, when rumours start to circulate, banks are reminded of various Chapter 18/page 25
Sugar Trading Manual horror stories over the year, whether it is cornering the silver market or manipulating copper markets, and tend to cancel or restrict credit lines first and ask questions later. Not all banks are like this, and the ideal match in any partnership is one where there is mutual self-respect and that the financial institution can demonstrate knowledge and awareness of the risks and issues, the players in the market, and the underlying fundamentals that drive the business, be they trading or processing. Credit at the cheapest price and on relatively easy terms is obviously an attractive proposition, but in difficult markets it is more than likely that any bank will cut these lines first, and with them, the lifeblood of the company. But trading companies, by their nature, are there to take risk, and, through discussing beforehand the deal with a financial institution, it is often possible to mitigate some of the more obvious risks. Of further importance in determining where to locate activities or to conduct trade is to analyze the hosting environment. How difficult is it to operate within the country? What are the constraints or the positive elements in conducting business? How does the country treat trade issues? Is it likely to invoke new regulations that restrict business activities or stop the flow of sugar in or out of the country with little or no notice? Further risks, as previously mentioned, are the transfer risk, the convertibility of currency risk and the political risk, all of which are taken into consideration by financial institutions when pricing risk. In trade finance, the repayment is through the self-liquidating nature of the transaction, as opposed to, say, money market lines providing general working capital, i.e. there is a clear source of repayment within the transaction being financed. In cases of transactions based on sugar, the bank must satisfy itself that there is no point at which it will be exposed to a risk beyond its control. Such financing relies on timing, especially in the case of payment flows and control of documents, control and title to shipping documents or warehouse receipts. Financial institutions also need to be more aware of the role of futures markets in the field of hedging commodity risk. Many banks still have a blind spot in this respect and view commodity futures as being purely and simply a speculative tool. Commodity financing often tends to view as sufficient the requirement for the underlying security to be simply stopping at the level of having control of the physical sugar and disregarding the impact of falling or rising futures prices. This situation has changed over the years owing to better communication and greater awareness of markets. I can still remember the puzzled looks of a group of bankers some years back when I told them that traders should look to buy when prices are high and sell when levels are cheap. This illustrates the gap in awareness that existed and, in some cases, still exists between the whole market that includes both physical sugar and commodity futures and options. Without an awareChapter 18/page 26
Finance and risk management ness of both, it is somewhat akin to fighting with one hand tied behind your back. In summary, it is important to point out that there are many other banking products that have not been outlined in this chapter, including foreign exchange cover, money market lines and instruments such as promissory notes, trust receipts and so forth. The reason for their exclusion is that they tend to be general banking or financial instruments and what this chapter has sought to do is to outline those products and risk mitigants that are most relevant to the sugar industry. The market has changed radically in the last few years. It has become more fragmented than ever previously. This has led to inexperienced buyers and sellers becoming involved, and immature financial and political institutions in those countries having to grapple with issues relating to trade and payments. The result has been to increase the risk profile, sometimes leading to increased performance and payment risk. It is therefore essential that experienced and knowledgeable financial institutions and sugar companies adapt to the changing environment and work closely together to eliminate risk wherever possible to do so. This will entail more transparency by all parties and a greater understanding from both sides as to the risk/reward equation. In this regard, for anyone moving from trading and processing to banking, the difference between looking for opportunities with risk and having to transform to mitigating the risks, would be an interesting challenge. The goal remains to find a happy medium where all parties can be satisfied and there is mutual benefit arising from growing, investing, trading and financing of the sugar chain.
Chapter 18/page 27
Part 6 Regional markets
19 The European Union Joan Noble Joan Noble Associates
The EU sugar policy 2001–2006 Support prices Prices, support payments and exchange rates Production quotas Sugar imports and the EU’s raw cane refining industry EU supply EU preference EU sugar exports Intervention Other aspects of the sugar regime Quality standards Carryover National aids and cane refining aids Non-food uses for sugar and sugar beet on set-aside land Financing the sugar regime Production levies Environmental considerations
Pressures for change: the EU sugar policy from 2006 Internal pressures for change External pressures for change
The policy beyond 2006 Appendix A: EU sugar support prices Appendix B: Basic sugar, isoglucose and inulin quotas in the EU (tonnes) 2001/02 to 2005/06
Appendix C: Coefficients used to cut Member States’ quotas for sugar, isoglucose and inulin: applicable from 2004/05 Appendix D: EU production quotas for sugar, isoglucose and inulin Appendix E: Preferential sugar quotas for ACP and India
The European Union’s sugar industry is highly regulated. The sugar regime is part of the Common Agricultural Policy (CAP), a cornerstone of the 1957 Treaty of Rome, which established the original European Economic Community with six member states. Between 1957 and 2004 the European Community, now known as the European Union (EU), has grown from six to 25 member states. The CAP required common policies to be established for all the major agricultural products, including sugar. Most sugar produced in the EU is from beet, although there is a small amount of cane grown in the French département Outre Mer. The aims of the CAP are laid down in the Treaty of Rome. These are: 1 2 3 4 5
To To To To To
increase agricultural productivity. ensure a fair standard of living for agricultural producers. stabilize agricultural markets. guarantee regular supplies of food to consumers. ensure reasonable prices of food to consumers.
It is important to understand the aims of the CAP to understand the subsequent aims of the EU’s sugar policy. The aims to increase agricultural productivity and to ensure supplies for the domestic market in particular have shaped the policy over the last thirty and more years. The sugar regime has encouraged production of sugar from sugar beet to ensure a high level of self-sufficiency. Although the area planted to sugar beet has been relatively constant, yields throughout the EU have shown a marked increase in the last twenty-seven years (see Fig. 19.1). Although sugar beet accounts for only a small percentage (in 2001, 1.6% for EU12 and 2.2% for the ten new member states) of the share of individual products in final agricultural production, it is an important rotation crop in the agricultural economy and one of the most profitable crops for the EU farmer. The policy has always been rigid with a high degree of protectionism. The sugar regime, normally reviewed every five years, has remained largely unchanged from the system which was originally established in 1968. The current policy is applicable from 1 July 2001 to 30 June 2006. Although there was scope for changes to be made following a Commission report to be submitted in 2003, no changes were proposed prior to the overall reform in 2006. Included in this chapter is a broad outline of how the policy currently applies and possibilities for the future.
The EU sugar policy 2001–2006 The current policy, adopted in June 2001, expires on 30 June 2006. The regime allows for a system of support prices, production quotas and preferential import quotas. Import duties ensure EU preference, Chapter 19/page 1
Sugar Trading Manual Table 19.1 Sugar support prices 2001/02–2005/06 =C/tonne White sugar intervention price Raw sugar intervention price Basic beet price Minimum price for A beet Minimum price for B beet
631.9 523.7 47.67 46.72 32.42
Source: European Commission.
Tonnes per hectare, raw value
10
9
8
7
6
5 75/76 77/78 79/80 81/82 83/84 85/86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02
19.1 EU sugar yields 1975/6–2001/2. Source: European Commission.
and export subsidies (or taxes when EU prices have been higher than world market prices) allow any over-production within the quota to compete on the world market. Originally the sugar regime covered sugar alone. However, as technological advances – and high sugar prices – encouraged the use of isoglucose (or high fructose corn syrup, as it is known in the USA) and later inulin syrup, produced from chicory and Jerusalem artichoke, these products were brought into the scope of the regime.
Support prices The Council of Ministers, made up of agricultural ministers from each of the member states, decides, on the basis of a proposal from the Commission, the support prices which should apply in the sugar sector. Traditionally this decision was taken annually but from July 2001 the Chapter 19/page 2
The European Union Table 19.2 Build-up of intervention price =C/100 kg Basic beet price (official yield 13%) White sugar price Add Transport and unloading costs Refiner’s margin Subtract Molasses allowance Intervention price
4.767
Lowest price paid for beet (before producer levies are deducted)
36.67
Beet price/0.13
4.41 24.36 65.44
Includes oil, ash etc
2.25 63.19
Value of molasses in beet Price at which EU will buy white sugar for intervention
Source: European Commission.
support prices have been fixed until 2005/06. The latest support prices are shown in Table 19.1. Since 1993 the support levels have remained largely unchanged in ECU, now euro. Producers are guaranteed a minimum – or intervention – price and are obliged to pay the farmer a minimum price for the beet, or cane, sold to them. There is, therefore, a link between the intervention price and the minimum beet price as shown in Table 19.2. The intervention price is the price paid to the producer if the sugar cannot be marketed within the EU. Although the sugar regime is a common policy for all fifteen EU member states, different prices apply in some member states. In these, so called ‘deficit area countries’, higher support prices are applicable. This traditional element in the price structure has not been abandoned despite the completion of the single European market and a high level of self sufficiency in most member states for consistency (see Fig. 19.2). At present, higher support prices are paid in Spain, Finland, Ireland, Portugal and the UK, while support prices in the other ten member states are paid at the ‘common level’. These derived prices are fixed annually for deficit area countries. The price structure is rigid and prices are all set in euros. A list of the prices applicable from 2001/02 is attached as Appendix A. EU support prices for sugar since 1980/81 have consistently been higher than world market prices. Indeed, only twice in the history of the regime has the world price peaked above the EU support level (see Fig. 19.3). Chapter 19/page 3
Sugar Trading Manual 100 80 60 %
40 20 0 –20 –40
France BLEU N'lands Austria UK Ireland Germany Portugal Denmark
Greece Sweden Italy Finland Spain
(Supply quotas for 2000/01, Consumption average 1997–2000)
19.2 EU sugar supply surplus percentage over consumption. Source: European Commission and JNA calculations.
ECU/ /100 kg
150
100 Intervention price 50 World price
0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 (Jul 69–Nov 99, Paris Spot, Dec 99 onwards LDP) EC prices between 1984 and 1994 adjusted for the switchover
19.3 White sugar world market and EU prices. Source: European Commission, Czarnikov and F.O. Licht.
Prices, support payments and exchange rates The EU fixes all support payments and prices in euros. Prior to the introduction of the single currency, there were complicated agrimonetary rules used for the conversion of these amounts into national currencies. The introduction of the euro simplified matters for the countries participating in the single currency. Support prices applicable outside the euro countries have to be converted into national currencies. If all member states were party to the Chapter 19/page 4
The European Union
%
single European currency it would be much more simple. However, the UK, Denmark and Sweden remain outside the euro, and the ten new member states have to meet stability criteria before joining. Most of the new countries will wait to judge the relative success of the euro before looking for membership, although some countries have already linked their currencies to the euro. The Danish currency is relatively stable as it has joined the exchange rate mechanism (ERMII), which was established following the introduction of the single currency. The krona fluctuates against the euro within a range of ±2.25%. Sweden and the UK are outside the ERM and their currencies are subject to a greater degree of volatility (see Fig. 19.4), as with most of the member states joining on 1 May 2004. The support levels for the countries outside the single currency, in national currency terms, therefore fluctuate. While all the amounts are fixed in euro they are converted using an exchange rate, which is announced by the European Central Bank daily. For certain amounts (e.g. the intervention price and the export refund) a daily rate is used and the exchange rate is that which the ECB announced the afternoon before the date when sugar is sold into intervention or the ‘operative event’. Import duties are calculated using an exchange rate fixed monthly. This can be changed at times of currency volatility mid-month but it is normally fixed for a whole month. For farmers the minimum beet price is calculated from an average of the exchange rates that were applicable during the whole marketing year. The marketing year for sugar runs from 1 July to 30 June. Certain other support amounts are subject to special arrangements and
24 22 20 18 16 14 12 10 8 6
UK
Greece
Sweden
4 2 0 –2
Denmark Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03
19.4 Euro exchange rates: % change from 1 January 1999. Source: European Commission and JNA calculations. Chapter 19/page 5
Sugar Trading Manual converted using other exchange rates. These include cane refining aids, which are converted using the rate applicable on the first day of each month following the sale of the sugar, and the chemical production refund, which is converted using the rate applicable one month after the submission of the application. In the countries outside the single currency, therefore, different exchange rates are used for different transactions. This complicates matters for producers, traders and users alike.
Production quotas High support prices encourage production. To curtail the level of production, the EU established production quotas, and the guaranteed support prices are only applicable to the sugar produced within the quota. The sugar regime is unique among the CAP commodity regimes in that a system of production quotas was established from the start. Production quotas were originally set at a level to cover domestic consumption plus a safety margin, which was exported on to the world market. Production is divided between A and B quotas, with sugar produced in excess of the quota known as C sugar. C sugar is produced entirely for sale on to the world market at world market prices and, indeed, has to be exported on to the world market within a certain time limit or producers are liable to pay a sizeable penalty. Production quotas are set for sugar, isoglucose and inulin (see Table 19.3). The EU establishes the overall production quota and also allocates the quota between regions (see Fig. 19.5). For sugar the quotas are divided between regions, and the member states allocate the quota to sugar producers, while the quotas for isoglucose and inulin are allocated to the companies producing these sweeteners. Producers are
Table 19.3 Initial shares of sugar, isoglucose and inulin quotas applicable 2001/02 to 2005/06 EU 15 000t wse Sugar Isoglucose Inulin
14 482 301 321
Total
15 104
EU 25 % 95.89 1.99 2.12 100
000t wse 17 441 508 321 18 270
% 95.46 2.78 1.76 100
These quantities are subject to annual adjustments to meet WTO limits. Source: European Commission and JNA calculations. Chapter 19/page 6
The European Union France Denmark BLEU Ireland N’lands
Portugal Slovenia Slovakia Poland
Lithuania Latvia Hungary Czech Rep Spain Sweden Greece
Germany Austria Finland UK Italy
19.5 Initial sugar production quotas 2004/5–2005/6 Source: JNA calculations from European Commission.
allocated an A quota and a B quota, which together make up the maximum quota that can be sold on the internal EU market. The production quotas currently set for each member state are shown in Appendix B. These quotas are, however, initial amounts and have to be reviewed annually in order to keep within limits on the volumes and cost of subsidized exports agreed as part of the Uruguay Round. Until 2000/01 the EU did not have to adjust quotas as the cost and volume of exports were under the allowed limits. For the 2000/01 marketing year a quota cut of 498 thousand tonnes was implemented and from 2001/02 a permanent quota cut of 115 thousand tonnes was agreed by the Council of Ministers to take effect from 1 July 2001. For 2001/02 no additional cut (other than the permanent reduction of 115 thousand tonnes) was made from the levels for the period 2001/02 to 2005/06 to meet the WTO limits. However, cuts had to be made in subsequent years. The system of reviewing quotas annually means that total quota production fluctuates and may be reduced one year to be increased the following year. When quota cuts are implemented the cuts are shared between sugar, isoglucose and inulin in direct proportion to the production quotas. For example, for every 100 000 tonnes of quota to be reduced 95 886 tonnes of sugar quota will be cut while 1991 tonnes of isoglucose and 2122 tonnes of inulin quotas will be cut. In addition a proportion of the cane imports is reduced (see later). The agreed rules to cut production quotas if necessary allow for the quotas of all member states to be reduced. The share of the reduction is based on the share of the production levies paid to cover the cost of Chapter 19/page 7
Sugar Trading Manual Ireland 0.8% N'lands 6.7%
BLEU 5.6%
Germany 29.4%
Denmark 3.5%
Austria 2.8%
France 29.8%
Finland 0.6% Portugal 0.3%
UK 4.9%
Spain 2.8% Sweden 1.6%
Italy 9.8% Greece 1.4%
19.6 EU share of beet quota cuts. Source: European Commission.
exporting the surplus production (see Fig. 19.6). The quota cuts are achieved through established coefficients shown in Appendix C. The application of this system means that the greater cuts come from those member states with the largest B quotas. Adjusted quotas for 2000/01 and 2003/04 are shown in Appendix D. When production quotas are cut, EU sugar producers can continue to produce as much sugar for export although more will be exported as C sugar without subsidy. The quantities produced in following years, therefore, could depend on world prices and the prices farmers in the EU could get for alternative crops as well as the normal seasonal variations.
Sugar imports and the EU’s raw cane refining industry Although the EU produces a surplus to domestic requirements, it is also a major importer of sugar (see Fig. 19.7). The cane refining industry in Europe dates back to well before the EU sugar regime was established. A small quantity of raw cane sugar comes from the French Départements Outre Mer (DOMs), Réunion, Guadeloupe and Martinique, and is part of the production quota system, or domestic production. This together with some beet raws was processed in the French sugar refineries or used in off-season refining in beet factories. Chapter 19/page 8
The European Union EXPORTERS
12 10 8 6 4 2 0
il U lia d a la ca ia lf us az E tra ilan Cub ma fri mb Gu riti s a Br te h A lo n au Au Th ua ut Co rsia M G So Pe
IMPORTERS
10 Million tonnes raw value
Million tonnes raw value
14
8 6 4 2 0
a a n a t a a n si EU esi US pa ore yp ad ysi Ira n Ja K Eg an ala o d C M In
us
R
19.7 Major sugar exporters and importers. Source: International Sugar Organization 1999.
A significant change occurred with the accession of the UK in 1973. At the time of accession the UK imported about two million tonnes of raw cane sugar a year through the Commonwealth Sugar Agreement. As part of the UK’s accession arrangements, a preferential import scheme was agreed with a number of developing countries, known as the African Caribbean and Pacific (ACP) countries. The result was the Sugar Protocol, embodied in the Lomé Convention, which was established in 1975. This allows for the import of 1.3047 million tonnes (wse) a year of raw cane sugar either for refining or for direct consumption as raw sugar. This tonnage is imported levy free, from ACP countries and India at the ACP guaranteed price, which has normally been fixed at the level of the EU raw sugar support price. Signatories to the Sugar Protocol are given a quota (see Appendix E). This scheme is attractive for the suppliers who receive a price normally much higher than the world market price. It is worth noting that the Sugar Protocol is of open-ended duration, unlike the Lomé Convention, which was subject to regular reviews and in June 2000 was replaced by the Cotonou Agreement. Later, two more countries with refining industries, Portugal and Finland, joined the EU and supply problems emerged. The EU had to address these supply questions. The Portuguese accession was prior to the conclusion of the Uruguay Round and the supply problem was an internal matter. However, when Finland joined, the Uruguay Round had already been concluded and Finland independently had entered into commitments relating to supply arrangements with third countries, which had been consolidated under the General Agreement on Tariffs Chapter 19/page 9
Sugar Trading Manual Table 19.4 MFN imports MFN exporter since 1997/98
Thousand tonnes wse
Brazil Cuba Other
23 56 3
Total
82
Source: European Commission.
and Trade (GATT). This is now part of the EU’s import commitments and allows for the tonnages to be imported from the countries shown in Table 19.4 under the most favoured nation (MFN) arrangements. From 1 July 1995 the EU adapted the import regime. At this time the EU established maximum supply needs for the four countries with raw cane sugar refining industries and, from 1 May 2004, for Slovenia. These maximum supply needs are shown in Table 19.5, and, like production quotas, are subject to reduction in order to meet the Uruguay Round commitments. The commitment to reduce imports covers just the SPS imports, not the total, as the 1.304 million tonnes that comes in under the Sugar Protocol is not reduced. In February 2001 the EU adopted an amendment to the generalized scheme of preferences (GSP) to allow duty-free access for all goods except arms to 49 lesser developed countries (LDCs). This followed a quod agreement between the US, Canada, Japan and the EU, to promote duty-free access for the LDCs. For sugar full duty-free access is delayed until 2009 but the duties between 2006 and 2009 will be reduced. Prior to the start of the duty concessions the EU is committed to import raw sugar duty-free under quota arrangements as shown in Table 19.6. The maximum supply needs for the refineries are now met through imports under four separate schemes. These are the Sugar Protocol under the Cotonou Agreement, imports from the 49 lesser developed countries, Most Favoured Nation import arrangements and finally Special Preferential Sugar (SPS). A balance sheet is drawn up annually to consider how much sugar is to be imported under the SPS arrangements. Until the agreement was introduced to import from the LDCs, first under quota arrangements, the balance sheet started with the maximum supply needs for EU25 of 1.796 million tonnes. From this was deducted the 1.3047 million tonnes imported under the Sugar Protocol, plus any raw cane production in the DOMs (this varies annually), plus the MFN commitment of 82 000 tonnes. Once the level of the shortfall Chapter 19/page 10
100.00% 101.10%
EU15 Total EU25 Total
* Slovenia from 1 May 2004.
Cut from initial tonnage
63.52% 16.69% 16.41% 3.37% 1.10%
UK France Portugal Finland Slovenia* 1 779 000.00
1 130 000.00 297 000.00 292 000.00 60 000.00
Initial tonnage 2000/2001
8 400.00
1 770 600.00
1 124 700.00 295 600.00 290 600.00 59 700.00
WTO adjusted tonnage 2000/2001
Table 19.5 Imports of sugar – maximum supply needs (tonnes)
1 776 766.00 1 796 351.00
1 128 581.00 296 627.00 291 633.00 59 925.00 19 585.00
Initial tonnage 2001/02 to 2005/06
0.00
1 776 766.00
1 128 581.00 296 627.00 291 633.00 59 925.00
2001/2002
12 588.30
1 764 177.70
1 120 585.10 294 525.40 289 566.80 59 500.40
2002/2003
WTO adjusted tonnage
2 691.50
1 774 074.50
1 126 871.40 296 177.70 291 191.20 59 834.20
2003/2004
The European Union
Chapter 19/page 11
Sugar Trading Manual Table 19.6 EU duty-free imports from LDCs Raw sugar tonnes wse 2001 2002 2003 2004 2005 2006 2007 2008 2009
74 185 85 313 98 110 112 826 129 750 149 213 171 594 197 334 Duty-free access for
Duty concession on all sugar imports
20% duty reduction 50% duty reduction 80% duty reduction all white and raw sugar
Source: European Commission.
has been calculated, the ACP countries and India can sell additional cane raws into the EU as special preferential sugar. The sellers negotiate a price, and both the MFN and SPS sugar is imported at a reduced import duty to align the import price with the ACP guaranteed price. Finally, following an increase of imports of sugar and sugar and cocoa mixes, which rose from zero in 1996 to 53 000 tonnes in 1999 from Overseas Countries and Territories (OCTs), the EU imposed quota arrangements under a safeguard mechanism. The quota for the period 1 July to 31 December 2001 was 4848 tonnes. Imports under the quota are duty-free. Quota arrangements have also been established for fructose, and an annual import quota of 4504 tonnes of chemically pure fructose from third countries was introduced in 1990. Imports of chemically pure fructose under the quota enter with reduced duty. The EU also established trade arrangement with the Balkan countries that allowed duty-free access. Because of apparent trade distortion the EU, however, imposed conditions on this duty-free access and in some cases suspended it altogether. These import preferences make the EU a major importer of sugar in the world market (see Fig. 19.7 above).
EU supply Following the production quota and preferential import reductions, which resulted from the Commission’s decision to meet the World Trade Organization requirements and the Council of Ministers’ decision to reduce quotas permanently by 115 000 tonnes in 2001/02, domestic supply has been reduced, although there is still a built-in surplus within the quota. For EU15 domestic consumption is normally under 13 million tonnes annually so there is about 1.5 million tonnes of sugar Chapter 19/page 12
The European Union Table 19.7 EU domestic supply (thousand tonnes wse) 2001/02–2005/06 Initial tonnage 2001/02
WTO adjusted tonnage 2002/03
EU 15 WTO adjusted tonnage 2003/04*
EU 25 initial tonnage 2004/05
Sugar Isoglucose Inulin Imports
14 482 301 321 1 777
14 114 293 312 1 771
14 482 301 321 1 777
17 441 508 321 1 796
Total
16 881
16 490
16 881
20 066
* not including new member states. Source: European Commission.
surplus available for the export market produced within the production quota, with the additional preferential imports giving a surplus for subsidized exports of at least 3 million tonnes (see Table 19.7). The quotas for the new member states joining on 1 May 2004 were set to maintain the overall balance and not increase the EU’s exportable surplus.
EU preference Sugar producers have historically been protected from world market imports through the application of import duties. A fundamental aim of the CAP is to provide protection for EU farmers from imports outside the preferential arrangements described above. Import duties for sugar are an essential part of the protection while support levels are higher than world market prices. Prior to the Uruguay Round Agreement, a variable import levy was set on a daily basis. This was calculated from the difference between the world market and EU prices. One of the major aims of the GATT negotiating partners was to translate variable import tariffs, and non-tariff barriers, into fixed duties. Since 1 July 1995 there has been a fixed import duty applicable for sugar. This fixed duty was reduced between 1995 and 2001 by 3.3% a year. This cut was the lowest reduction of any agricultural commodity produced under the common agricultural policy as the majority of CAP products had tariffs reduced by 36% by 2001. The fixed duty of =C419/tonne remains until the conclusions of the Doha Development Agenda (see Table 19.8). However, this is not the whole story. EU sugar producers also benefit from the safeguard mechanism allowed for under the GATT agreement. The safeguard clause allows for an additional duty to be charged when world prices are lower than a trigger price or the volume of imports increases over a certain level. Because of the trigger price (the average ACP guaranteed price Chapter 19/page 13
Sugar Trading Manual Table 19.8 EU fixed import duty, effective support price and possible minimum entry price = per tonne ECU/C
1 1 1 1 1 1 1
July July July July July July July
1995 1996 1997 1998 1999 2000 2001
Fixed import duty
Effective support price
Maximum world price for importing commercially even before application of the variable additional duty
507.00 489.00 472.00 454.00 437.00 419.00 419.00
668.10 656.90 651.90 651.90 651.90 651.90 631.90*
161.10 167.90 179.90 197.90 214.90 232.90 212.90
* =C20 reduction because of the abolition of the storage levy. Source: European Commission and JNA calculations. 70 Total duty
= ECU/C/100 kg
60 50 Variable import levy
Fixed duty
40 30
Representative price
20 10 Jul 1994 Jul 1995 Jul 1996 Jul 1997 Jul 1998 Jul 1999 Jul 2000 Jul 2001
19.8 EU sugar import duties from July 1994 to July 2001. Source: European Commission and JNA calculations.
applicable at the time of 531 ECU/tonne) used for the calculation, this safeguard mechanism has been and will be in almost permanent operation (see Fig. 19.8). The additional levy is applicable whenever the world price is less than 90% of the trigger price of 531 =C/tonne and is calculated according to a set formula from the difference between the world market and EU prices. The additional duties increase as world prices drop. The mechanism applies so that where the difference between the cif import price and the trigger price is: Chapter 19/page 14
The European Union 1 10% or less of the trigger price, the additional duty is zero; 2 more than 10% but less than 40%, the additional duty is 30% of the amount over and above 10%; 3 more than 40% but less than 60%, the additional duty is 50% of the amount over 40% plus the amounts calculated under (b); 4 more than 60% but less than 75%, the additional duty is 70% of the amount over 60% plus the amounts calculated under (c); 5 more than 75%, the additional duty is 90% of the amount over 75% plus the amounts calculated under (d). Currently the additional duty charged, together with the basic duty, provides adequate protection for EU producers.
EU sugar exports As well as being a major importer, the EU is also a major sugar exporter (as has been shown earlier in Fig. 19.7). All sugar imports and exports are subject to licensing arrangements. The EU exports surplus sugar produced within the production quotas as well as C sugar produced outside the quota. The quantity of C sugar varies as it is affected by both domestic production and the situation on the world market. In recent years the quantity of C sugar exported has varied between 1.5 and almost 3 million tonnes (see Table 19.9). The EU also exports sugar produced within the quota that is surplus to domestic requirements. The bulk of quota sugar exports is exported under a weekly tender system. Traders tender for export refunds when EU prices for sugar are higher than world prices, or export taxes when prices are lower than world market prices. Small tonnages of sugar can be exported under a standing refund system. This refund is calculated regularly to reflect world market price
Table 19.9 EU 15 exports of C sugar Million tonnes wse 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02
1.991 1.581 2.369 3.148 2.033 3.385 3.775 1.320
Source: European Commission. Chapter 19/page 15
Sugar Trading Manual movements and is normally lower than the refund available under the tender. Export refunds are also payable on sugar exported in the form of processed goods, so called non-Annex I products, such as sugar confectionery, chocolate, biscuits, cakes, ice cream, soft drinks, etc. The EU currently exports about 3 million tonnes of quota sugar annually, with a further 800 000 tonnes exported in the form of processed products. In 2000/01 the total export tonnage was in the region of 4.3 million tonnes including C sugar. Fig. 19.9 shows the production, imports and consumption and hence the level of export surplus available since 1968/69.
Intervention The rules allow for sugar that cannot be sold on to the internal market to be sold into intervention at the intervention price. The EU’s authorities are obliged to buy in any sugar, which, subject to quality and packaging requirements, is offered to them. In practice there is little sugar sold into intervention (and none in recent years) as the European Commission, through the export tender mechanism, manages the market to allow for exports rather than intervention sales.
Other aspects of the sugar regime There are a number of other regulatory points included in the regime. Although these are worth mentioning it seems superfluous to go into any real detail in a publication of this kind.
Million tonnes wse
20 18 16 14 12 10 EC6
EC9
EC10
EC12
EC12+
EU15
1 3 9 7 5 3 1 9 7 5 3 1 9 7 1 5 9 3 /0 /0 /6 0/7 2/7 4/7 6/7 8/7 0/8 2/8 4/8 6/8 8/8 0/9 2/9 4/9 6/9 8/9 00 002 9 9 9 9 9 8 8 8 8 8 7 7 7 7 7 0 2 2 Max quota Quotas + Imports Consumption* Production*
68
*Figures adjusted to include production/consumption of states before accession
19.9 EU 15 sugar balance. Source: European Commission. Chapter 19/page 16
The European Union Quality standards Quality standards are established for sugar beet as well as raw and white sugar. Carryover Producers can carryover sugar, isoglucose or inulin syrup produced in excess of their A quota each year to be included in the quota the following year. They can carry over up to 20% of their A quota. The sugar carried over is either B or C sugar and becomes part of the following year’s A quota. This provides some security in case an undertaking fails to fill its A quota the following year and is especially useful when world market prices are low and producers are reluctant to sell C sugar on to the world market. It is mainly C sugar, rather than B, which is carried over each year as most undertakings fulfil their entire A and B quotas. National aids and cane refining aids Some countries, for example, Spain, Italy and Portugal, are able to pay national aids to their sugar producers and there are also a number of cane refining aids payable. Non-food uses for sugar and sugar beet on set-aside land A production subsidy is paid for the use of sugar for non-food purposes. This subsidy was introduced to encourage the use of sugar by chemical and pharmaceutical companies. In addition, sugar can be produced on set-aside land for industrial uses, although this in practice can only be used by a small number of ethanol producers.
Financing the sugar regime The sugar regime is unique among the EU commodity regimes in another respect. It is a low-cost regime in terms of the EU budget (see Fig. 19.10) and considered to be ‘self financing’. Unlike other commodities the sugar market is managed to export surpluses rather than store them as intervention stocks. The main cost of the regime is the cost of exporting surplus sugar. This cost is covered by levies paid by producers and domestic consumers. Production levies Production of all quota sugar (both A and B) is subject to a production levy of 2% of the intervention price. In addition B quota sugar is subject Chapter 19/page 17
Sugar Trading Manual
Billion euros
20
15
10
5
r ga Su
o cc ba
ar
To
ke
ts
in e us rio
nd ui ta Fr
Va
ilk
ve
m
ge
ta
W
bl es
er O
uc pr
od
th
ts
ts pl an M
ei n ot
& ts Fa
M
ea
pr
te
Ar
gg
ab
s
le
po
cr
op
s
ul try
0
19.10 EAGFF payments 2001. Source: Court of Auditors report 2002.
to a further levy of 30%, which can be increased to 37.5% at times of low world market prices. In recent years the maximum B quota levy of 37.5% has normally been applied. In addition, when the cost of export subsidies is particularly high, an additional levy can be charged the following marketing year. This additional levy was applicable in 1999 to cover the expenditure in 1998/99 at a rate of 16.52%. No additional levy was necessary in the earlier years of the regime applicable until June 2001. The levies are collected from the sugar companies, who, in turn, collect the share (60%) applicable to the beet price from the farmers. It is, therefore, the farmers and producers who pay for the cost of exporting quota sugar. Environmental considerations The regulation adopted in June 2001 included a new initiative on environmental considerations. This allows for environmental protection in that penalties can be charged by member states against producers failing to comply with environmental requirements. In addition member states have to submit to the European Commission reports on the impact of national measures adopted to protect the environment. Environmental aspects have until recent legislation largely been ignored but are now becoming much more central to all agricultural legislation.
Chapter 19/page 18
The European Union
Pressures for change: the EU sugar policy from 2006 When the EU established its policy until 2006, it instructed the European Commission to undertake a review in 2003. There are clearly a number of pressures, both internal and external, on the EU to agree major reforms for the regime to be operated from 2006.
Internal pressures for change Since the 1970s the regime has been under pressure for reform. Both the EU’s Court of Justice and Court of Auditors have been critical of the policy and the lack of competition in the market. In addition to the criticism cited by these bodies, there are several internal pressures for change. The first is the unease from consumers, particularly the industrial users of sugar, because of the high prices paid for sugar. Processed food manufacturers also have some problems with exporting their products because of the Uruguay Round commitments on export subsidies. From time to time emergency action has to be taken to curb the level of export refunds, and what the alternative industrial users would like to see is a reduction in the sugar support price, as has already happened in the cereal sector. This would ease the pressure on the commitments entered into and reduce the need to import under inward processing relief schemes. The second issue is the disparity between the prices paid to sugar beet farmers and those paid for other crop products. Most other crop products have been subjected to significant price decreases following reforms of the CAP, including the MacSharry reforms of 1992, the Agenda 2000 reforms of 1999 and the so-called Mid Term review of 2003. Thirdly, there are financial concerns. At the 1999 Berlin summit the EU heads of state decreed that agricultural spending would be capped at €40.5 billion (plus inflation adjustment) a year until 2006. Further, in October 2002 it was agreed that from 2007 spending on agriculture will be capped and will not increase by more than 1% a year up to 2013. This provides a double-edged sword as far as sugar is concerned. Sugar is a low-cost regime compared to other sectors in the CAP (see Fig. 19.10 above), and any reforms will presumably have to be at least budgetary neutral or, better still, provide a budgetary saving. This will be difficult as farmers faced with price cuts would be looking for compensation as happened for other crop products under the MacSharry and Agenda 2000 reforms. Budget restrictions, therefore, contribute to the pressures against radical reform.
Chapter 19/page 19
Sugar Trading Manual External pressures for change Now that the Uruguay Round transition period has ended the limits on import duties and on export subsidies remain in place until the conclusion of the next round. There are a number of countries looking for an early ending to export subsidies, and the policy is subject to a challenge from Brazil, Australia and Thailand within the WTO. A successful challenge would increase pressure for early reform of the sugar regime. The challenging countries believe that the export of C sugar is in fact subsidized because of the high prices paid for quota sugar. Further, they say that the re-export of sugar imported under the Sugar Protocol from the ACP countries and India should be included in the limits set on the cost and volume of subsidized exports. If the challenge is successful quota exports will have to be reduced and C sugar exports would cease. As for future WTO limits, these are being negotiated under the Doha Development Agenda. It must be remembered that sugar is only a small part of the negotiations on agriculture, which include all other sectors including difficult issues such as beef hormones, genetically modified foods, animal welfare etc. In addition, agriculture is only a small part of the whole negotiation, which covers other trade issues such as services, including financial services. (However, WTO members are committed to conclude a new deal on agriculture in isolation if necessary.) How much the EU will be under pressure from its trading partners to make substantial changes to the sugar sector is yet to be seen. Certainly sugar was one of the least targeted sectors during the Uruguay Round negotiations, but this is not the case this time and the practice of payments to subsidise exports has already come under real criticism. The limits on both volumes and cost of subsidized exports will clearly be tightened, and perhaps phased out altogether, thus reducing export opportunities for the EU. It is not just pressures on export refunds that will affect the current policy. The EU’s trading partners will look to extend the import tariff reductions (perhaps a continued phased reduction as applicable following the Uruguay Round agreement), and there will be challenges to the continuation of the safeguard mechanism that has so far provided significant protection to the EU market. In addition, there is a dilemma to be faced by the developing countries. Because of the Sugar Protocol many of the developing countries benefit from the higher support prices that apply in the EU. As support prices in the EU fall, so too do the prices paid to the ACP countries for sugar exported to the EU. This could seriously harm the returns sugar producers in ACP developing countries currently receive. Increasing duty-free access to the EU following bilateral agreements poses a threat to the sugar regime, which has been very protectionist Chapter 19/page 20
The European Union in the past. The EU’s agreement to allow imports from the 49 lesser developed countries under the GSP in full by 2009 could pose a threat while EU prices remain so much higher than world market prices. Production in these countries amounts to about 2 million tonnes, 95% for internal consumption currently. Further trade agreements, like the agreement to allow duty-free access to the Balkan states, makes EU sugar producers more vulnerable to third country competition. There is discussion too on reviews of the Sugar Protocol in the light of the Economic Parternship Agreement, and duty-free access to the EU market could be extended and negotiations with MERCOSUR could further increase imports.
The policy beyond 2006 In September 2003 the European Commission presented a paper outlining three possible reform options. The three options are: 1 maintain the status quo (adjusting quotas annually to meet WTO limits) 2 reducing internal prices and a phased abolition of production quotas 3 full market liberalization. Unless the EU decides to maintain the status quo, which is unlikely because of the pressures on the regime, there will be significant changes to the EU’s sugar policy from 2006. It seems unlikely that the member states will adopt a policy to allow full market liberalization, and there will have to be a period from 2006 which will see price and quota reductions. How far the changes will go depends on decisions to be taken by the EU’s member states as well as the results of bilateral trade agreements, the outcome of the Doha Development Agenda, possible further enlargement and world market conditions at the time. In the paper presented by the Commission in 2003 outlining the three options it is clear that the one most favoured by the Commission is a transitional reform. It is envisaged there would be a reduction in support prices of 15 to 20% by 2011, with a further price reduction in a second phase from 2011. During the second phase, production quotas could be phased out once the internal market was in balance, and during the whole tranistion period import tariffs would fall as would export subsidies. Currently quotas are not transferable between member states, but it is being suggested that during the transition period this may be allowed. Price cuts would affect the ACP countries currently exporting sugar to the EU under quota, and it is thought there will be some aid to be paid to these countries if a plan such as outlined is agreed by the 25 member states. As the current regime has been set only up to 30 June 2006 it will be necessary for the EU to agree on a legislative framework for the Chapter 19/page 21
Sugar Trading Manual policy to take effect from 1 July 2006. While the debate on the future regime began towards the end of 2003, the real discussions on reform will get under way in the second half of 2004 after the EU has completed the accession of the ten new member states on 1 May 2004, with decisions unlikely before 2005. In 2005 there will be a newly elected European Parliament and a new European Commission. The regime is very political and member states have shied away from reforming it in the past: the time may have come when significant reforms will have to be finalized.
Chapter 19/page 22
Appendix A: EU sugar support prices
TARGET PRICE – White sugar INTERVENTION PRICES White sugar – Common level – UK/Ireland/Portugal/Finland – Spain Raw sugar – Common level
July 1999– June 2001 /tonne
July 2001– June 2006[a] /tonne
665.00
665.00
0.00
0.00
631.90 646.50 648.80
631.90 646.50 648.80
0.00 0.00 0.00
0.00 0.00 0.00
523.70
523.70
0.00
0.00
EFFECTIVE SUPPORT PRICES [b] White sugar – Common level 651.90 – UK/Ireland/Portugal/Finland 666.50 – Spain 668.80 Raw sugar – Common level 546.70 BASIC BEET PRICE – EU ‘10’ MINIMUM BEET PRICE ‘A’ Quota (2% ‘A’ levy) – Common level – UK/Ireland/Portugal/Finland – Spain ‘B’ Quota (30.0% ‘B’ levy) – Common level – UK/Ireland/Portugal/Finland – Spain ‘B’ Quota (37.5% ‘B’ levy) – Common level – UK/Ireland/Portugal/Finland – Spain
% change
NA NA NA NA
47.67
47.67
0.00
0.00
46.72 48.62 48.92
46.72 48.62 48.92
0.00 0.00 0.00
0.00 0.00 0.00
32.42 34.32 34.62
32.42 34.32 34.62
0.00 0.00 0.00
0.00 0.00 0.00
28.84 30.74 31.04
28.84 30.74 31.04
0.00 0.00 0.00
0.00 0.00 0.00
-20.00 -18.40 -3.30
-100.00 -100.00 -100.00
0.00 0.00
0.00 0.00
STORAGE COST LEVY/REIMBURSEMENT – White sugar 20.00 – Raw sugar 18.40 – Storage cost monthly 3.30 reimbursement GUARANTEED ACP PRICE – White sugar – Raw sugar
Change /tonne
646.50 523.70
[b] NA NA NA
646.50 523.70
[a] Subject to future Council decisions. [b] No longer applicable from July 2001. Source: European Commission.
Chapter 19/page 23
Sugar Trading Manual
Appendix B: Basic sugar, isoglucose and inulin quotas in the EU (tonnes) 2001/02 to 2005/06 Member states
Sugar (tonnes wse) A Quota
B Quota
as % of Grand Total
Total
Isoglucose (tonnes dry matter) A Quota
314 028.9
73 297.5
387 326.4
2.2%
BLEU
674 905.5
144 906.1
819 811.6
4.7%
Czech Republic
441 209.0
13 653.0
454 862.0
2.6%
Denmark
325 000.0
95 745.5
420 745.5
2.4%
Finland
132 806.3
13 280.4
146 086.7
0.8%
10 792.0
1 079.7
11 871.7
France (Met)
2 506 487.4
752 259.5
3 258 746.9
18.7%
15 747.1
4 098.6
19 845.7
463 872.0
46 372.5
510 244.5
2.9%
Germany
56 150.6
0
0
0
Total
Austria
France (DOM)
0
B Quota
15 441.0
0
0
0 71 591.6
0
0
2 612 913.3
803 982.2
3 416 895.5
19.6%
28 643.3
6 745.5
Greece
288 638.0
28 863.8
317 501.8
1.8%
10 435.0
2 457.5
12 892.5
Hungary
400 454.0
1 230.0
401 684.0
2.3%
127 627.0
10 000.0
137 627.0
Ireland Italy Latvia
181 145.2
18 114.5
199 259.7
1.1%
1 310 903.9
246 539.3
1 557 443.2
8.9% 0.4%
0 16 432.1
0 3 869.8
35 388.8
0 20 301.9
66 400.0
105.0
66 505.0
Lithuania
103 010.0
0.0
103 010.0
0.6%
Netherlands
684 112.4
180 447.1
864 559.5
5.0%
7 364.6
1 734.5
9 099.1
1 580 000.0
91 926.0
1 671 926.0
9.6%
24 911.0
1 870.0
26 781.0
63 380.2
6 338.0
69 718.2
0.4%
8 027.0
1 890.3
9 917.3
9 048.2
904.8
9 953.0
0.1%
Slovakia
189 760.0
17 672
207 432.0
1.2%
Slovenia
48 157.0
4 816
52 973.0
0.3%
Spain
957 082.4
39 878.5
996 960.9
5.7%
Sweden
334 784.2
33 478.0
368 262.2
2.1%
1 035 115.4
103 511.5
1 138 626.9
6.5%
21 502.0
5 735.3
27 237.3
EU25 Total
14 723 213.3
2 717 321.2
17 440 534.5
100.0%
439 773.3
67 906.6
507 679.9
EU15 Total
11 894 223
2 587 919
14 482 143
83.0%
249 713
51 012
300 725
CC10Total
2 828 990
129 402
2 958 392
17.0%
190 060
16 895
206 955
Poland Portugal Portugal (Azores)
UK
Source: European Commission and JNA calculations.
Chapter 19/page 24
0
0
0
37 522.0
5 025.0
42 547.0
74 619.6
7 959.4
82 579.0
0
0
0
The European Union
as % of Grand Total 0.0% 14.1%
Inulin (tonnes dry matter) A Quota 0 174 218.6
B Quota 0 41 028.2
as % of Grand Total
Total 0 215 246.8
A Total
B Total
All Quota
as % of Grand Total
0.0%
314 029
73 298
387 326
67.1%
905 275
201 375
1 106 650
2.1% 6.1%
441 209
13 653
454 862
2.5% 2.3%
0.0%
0
0
0
0.0%
325 000
95 746
420 746
2.3%
0
0
0
0.0%
143 598
14 360
157 958
0.9%
7.6%
2 542 082
761 032
3 303 114
18.1%
3.9%
19 847.1
4 674.2
24 521.3
0.0%
0
0
0
0.0%
463 872
46 373
510 245
2.8%
7.0%
0
0
0
0.0%
2 641 557
810 728
3 452 284
18.9%
2.5%
0
0
0
0.0%
299 073
31 321
330 394
1.8%
528 081
11 230
539 311
3.0% 1.1%
27.1% 0.0%
0
0
0
0.0%
181 145
18 115
199 260
4.0%
0
0
0
0.0%
1 327 336
250 409
1 577 745
8.6%
66 400
105
66 505
0.4%
103 010
0
103 010
0.6%
756 996
197 612
954 609
5.2%
1 604 911
93 796
1 698 707
9.3%
0.0% 0.0% 1.8%
65 519.4
15 430.5
80 949.9
25.2%
5.3% 2.0%
0
0
0
0.0%
71 407
8 228
79 636
0.4%
0.0%
0
0
0
0.0%
9 048
905
9 953
0.1%
8.4%
227 282
22 697
249 979
1.4%
0.0%
48 157
4 816
52 973
0.3%
16.3%
0
0
0
0.0%
1 031 702
47 838
1 079 540
5.9%
0.0%
0
0
0
0.0%
334 784
33 478
368 262
2.0%
5.4%
0
0
0
0.0%
1 056 617
109 247
1 165 864
6.4%
100.0%
259 585.1
61 132.9
320 718
100.0%
15 422 571.7
2 846 360.7
18 268 932.4
59.2%
259 585.1
61 132.9
320 718
100.0%
12 403 522
2 700 064
15 103 586
82.7%
3 019 050
146 297
3 165 347
17.3%
40.8%
100.0%
Chapter 19/page 25
Chapter 19/page 26
0.020888
0.042563
0.010082
0.025064
0.005236
0.196442
0.017779
0.207111
0.011379
0.006192
0.007142
0.075996
BLEU
Czech Republic
Denmark
Finland
France (Met)
France (DOM)
Germany
Greece
Hungary
Ireland
Italy
0.014293
0.001901
0.000019
0.001138
0.063728
0.001901
0.058260
0.000523
0.007384
0.000312
0.009139
0.004875
0.042216
—
0.169295
0.026809
0.073589
—
0.043118
0.016343
—
—
0.159218
—
A Isoglucose
A Sugar
0.009941
—
0.013265
0.006314
0.017331
—
0.011223
0.001635
—
—
0.043784
—
B Isoglucose
Coefficient applicable to isoglucose in dry matter
Coefficient applicable to sugar expressed as white sugar B Sugar
2
1
Austria
Member States
—
—
—
—
—
—
0.058922
—
—
—
0.556265
—
A Inulin syrup
—
—
—
—
—
—
0.013847
—
—
—
0.130955
—
B Inulin syrup
Coefficient applicable to inulin syrup as sugar/isoglucose equivalent
3
Appendix C: Coefficients used to cut Member States’ quotas for sugar, isoglucose and inulin: applicable from 2004/05
Sugar Trading Manual
0.001506
0.049189
0.046920
0.002140
0.000357
0.007207
0.001904
0.024376
0.013199
0.040809
Lithuania
Netherlands
Poland
Portugal
Portugal (Azores)
Slovakia
Slovenia
Spain
Sweden
UK
0.004081
0.001320
0.001015
0.000190
0.000671
0.000036
0.000214
0.002730
0.012974
—
0.000002
Source: Council Regulation (EC) No 1260/2001.
0.001000
Latvia
0.059801
—
0.117280
—
0.067725
—
0.020622
0.003230
0.018921
—
—
0.015951
—
0.012510
—
0.009070
—
0.004857
0.002425
0.004456
—
—
—
—
—
—
—
—
—
—
0.194365
—
—
—
—
—
—
—
—
—
—
0.045646
—
—
The European Union
Chapter 19/page 27
Appendix D: EU production quotas for sugar, isoglucose and inulin 2000/01 Sugar (1)
Isoglucose (2)
Inulin (2)
Base quantities 2001/2002 to 2005/2006 and set for 2001/02 Sugar (1)
Austria
Belgium
Denmark
Finland
France Metropolitan France DOM France Total Germany
Greece
Ireland
Italy
Netherlands
Portugal Mainland Portugal Azores Portugal Total Spain
Sweden
UK
EU Total
A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum
305 685.0 71 350.0 377 035.0 657 903.1 141 255.5 799 158.6 314 988.0 92 795.9 407 783.9 130 715.0 13 071.3 143 786.3 2 458 016.6 728 987.1 3 187 003.7 426 770.2 45 613.3 472 383.5 2 884 786.8 774 600.4 3 659 387.2 2 530 180.6 778 525.6 3 308 706.2 284 092.3 28 409.3 312 501.6 178 292.4 17 829.3 196 121.7 1 280 546.5 240 830.0 1 521 376.5 664 463.4 175 264.4 839 727.8 62 525.4 6 252.6 68 778.0
A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum A Quota B Quota Maximum
8 905.8 890.4 9 796.2 71 431.2 7 143.0 78 574.2 947 345.3 39 472.9 986 818.2 329 511.7 32 950.6 362 462.3 1 018 813.8 101 881.2 1 120 695.0
20 854.7 5 562.6 26 417.3
A Quota B Quota Maximum
11 598 755.1 2 515 379.4 14 114 134.5
243 457.4 49 626.3 293 083.7
54 427.0 14 967.0 69 394.0
10 615.1 1 062.0 11 677.1 15 280.4 3 977.1 19 257.5
15 280.4 3 977.1 19 257.5 27 846.7 6 558.2 34 404.9 10 144.8 2 389.2 12 534.0
15 975.1 3 762.1 19 737.2 7 159.8 1 686.3 8 846.1 7 803.8 1 837.8 9 641.6
169 685.2 39 961.0 209 646.2
19 366.9 4 561.3 23 928.2
19 366.9 4 561.3 23 928.2
63 935.3 15 058.5 78 993.8
7 803.8 1 837.8 9 641.6 73 350.0 7 824.0 81 174.0
252 987.4 59 580.8 312 568.2
EU Total: sugar, isoglucose, inulin
14 719 786.4
Change from previous year Change from basic quantity
(498 799.6) (498 799.6)
(1) tonnes white sugar equivalent. (2) tonnes dry matter. Source: European Commission.
314 028.9 73 297.5 387 326.4 674 905.5 144 906.1 819 811.6 325 000.0 95 745.5 420 745.5 132 806.3 13 280.4 146 086.7 2 536 487.4 752 259.5 3 288 746.9 433 872.0 46 372.5 480 244.5 2 970 359.4 798 632.0 3 768 991.4 2 612 913.3 803 982.2 3 416 895.5 288 638.0 28 863.8 317 501.8 181 145.2 18 114.5 199 259.7 1 310 903.9 246 539.3 1 557 443.2 684 112.4 180 447.1 864 559.5 63 380.2 6 338.0 69 718.2 9048.2 904.8 9 953.0 72 428.4 7 242.8 79 671.2 957 082.4 39 878.5 996 960.9 334 784.2 33 478.0 368 262.2 1 035 115.4 103 511.5 1 138 626.9 11 894 223.3 2 587 919.2 14 482 142.5
Isoglucose (2)
56 150.6 15 441.0 71 591.6
10 792.0 1 079.7 11 871.7 15 747.1 4 098.6 19 845.7
15 747.1 4 098.6 19 845.7 28 643.3 6 745.8 35 389.1 10 435.0 2 457.5 12 892.5
16 432.1 3 869.8 20 301.9 7 364.6 1 734.5 9 099.1 8 027.0 1 890.3 9 917.3
8 027.0 1 890.3 9 917.3 74 619.6 7 959.4 82 579.0
21 502.0 5 735.3 27 237.3 249 713.3 51 011.9 300 725.2
2002/03 Sugar (1)
2003/04 Isoglucose (2)
Inulin (2)
Sugar (1)
Isoglucose (2)
Inulin (2)
Inulin (2)
174 218.6 41 028.2 215 246.8
19 847.1 4 674.2 24 521.3
19 847.1 4 674.2 24 521.3
65 519.4 15 430.5 80 949.9
259 585.1 61 132.9 320 718.0
295 278.6 68 921.1 364 199.7 636 697.8 136 702.4 773 400.2 302 501.0 89 117.2 391 618.2 128 106.5 12 810.7 140 917.2 2 360 147.9 699 961.6 3 060 109.5 417 912.8 44 666.4 462 579.2 2 778 060.7 744 628.0 3 522 688.7 2 426 996.4 746 776.1 3 173 772.5 278 423.0 27 842.5 306 265.5 174 734.4 17 473.6 192 208.0 1 242 684.8 233 709.4 1 476 394.2 639 957.0 168 800.6 808 757.6 61 459.1 6 146.1 67 605.2 8 728.2 872.5 9 600.7 70 187.3 7 018.6 77 205.9 935 201.1 38 967.2 974 168.3 322 935.9 32 292.9 355 228.8 998 482.3 99 847.9 1 098 330.2 11 230 246.8 2 424 908.2 13 655 155.0
52 277.4 14 375.9 66 653.3
10 394.4 1 039.9 11 434.3 14 698.2 3 825.6 18 523.8
14 698.2 3 825.6 18 523.8 26 853.1 6 323.9 33 177.0 9 782.8 2 303.9 12 086.7
15 405.1 3 628.0 19 033.1 6 904.3 1 626.1 8 530.4 7 525.3 1 772.2 9 297.5
164 031.0 38 629.9 202 660.9
18 768.0 4 420.6 23 188.6
18 768.0 4 420.6 23 188.6
61 959.7 14 594.5 76 554.2
7 525.3 1 772.2 9 297.5 71 766.6 7 655.1 79 421.7
20 047.3 5 347.3 25 394.6 235 654.5 47 897.9 283 552.4
244 758.7 57 645.0 302 403.7
309 343.6 72 203.9 381 547.5 665 358.3 142 586.2 807 944.5 319 378.0 94 089.2 413 467.2 131 631.9 13 163.0 144 794.9 2 492 424.1 739 191.4 3 231 615.5 429 884.2 45 946.2 475 830.4 2 922 308.3 785 137.6 3 707 445.9 2 566 456.9 789 687.7 3 356 144.6 286 085.5 28 608.6 314 694.1 179 543.3 17 954.3 197 497.6 1 293 857.5 243 333.4 1 537 190.9 673 079.0 177 536.9 850 615.9 62 900.2 6 290.1 69 190.3 8 968.2 896.7 9 864.9 71 868.4 7 186.8 79 055.2 951 614.8 39 650.8 991 265.6 331 823.6 33 181.9 365 005.5 1 025 961.6 102 596.1 1 128 557.7 11 728 310.7 2 546 916.4 14 275 227.1
55 182.8 15 174.9 70 357.7
171 672.9 40 428.9 212 101.8
10 692.7 1 069.8 11 762.5 15 485.0 4 030.4 19 515.4
19 577.5 4 610.8 24 188.3
15 485.0 4 030.4 19 515.4 28 196.0 6 640.2 34 836.2 10 272.0 2 419.1 12 691.1
16 175.5 3 809.4 19 984.9 7 249.6 1 707.4 8 957.0 7 901.6 1 860.0 9 761.6
19 577.5 4 610.8 24 188.3
64 629.9 15 221.6 79 851.5
7 901.6 1 860.0 9 761.6 73 906.7 7 883.4 81 790.1
21 138.5 5 638.3 26 776.8 246 200.4 50 232.9 296 433.3
255 880.3 60 261.3 316 141.6
15 103 585.7
14 241 111.1
14 887 802.0
(383 799.3) 0.0
(862 474.6) 14 241 111.1
646 690.9 14887 802.0
Chapter 19/page 30
20 000
69 000
Trinidad &
1 304 700.0
Total
5 000
1 303 899.0
—
69 000
10 000
116 400
3 199
14 800
487 200
20 000
10 000
5 000
118 300
—
25 000
157 700
163 600
10 000
39 400
49 300
1977/78
409 1 288 826.0
—
69 000
10 000
116 400
2 667
14 800
487 200
20 000
10 000
93
118 300
—
25 000
157 700
163 600
4 957
39 400
49 300
1978/79
0 1 288 417.0
—
69 000
10 000
116 400
2 667
14 800
487 200
20 000
10 000
93
118 300
—
25 000
157 700
163 600
4 957
39 400
49 300
1979/80
0 1 287 384.0
—
69 000
10 000
116 400
1 634
14 800
487 200
20 000
10 000
93
118 300
—
25 000
157 700
163 600
4 957
39 400
49 300
1980/81
1 266 750.0
6 000
0
69 000
10 000
116 400
0
14 800
487 200
20 000
10 000
93
118 300
—
0
157 700
163 600
4 957
39 400
49 300
1981/82
1 289 657.0
25 000
0
69 000
10 000
116 400
0
14 800
487 200
20 000
10 000
4 000
118 300
—
0
157 700
163 600
4 957
39 400
49 300
1982/83
(a) Until 1984 called St Kitts/Nevis/Anguilla. (b) For 1981/82 the 6000 tonnes is not a quota but a special arrangement for that one year. The quota was set from 1982/83. Source: European Commission.
—
Zimbabwe (b)
Uganda
5 000
10 000
Tanzania
Tobago
4 000
116 400
Swaziland
14 800
Suriname
/Nevis (a)
St Christopher
487 200
Malawi
Mauritius
10 000
5 000
118 300
—
Madagascar
Kenya
Jamaica
Ivory Coast
25 000
157 700
India
163 600
10 000
Congo
Guyana
39 400
Belize
Fiji
49 300
Barbados
1975/76 1976/77
Tonnes white sugar equivalent
1 304 700.0
25 000
0
69 000
10 000
116 400
0
14 800
487 200
20 000
10 000
4 000
118 300
2 000
10 000
157 700
163 600
8 000
39 400
49 300
1983/84
1 304 700.0
30 000.0
0
43 500.0
10 000.0
117 450.2
0
15 394.4
489 914.2
20 617.8
10 572.8
5 000.0
118 300.0
10 000.0
10 000.0
158 935.3
164 862.1
10 000.0
40 104.4
50 048.8
1984/85 –1985/86
Appendix E: Preferential sugar quotas for ACP and India
1 304 700.0
30 224.8
0
43 751.0
10 186.1
117 844.5
0
15 590.9
491 030.5
20 824.4
10 760.0
0.0
118 696.0
10 186.1
10 000.0
159 410.1
165 348.3
10 186.1
40 348.8
50 312.4
From 1986/87
Sugar Trading Manual
20 The United States Frank Jenkins Jenkins Sugar Group
US sugar policy Tariff rate quota Sugar program apparatus Re-export programs The US sugar beet industry Far West Great Lakes Great Plains Red River Valley
The US cane sugar industry Florida Louisiana Hawaii Texas Puerto Rico Industry structure
Free trade
The United States is home to a diverse and complex sugar market. Both cane and beet sugar are produced in the United States. In the 2001–02 October/September crop year, domestic production is expected to total 7.652 million tonnes. Beet production is estimated to total 3.855 million tonnes, well below the past several years’ levels due to lower prices and related plant closures. Cane sugar production from the 2001–02 crop is expected to total 3.797 million tonnes. The US is the world’s fifth largest producer of sugar behind the combined European Union (EU), Brazil, China and India. This production is supplemented by imports, which are managed by the United States government. The United States Department of Agriculture (USDA) is responsible for the management of the US sugar program, the cornerstone of which is a price support regime, administered through the USDA’s making government loans to cane and beet sugar producers, combined with a restrictive import policy. The result is a US internal sugar price for both raws and white sugar which is significantly higher than the world sugar price as reflected by the futures markets in London and New York. The US, including Puerto Rico, had an estimated 275.3 million consumers in the year 1999. With total domestic consumption estimated at 8.546 million mt for 1999–2000, the US is the world’s third largest consumer of sugar, behind India and the combined European Union. Per capita consumption based on distribution for domestic food and beverage use is estimated at 66.4 pounds (30.11 kilos), refined value. Per capita consumption for all uses is over 68 pounds (30.85 kilos) refined value. Domestic deliveries are expected to grow by just under 1% from 2000–01 to 2001–02, with the growth in consumption expected at a rate of 1.36% between 2008 and 2009 according to Department of Agriculture predictions. Total US disappearance should rise to 10.523 million tonnes by the year 2010.
US sugar policy The basis for much of the structure built up around the US sugar policy is the USDA’s loan program. Since 1981, the Commodity Credit Corporation (CCC) has provided price supports for domestically grown sugar cane and sugar beet. The national average loan rate since the 1995 crop year has been 18.00 cents per pound for cane sugar and 22.90 cents per pound for beet sugar. These levels were fixed for the seven-year life of the 1996 US farm bill, known as the Federal Agriculture Improvement and Reform Act (FAIR Act). Given that the loan rates are substantially higher than the world price for sugar, US domestic prices must be maintained at artificially high levels to ensure that growers can repay loans to the CCC. A quota system, supplemented with a multi-tiered tariff system has been employed to provide Chapter 20/page 1
Sugar Trading Manual sufficient prices in the US to ensure orderly marketing of the domestic crop. This system of quotas is contentious. The sugar program comes under regular attack from a variety of quarters, both from within the United States and from abroad. In the US, industrial users of sugar are forced to pay prices that are regularly at multiples of the world market price as reflected on the New York raw sugar or London white sugar futures markets. A study published by the US Government General Accounting Office (GAO) in 1993 placed the cost of the US sugar program to US consumers at $1.4 billion per year. From abroad, US sugar legislation is criticized as protectionist. Several efficient producers have cried loudly for the program’s demise – even some quota-holding countries that enjoy access to the US market’s high price structure on a limited basis would clearly prefer increased access to the US market at world market levels. Total foreign receipts of sugar by the US stood at 4.196 million tonnes in 1977/8 and at 4.428 million tonnes in 1980/1. The 1981/2 fiscal year, the first year that quota imports were seen under the new regime, saw total offshore receipts drop to 3.278 million tonnes and in the 1982/3 year, total offshore receipts totalled 2.817 million tonnes. Unfettered access to a substantially larger market, even at lower prices, would be cheered by many efficient producers, particularly given the widely held assumption that a freely traded US market would give a boost to the world sugar price in general. The reduction in imports was not offset by an increase in domestic cane or beet production but rather by a reduction in deliveries for domestic food and beverage use. Domestic deliveries for food and beverage use declined from 9.846 million tonnes in 1977/8 to 8.900 million tonnes in 1980–1, and to 8.050 million tonnes in 1981–2. The decline continued for several more years as US bottlers shifted away from sucrose to high fructose corn sweeteners. Domestic deliveries for food and beverage use bottomed in 1985–6 at 7.071 million tonnes, nearly 28% below levels seen in 1977–8. Unlike many other US agricultural price support programs, the sugar program does not provide for direct payments to growers and thus does not represent any ‘cost’ – there is no line item for sugar support payments in the US budget. The program thus is more politically palatable than many other such programs. As evidence of this, the 1996 farm act, dubbed the Federal Agriculture Improvement and Reform Act, did little to alter the workings of the sugar program while imposing wrenching changes on US agriculture as a whole. Proponents of the US sugar program claim, with some reason, that there are very few free and open markets for sugar in the world –
Chapter 20/page 2
The United States most internal markets are protected and the world sugar price as reflected in the New York Coffee, Sugar and Cocoa Exchange illustrates a ‘dump market’. Unilateral disarmament with regard to sugar trade policy would be crippling to the US industry. Effective lobbying in the nation’s capitol by the US industry has played an important role in keeping price supports intact. Given that the US has been in active trade negotiations between the NAFTA, the WTO rounds and, more recently the Free Trade Agreement of the Americas, for much of recent history, and that domestic farm legislation must regularly be renewed, there have been myriad opportunities to attack and reform sugar legislation. There has been little appetite in Washington, however, to alienate as important a political constituency as the US sugar industry – beets are grown in 14 states, including California, and cane is grown in four states, including Florida and Texas. These rank among the nation’s most populous states, and are thus politically critical.
Tariff rate quota Almost without exception, the US has restricted sugar imports since 1934 with the imposition of a quota to regulate domestic sugar supplies under the Jones–Costigan Act. Then, as now, the USDA was charged with gauging domestic needs. A small group comprised of domestic cane and beet producers, Hawaii, Puerto Rico, the Philippines and the Virgin Islands (US dependencies at the time) and neighbouring Cuba, were allocated virtually all of the raw sugar quota. A series of events has served to transform the quota over the ensuing years: the Cuban Revolution and subsequent embargo precluded Cuban imports, the Philippines became independent while Hawaii opted for statehood, altering the status of the roster of players, and a spike in world sugar prices to 60 cents in 1974 effectively upended the playing field. The quota was removed and replaced by an ineffective tariff system. As prices returned to more normal levels, quotas were reimposed. A system of quotas employing various duty and fee structures has been in place since May 1982. On 13 September 1990, the quota system was converted from an absolute quota to a tariff rate quota (TRQ) in order to bring the programme in line with the prescripts of the General Agreement on Tariffs and Trade (GATT). Country specific quotas were allocated among exporters based on their historical US raw sugar market share during the period 1975–81. Access to the US market at the ‘low duty rate’ of 0.625 cents per pound is granted to 40 countries under the TRQ. Countries covered under the Caribbean Basin Initiative and the Generalized System of Preferences (GSP) are
Chapter 20/page 3
Sugar Trading Manual currently granted duty-free access under the TRQ, however, thus the only countries currently subject to low tier duty are Argentina, Australia, Brazil, Gabon and Taiwan. Under GATT provisions, the current quota holders are entitled to their historical share of the US TRQ based on the GATT minimum access of 1.25 million short tons (1.134 million tonnes). A list of quota holders and their respective percentage of the total TRQ is shown in Table 20.1. The Secretary of Agriculture establishes the TRQ amount annually. Under the provisions of the FAIR Act, the quota amount is set prior to the 1 October beginning of the US fiscal year. The total amount of TRQ imports is derived using data published monthly in the USDA’s World Agricultural Supply and Demand Estimate (WASDE). The annual ending stocks-to-use ratio reported in the WASDE is the basis for the secretary’s determination of quota size. From 1997 to 1999, the USDA had set the initial quota size to provide for a projected ending stocksto-use ratio of approximately 14.5%. More recently, oversupply in the US has forced the USDA to set the quota at the GATT minimum. The US Trade Representatives Office makes an initial allotment available for allocation on a country-by-country basis. Under the current rules, additional quota allocations are made in January, March and May if the ending fiscal year stocks-to-use ratio as published in the WASDE reports for those same months, is equal to or less than 15.5%. If the ending stocks-to-use ratio is above the 15.5% threshold, the scheduled tranche is cancelled, and the total quota for the fiscal year in question is reduced by a corresponding amount. This system of continually monitoring supply as reflected in ending stocks and ending stocks-touse ratios and removing supply if stocks rise above a pre-determined level ensures that prices are maintained at levels sufficient to preclude loan forfeitures. For example, for the 1998/9 program year the USDA announced an initial quota of 1 614 915 tonnes and made available for immediate allocation of 1 164 958 tonnes. Three TRQ tranches of 150 000 tonnes each were withheld for allocation in January, March and May if the ending fiscal year stocks-to-use as published in the WASDE report in those same months were equal to or below 15.5%. As the projected ending stocks-to-use ratio published in January was in excess of 15.5%, the January tranche was cancelled, and the total quota, including unallocated March and May tranches, was reduced to 1 465 915 million tonnes. March WASDE numbers were released two months later, showing an ending stocks-to-use ratio of 15.9%, and a second 150 000 tonnes quota tranche was cancelled, reducing the potential total quota to 1 314 934 tonnes. Subsequently, May WASDE numbers were released on 12 May. Owing to an anticipated surge in over-quota imports from Mexico the ending stocks-to-use ratio was estimated at 16.0%, again Chapter 20/page 4
The United States Table 20.1 GATT mandated minimum quota access Country
Percentage
Argentina Australia Barbados Belize Bolivia Brazil Canada Colombia Congo
4.3 8.3 0.7 1.1 0.8 14.5 1.11 2.4 0.3
Comments
Approximate GATT minimum access 46 581 89 912 7 583 11 916 8 666 157 076
Minimum boat-load country2
25 999 7 258
Costa Rica Cote d’Ivoire
1.5 0.3
Dominican Republic Ecuador El Salvador Fiji Gabon
17.6
190 657
1.1 2.6 0.9 0.3
11 916 28 165 9 750 7 258
Guatemala Guyana Haiti
4.8 1.2 0.3*
Honduras India Jamaica Madagascar
1.0 0.8 1.1 0.3*
Malawi Mauritius Mexico Mozambique Nicaragua Panama Papua New Guinea Paraguay
1.0 1.2 N/A 1.3 2.1 2.9 0.3 0.3
Minimum boat-load country2
Minimum boat-load country2
Minimum boat-load country2
Minimum boat-load country2
16 249 7 258
51 997 12 999 7 258 10 833 8 666 11 916 7 258 10 833 12 999
Previously minimum boat-load country3
Minimum boat-load country2 Minimum boat-load country2
14 083 22 749 31 415 7 258 7 258 Chapter 20/page 5
Sugar Trading Manual Table 20.1 (cont.) Country
Peru
Percentage
Comments
Approximate GATT minimum access
4.1
44 415
13.5
146 243
South Africa
2.3
24 915
St Kitts
0.3
Swaziland
1.6
17 332
Taiwan
1.2
12 999
Thailand
1.4
15 166
Trinidad/Tobago
0.7
7 583
Uruguay
0.3
Zimbabwe
1.2
Philippines
Minimum boat-load country2
Minimum boat-load country2
7 258
7 258 12 999
Notes: 1 As of the beginning of the 1991 fiscal year, Canada is exempt from the TRQ second tier duty and thus faces no prohibitive duty. Canada previously had a 1.1% quota share. 2 Minimum boat-load countries are allocated a quantity deemed economically shippable by the USDA. For 1998–9, the minimum boat-load quantity is 7258 mt. 3 Mexico’s access to the US market is limited to 25 000 mt through fiscal year 1999–2000. Prior to passage of the NAFTA, Mexico had minimum boat-load access.
precluding the allocation of the quota tranche. The total quota supply allowed for allocation for the 1998/9 program year was essentially the minimum allowed under the GATT as the USDA withheld 450 000 tonnes of potential quota from the market in order to reduce stock levels in the US. The USDA thus continually monitors domestic stocks and adjusts imports to ensure the orderly marketing of the domestically produced cane and beet crops. In the 1999–2000 program year, domestic stocks built significantly, and in the 2000–01 year, the USDA was forced to set the initial TRQ at the GATT minimum, making only a token reference to a potential quota increase if needed. The Department thus lost its ability to adjust stocks, and prices, through management of the TRQ. The result was that nearly one million tonnes of sugar were either defaulted or sold into the government’s hands. Chapter 20/page 6
The United States
Sugar program apparatus As mentioned, the cornerstone of the US sugar program is a price support system. The sugar price support system is administered by the CCC through making loans to processors of sugar cane and sugar beets. The FAIR Act fixed the loan rate for cane sugar at 18.00 cents per pound and the rate for beet sugar at 22.90 cents per pound. The rates are adjusted to reflect geographic processing location. These differentials adjust the loan rate for sugar processed in specific regions based on transportation costs associated with moving products to traditional markets. Thus the adjusted loan rate for a processor in Florida is higher than that for a processor in Hawaii. In order to participate in the loan program, an eligible processor must guarantee a minimum payment, specified by the CCC, to all growers who deliver sugar cane or sugar beet to the processor for processing. Processors must pledge eligible sugar as collateral for the loan and must maintain pledged sugar in an approved eligible warehouse. On 27 June 1997, the USDA altered the definition of the domestic crop year for the purposes of the loan program. The year was changed from a June/July basis to an October/September basis to coincide with the fiscal and program years. This eliminated the need for loans to be extended in regions where beets are harvested during the July–September quarter. Loans are not made available before the beginning of the fiscal year and mature on the last day of the ninth month following the month of loan disbursement or the end of the fiscal year whichever is earlier. Under the provisions of the FAIR Act farm legislation, US loans are non-recourse as long as the initial total US tariff rate import quota for the relevant crop year is at, or in excess of, 1.5 million short tons. If domestic prices are not sufficient to allow for loan repayment, the raw cane or refined beet sugar placed under loan can be forfeited to the CCC in lieu of repayment in the processor’s option. If the TRQ was initially set at or below 1.50 million short tons (1.36 million tonnes), loans granted under the program are recourse loans and the USDA can demand repayment of the loan, regardless of the price of sugar. During the 2000–01 program year, grower interests introduced legislation guaranteeing that all sugar loans made during the duration of the FAIR Act would be made on a non-recourse basis, allowing for sugar to be defaulted as collateral regardless of the TRQ size – a major defeat for those who had sought to reform the sugar program through the FAIR Act. Among the components of the FAIR Act, sugar legislation, was the imposition of a 1 cent penalty to be paid by cane processors on each pound of raw sugar forfeited to the CCC, and a 1.07 cent penalty paid by beet processors on each pound of refined sugar so forfeited. While Chapter 20/page 7
Sugar Trading Manual the act fixed the cane loan rate at 18 cents per pound and the beet loan rate at 22.90 cents per pound, the impact of this penalty was to reduce the effective loan rate. A cane grower could borrow 18.00 cents under the loan program, but would be penalized 1 cent upon forfeiture, essentially reducing his break-even calculation on his loan to 17.00 cents. Thus the level where economic forfeitures could occur was reduced by 1 cent under the FAIR Act. When sugar collateral is forfeited, the CCC must negotiate a storage contract with the processor, specifying the rate at which the government will pay for storage at a satisfactory site. The CCC must release a program announcement indicating instruction on how to submit bids for the purchase of the forfeited sugar. Section 407 of the Agricultural Act of 1949, as amended, provides that the CCC may not sell a storable non-basic commodity for less than 115% of the current support price, plus reasonable carrying charges. The CCC can sell sugar below this threshold if the sugar is sold as a new product or byproduct for other than primary uses, or if the sugar had substantially deteriorated in quality or if there were a danger that such deterioration could occur. Furthermore, the CCC can sell forfeited sugar below the 115% threshold if lower prices are deemed desirable owing to age, location or continued storage concerns as long as the sales do not substantially impair any price support program or unduly affect market prices. Starting in 1985, the USDA was under congressional mandate to operate the sugar price support program at no net cost to the Federal Government. Section 902 of the Food Security Act of 1985 states that: Beginning with the quota year for sugar which begins after the 1985–86 quota year, the President shall use all authority available to the President as is necessary to enable the Secretary of Agriculture to operate the sugar program established under section 206 of the Agriculture Act of 1949 at no cost to the Federal Government by preventing the accumulation of sugar acquired by the Commodity Credit Corporation. While the above language allowed USDA to take a broad array of actions after forfeitures had occurred, ranging from the implementation of restrictive shipping patterns to extention of the quota year for a minimum of three months, this mandate, commonly referred to as the ‘no cost provision’, laid the groundwork for a more restrictive import policy. The predominant consideration guiding import policy was the prevention of forfeitures as a subsequent resale by the CCC, at a level insufficient to recover the cost of the loan plus storage and carrying charges, would be, for all intents and purposes, unlawful. Chapter 20/page 8
The United States The 1996 FAIR Act farm legislation rendered the no cost provision obsolete. Thus, while the avoidance of forfeitures remained a guiding principle for the management of the domestic program, the potential remedies available to the USDA in the event of a forfeiture were greatly expanded. In addition to import restrictions, the USDA has recently employed other means to ensure that domestic raw and refined prices are maintained at levels high enough to preclude forfeitures. Domestic production controls were imposed briefly in the form of marketing allotments. The imposition of marketing controls on domestically produced sugar is provided for in part VII of subtitle B of title III of the Agricultural Adjustment Act of 1938. On 29 June 1993, the CCC issued an interim rule imposing marketing allotments. Under this cumbersome program, the Secretary of Agriculture was directed to allocate the beet and cane marketing allotments not only by producing state or by region, but also at the processor level based on past marketings, processing capacity and ability to market. Once allotments were imposed, any processor whose marketings exceeded that processor’s allocation would be liable to the CCC for civil penalties in an amount equal to three times the US market value of the sugar marketed in excess of the allocated amount. To prevent sugar produced in excess of a processor’s allotment from being forfeited to the CCC, forfeited quantities of sugar would be considered as marketed, thus exposing the processor to treble damages. Allotment is reallocated from processors whose production exceeded their allotment to deficit processors, but cane production could only be reallocated within the cane sector and beet sugar could only be reallocated within the beet sector. Allotments were imposed for the first time in the fourth quarter of fiscal year 1993. Two direct results were an increase in domestic refined prices from 23.50 cents per pound to roughly 29.00 cents per pound and a lawsuit brought by four US beet sugar processors charging that the USDA had exceeded its authority in imposing allotments. The 1996 US farm bill, known as the Federal Agriculture Improvement and Reform Act (FAIR Act) eliminated authority for marketing allotments. Chaotic conditions and loan defaults during the 2000–01 program year have brought the idea of marketing allotments back into vogue with domestic producer interests as the negotiations for the 2003 farm legislation get underway. USDA-imposed shipping patterns further regulate the flow of sugar into the US by allowing certain significant shippers to deliver only a proportionate percentage of their allocated quota in each quarter or each half of the quota year at the Department’s discretion. The market activity during the 1999–2000 program year laid bare the inadequacies of the current sugar program. A large domestic crop ensured that TRQ imports would be set at the GATT mandated Chapter 20/page 9
Sugar Trading Manual minimum at the outset of the quota year, removing the USDA’s only effective tool for managing total supply. Domestic prices for both cane and beet remained significantly below levels that would allow producers and processors to repay CCC loans. In an effort to shore up prices, the CCC preemptively purchased 119 750 tonnes of refined sugar in June 2000. Despite this effort, in July Amalgamated Sugar defaulted on loans covering 38 100 tonnes of refined beet sugar. This event was followed by forfeitures totaling 51 030 tonnes of refined beet sugar and 43 400 tonnes of raw sugar from Florida in August. These forfeitures did little to revive prices, and in September loans covering 452 983 tonnes of beets and 224 208 tonnes of raws were defaulted on. Thus 809 662 tonnes of sugar were put into CCC hands through forfeitures in addition to the 119 750 tonnes purchased. The CCC subsequently announced a PIK program in an attempt to move stocks from the CCC back into the market. As a result 101 000 acres of beets were plowed under. Growers who had plowed under beets were given a like amount of refined sugar from CCC stocks. Despite this effort, as of July 2001, the CCC was still in possession of 721 219 tonnes raw value of beet and cane sugar.
Re-export programs The USDA allows for the import of raw sugar into the US outside the TRQ under three separate programs. 1 The Refined Sugar Re-export Program. 2 The Sugar-Containing Products Re-export Program. 3 The Polyhydric Alcohol Program. None of these programs allow for the import of sugar for human consumption within the US, but rather for subsequent re-export or for non-food use within the confines of the United States. The two programs concerned with the importation of offshore raw sugar for refining and subsequent export are the Refined Sugar Re-export Program and the Sugar-Containing Products Re-export Program. Under the Refined Sugar Re-export Program, foreign raw sugar can be entered into the US for subsequent export in refined form. It was recognized shortly after the implementation of the quota system in 1982 that cane refiners and exporters of sugar-containing products (SCPs) would be unable to compete in world markets if forced to use high priced quota raws in the manufacture of their respective products. In recognition of this, a Presidential Proclamation No. 6179, 55 FR 38293 (additional US note 3 to chapter 17 of the Harmonized Tariff Schedule of the United States (HTS US)) was issued. Refined Sugar Re-export regulations were initially issued by the Secretary of Chapter 20/page 10
The United States Agriculture on 28 June 1983 and were revised on 12 February 1999. Under the programme refiners must first attain a re-export license from the USDA through the department’s licensing authority. No individual, partnership corporation, association or other business enterprise may apply for or hold more than one license. At present there are five qualifying companies in the US. A license allows a refiner to enter raw cane sugar under subheading 1701.11.20 of the US HTS and export an equivalent amount of refined sugar on to the world market or transfer a like amount of refined sugar to licensees under the Sugar Containing Products Reexport Program or the Polyhydric Alcohol Program. In any case, such export or transfer must take place within 90 days of the raw sugar’s entry under the program. The initial importation of raw sugar results in a positive license balanse for the licensee, and the subsequent export or transfer of refined sugar reduces or eliminates the licensee’s positive balance. A licensee must establish a bond or letter of credit in favour of the USDA to charge program sugar in anticipation of the export of refined sugar. Cane refiners are allowed under the program to export refined sugar in anticipation of eventual imports. Such exports generate credits, or negative license balances, which are reduced or cleared upon the import of raw sugar under license. A cane refiner’s license balance for the sum of all charges and credits shall not exceed 50 000 short tons raw value. Sugars considered under the program are fungible. The sugars transferred or exported need not be the same sugar produced by refining raw sugar entered under the program. All refining must take place in US customs territory. Under the revised regulations, a refiner may enter raw sugar from Mexico and re-export, within 30 days of entry, refined sugar to Mexico without impacting on the refiner’s license. If an equivalent amount of refined sugar is not exported to Mexico within 30 days, a charge is made against the refiner’s license. In January 1994, regulations concerning the Sugar-Containing Products Re-export Program were issued; these regulations were also revised on 12 February 1999. Under this program, a manufacturer of SCPs may receive transfers of refined sugar from licensed cane refiners and export an equivalent amount of sugar as an ingredient in sugar-containing products. As with the Refined Sugar Re-export Program, a licensee must establish a bond or letter of credit in favor of the USDA to charge program sugar in anticipation of the export of sugar in sugar-containing products. A licensed manufacturer must complete the export leg of the re-export transaction within 18 months of the transfer of refined sugar from the licensed refiner. A manufacturer can not exceed a license balance in excess of 10 000 short tons refined value. Unlike the Refined Sugar Re-export Program, a person or Chapter 20/page 11
Sugar Trading Manual corporation who owns one or more wholly-owned subsidiary corporations manufacturing SCPs is eligible for a consolidated license covering the transactions of both parent and subsidiary. In such cases, the manufacturer’s consolidated balance cannot exceed 25 000 short tons refined value. All SCP manufacture must be accomplished in the US customs territory. A third program, the Polyhydric Alcohol Program, allows for the importation of sugar outside of the TRQ structure for the manufacture of a variety of non-food items. There is no export requirement under this program, though there are strict reporting requirements to ensure that the imported sugar is not diverted for food use, subverting the aims of the broader sugar program. License parameters with regard to corporate structure and license balance are identical to the SugarContaining Products Re-export Program regulations. Transferred refined sugar balances must be used in the production of polyhydric alcohol within 18 months of the date of transfer.
The US sugar beet industry One direct result of the imposition of import restrictions has been a substantial increase in the amount of domestically produced beet sugar. In 1982, 1.054 million acres were dedicated to sugar beet production and 18 955 million tonnes of beets were harvested, which yielded a crop of 2.348 million tonnes raw value. Eighteen years later, the 2000 campaign saw 1.565 million acres under sugar beets, producing an estimated crop of 29 503 million tonnes of beets, representing increases of 148% and 156% for acreage and production respectively. The 2000 crop yielded 4.082 million tonnes raw value, an increase of nearly 175% over the 1982 crop. Sugar beets are grown in 14 states, which are generally viewed as forming four distinct regions. They are known as the Far West region, which includes California, Idaho, Oregon and Washington state; the Great Lakes region, which includes Michigan and Ohio; the Great Plains region, which includes Colorado, Montana, Nebraska, New Mexico, Texas and Wyoming; and the Red River Valley region, which includes Minnesota and North Dakota, two states which, combined, produced nearly 50% of the total 1998 US beet crop. The cost of production varies widely from region to region. Desugarization of molasses has increased beet market efficiencies. By 1994, six desugarization plants were producing 236 870 tons of sugar from beet molasses, two of which have since been taken off line. Due to low prices and the threat of loan forfeitures, the USDA enacted a Payment in Kind (PIK) program for sugar beets in the year 2000. Under this program, farmers were paid sugar, which had been
Chapter 20/page 12
The United States forfeited in lieu of loan repayment, from government stocks in exchange for plowing under mature sugar beets. In total, over 101 000 acres were subscribed and subsequently plowed under in exchange for roughly 300 000 tonnes of refined sugar ex-CCC stocks.
Far West Farmers in the Far West region grew 360 300 acres of sugar beets in 1998, accounting for roughly 24% of total US beet acreage. For 2001, this total is expected to be reduced to only 262 000 acres. While the region as a whole has seen a gradual reduction in acres planted to sugar beets and in sugar beet production in the 1990s, the reintroduction of sugar beets into Washington state agriculture in 1996, after an 18-year hiatus, has returned production to the highest levels seen in the 1990s. The Far West is the most productive region in the US in terms of tonnes of sugar beets yielded per acre harvested, with an average yield of 25.22 tonnes per acre. Beet acreage in California has declined steadily in recent years, and USDA data for 1998 show 101 000 acres planted, of which 99 000 acres were harvested. This number is expected to drop precipitously to 45 000 acres in 2001 due to plant closures. By contrast, in 1988, California planted 219 000 acres of sugar beets. With a yield per acre of 24.93 tonnes per acre, California produced 2 470 289 tonnes of beets in 1998 and 3 135 262 tonnes in 1999 before dropping off to 2 756 963 tonnes in 2000. Since surpassing California in 1990, Idaho has consistently outproduced all other states except Minnesota. Idaho beet acreage has averaged just under 200 000 acres during the 1990s and the 1998 acreage was 204 000 acres according to USDA data. The 203 000 acres harvested yielded an average of 24.58 tonnes per acre. The 1998 harvest, at 4990 million tonnes of beets, was a record. The 2000 planted acreage was a record 212 000 acres, of which 195 000 acres were harvested. Amalgamated Sugar Company runs a molasses desugaring plant in Twin Falls, Idaho. Sugar beet production in Oregon has been erratic in recent years, ranging from a high of 476 277 tonnes in 1991 to a low of 337 476 tonnes in 1993. Production in 1998 was 427 288 tonnes, well above the average seen during the 1990s. Production peaked at 448 153 tonnes in 1999 before dropping to 370 000 tonnes in 2000. According to USDA data for 1998, Oregon planted 17 900 acres to sugar beets, 17 700 of which were harvested. A yield of 26.60 tonnes per acre was well above the 23.61 tonnes average seen during the 1990s. For the year 2000, Oregon planted 16 200 acres, of which 13 700 acres were harvested after the PIK program.
Chapter 20/page 13
Sugar Trading Manual Washington state was absent from sugar beet farming from 1978 until 1996, when the Columbia River Sugar Cooperative announced that it had completed negotiations with Imperial Holly Sugar Corporation (now Imperial Sugar Company) to build and operate a sugar beet slicing facility in the Moses Lake area. The plant was the first new beet processing plant built in the US since 1975. In 1996, 13 000 acres were planted to sugar beets and in 1998 37 300 acres were planted. Washington’s yields were the highest in the country for 1998, at 30.20 tonnes per acre. The USDA reported a crop of 1.081 million tonnes for 1998. In 2000, Washington state planted 28 400 acres and harvested 27 300. The early success in reviving the Washington state sugar beet industry was challenged owing to a troubled 1999 campaign and numerous problems associated with the start up of the Moses Lake facility. The facility experienced substantial operating losses owing to equipment failures exacerbated by warmer than normal temperatures across the growing region. On 26 April 1999, Imperial Sugar wrote off its investment in the partnership, known as the Pacific Northwest Sugar Company, transferring its interest back to the general partner. In 2001, the state is expected to plant only 7200 acres given the fact that the Moses Lake facility will not operate.
Great Lakes According to USDA data for 1998, 177 000 acres were planted to sugar beets in Michigan, of which 173 000 acres were harvested. The average yield per acre in Michigan was 14.5 tonnes, totalling 2.511 million tonnes of beets. In 2000, Michigan planted 189 000 acres to beets, harvesting only 166 000 due to the PIK program. Yield per acre was 18.6 tonnes, and production was 3 087 181 tonnes of beets. Ohio is a much smaller producer. Corn and soybeans provide strong competition for farmland in Ohio. According to USDA data for 1998, growers in Ohio planted just 1300 acres to sugar beets, 1100 of which were actually harvested. A 15.69 tonne per acre yield provided for 17 236 tonnes of beets. In 1989 a facility was constructed to extract sugar from molasses using ion-exchange technology adjacent to Michigan Sugar Company’s Freemont, Ohio, plant. The plant received molasses shipments from Michigan Sugar’s four processing facilities in Michigan as well. Both Michigan Sugar and ADSEP, the company responsible for the desugarization facility, were subsidiaries of Savannah Foods and Industries at the time. Savannah Foods and Industries was purchased by Imperial Sugar Company in 1998. As of July 2001, Michigan Sugar’s growers were actively seeking bank financing to cooperatively buy the company back from Imperial Sugar Company. Chapter 20/page 14
The United States The recent trend has seen Michigan recovering for the last three years, surpassing the 2.75 to 2.88 million tonne harvests seen in the early 1990s. Production in 1999 was a record 3 206 023 tonnes. The Ohio industry has been in fairly steady decline for much of the last decade, and processing and desugarization was halted in Fremont, Ohio in 1996. Only 15 422 tonnes of beets were produced in 2000, matching a 10-year low.
Great Plains The sugar beet industry in the Great Plains region has been a mixed proposition during the past decade. While the northern states of Colorado, Montana, Nebraska and Wyoming have shown erratic growth on balance, the industry in Texas and New Mexico has been in steady decline. Neither Texas nor New Mexico produced beet sugar during the 1998/9 campaign. Colorado grew 62 500 acres of sugar beets in 1998 versus 48 250 acres grown in the 1990s on average. The 57 300 harvested acres yielded 20.59 tonnes on average. Total production in 1998 was 1.180 million tonnes. In 2000, Colorado planted 17 500 acres to beets, 54 600 of which were harvested post-PIK. Yield per acre was 19.86 tonnes, and production was 1 084 768 tonnes. After maintaining a steady course for much of the last quartercentury, Montana’s sugar beet industry has shown steady growth in recent years. After averaging just over 55 350 acres planted from 1990 to 1995, beet acreage in Montana jumped to 59 500 acres in 1997 and to 64 000 acres in 1998 before declining to 60 700 acres in 2000. The 62 400 acres harvested in 1998 yielded 20.5 tonnes of beets on average for a total crop of 1.279 million tonnes, while the 53 900 acres harvested in 2000 averaged 22.23 tonnes for total production of 1 197 995 tonnes of beets. Nebraska’s sugar beet industry has shown a less impressive trajectory. After reaching a 15-year high of 85 600 acres planted in 1992, plantings dropped more or less steadily to the 53 800 acres for 1998 before rebounding to 78 200 acres harvested in 2000. An average yield of 18.23 tonnes per acre on the 55 200 acres harvested produced a crop of 1 006 296 tonnes of beets in 2000. The Western Sugar Company operates a molasses desugarization plant in Scottsbluff, Nebraska, drawing molasses from other plants in Nebraska as well as plants in Colorado, Wyoming and Montana. Wyoming’s acreage under sugar beets peaked in 1992 as well, at 71 000 acres planted, of which 69 100 acres were harvested. In 1998, 56 000 acres were planted according to USDA data, of which 53 400 acres were harvested. The average 18.42 tonnes per harvested acre netted a beet crop of 983 400 tonnes. In 2000, 61 000 acres were Chapter 20/page 15
Sugar Trading Manual planted, of which 56 100 acres were harvested after the PIK program. The 18.69 tonnes per acre yielded a crop of 1 048 716 tonnes.
Red River Valley While other sugar beet growing regions of the country have turned in mixed performances with regard to growth in the area devoted to sugar beets and sugar beet production, Minnesota and North Dakota have evolved into the most significant beet growing area in the US. In the 1997/8 crop year, the Red River Valley accounted for a full 47% of US domestic beet production, and in 2000, the two states accounted for 44% of US beet production. In 1982 Minnesota planted 253 000 acres to sugar beet and North Dakota 145 700 acres. In 2000, based on preliminary USDA data, Minnesota grew 490 000 acres of sugar beets and North Dakota grew 258 000 acres, a combined increase of 187.6%. Of Minnesota’s 490 000 acres, 458 000 were harvested. Minnesota’s yield per acre of 19.5 tonnes provided for a sugar beet crop of 8.387 million tonnes. Of North Dakota’s 258 000 planted acres, 232 000 were harvested. A yield of 20.05 tonnes per harvested acre netted a crop of 4.651 million tonnes. Such unbridled growth continually pushes the envelope with regard to harvesting, processing and marketing the crop from the Red River Valley. The slicing of the 1998 crop continued into late June. Despite typically long, cold winters experienced in the region and the increased use of insulated storage sheds, the business of slicing beets well into the spring is risky. Frigid air is blown into insulated storage sheds which are then sealed to minimize the exposure to temperature fluctuations, sun and wind. These massive sheds, which accommodate 45 000 to 70 000 tonne beet piles, must nonetheless be opened in order to access beets for slicing, and doing so in the relatively balmy spring can lead to rapid deterioration. Three sugar beet co-operatives have long operated in the Red River Valley. The largest, American Crystal, was formed in the early 1970s when a group of growers formed the co-op to buy sugar beet factories from the Denver-based American Crystal Sugar Company, which was divesting itself of its interests in the valley. In 1972 a group of roughly 300 growers formed the Southern Minnesota Beet Sugar Cooperative to build a new sugar beet factory in West-Central Minnesota. The Minn-Dak Farmers Cooperative was formed two years later. In 1990, Southern Minnesota put into operation the first molasses desugarization facility in the valley. American Crystal followed in 1993 with a plant at its East Grand Forks factory. In January of 1994, these three entities joined to form a marketing co-operative under the name United Sugars Corporation. The
Chapter 20/page 16
The United States co-operative, which also markets the output of United States Sugar Corporation, a Florida grower/refiner, accounts for roughly 20% of the US refined market.
The US cane sugar industry US cane sugar production in fiscal year 2000 (October/September) totalled 3.693 million tonnes. Cane sugar production is concentrated in the Southern states of Florida, Louisiana and Texas. The Hawaiian islands and Puerto Rico also produce cane sugar. Sugar production in Florida and Louisiana has been on the rise, and the sugar industry in both states has produced record crops in recent years. Hawaii, Puerto Rico and Texas, in sharp contrast, have seen declines in production in the latter half of the 1990s, though Texas’ production rebounded smartly in 2000.
Florida Florida is the largest cane sugar producer in the US, producing 1.864 million tonnes from the 2000–01 crop. The industry in Florida has grown steadily over the past years. As with most sectors of the US sugar industry, the 1980/1 crop year provides an interesting benchmark. In 1980/1, a total of 320 700 acres were planted to cane and total sugar production was 1.017 tonnes raw value. The 1998/9 crop saw 447 000 acres planted to sugar cane. Record production of 1.934 million tonnes in 1998–9 represents an 87% increase over the 1980/1 crop. The sugar industry in Florida is extremely well organized. Three companies operate six sugar mills. Flo-Sun Incorporated owns the Okeelanta mill in South Bay, Florida, and the Osceola Farms mill in Pahokee, Florida. The company also controls the Atlantic mill in Belle Glade, Florida, which it owns in conjunction with a growers’ group. The Sugar Cane Growers Cooperative of Florida (Coop Mill) operates the Glades Sugar House in Belle Glade, Florida. United States Sugar Corporation, located in Clewiston, Florida, operates mills in Clewiston and Bryant, Florida. Talisman Sugar Corporation, which owned and operated a mill in Belle Glade, is no longer in operation as of the 2000 crop. Flo-Sun, the Coop Mill and United Sugars have sold the bulk of their production since 1977 through the Florida Marketing and Terminal Association, an agricultural marketing co-operative. The association was formed for the purpose of marketing its members’ raw sugar output. In 1978, using the combined resources of the co-operative’s members, a deep-water shipping terminal was completed at the Port of West Palm Beach, allowing the association’s members efficient
Chapter 20/page 17
Sugar Trading Manual access to all relevant markets. A 18 000 tonne warehouse at the Port of West Palm Beach receives from 2500 to 5000 tonnes of raw sugar per day. Weather permitting, the group can easily move in excess of 100 000 tonnes per month through the port. The association’s members also hedge and market their production co-operatively, providing orderly, efficient marketing of a major reservoir of raw sugar supply. For the 2000–01 marketing year, the total Florida production will likely be approximately 65% larger than total imports from all shippers under the tariff rate quota. The Florida Molasses Exchange, a related entity, was formed in 1969 to facilitate the marketing of molasses produced by Florida’s seven sugar mills. Molasses is delivered to the Port of West Palm Beach where the exchange has substantial tank-based storage. Molasses is shipped from the same berth as sugar. Both products are shipped on a year-round basis. Talisman Sugar Corporation sold its production through direct commercial contract for refining and did not participate in the marketing association. Obligations of the company were assumed by the marketing association. Capacity at the various Florida mills varies fairly widely. Daily grinding capacity at the Atlantic mill is 10 886 tonnes of cane per 24-hour period; Okeelanta mill is approximately 20 684 tons; the Osceola Farms mill has a daily capacity of approximately 13 154 tonnes per 24 hours; capacity at the Glades Sugar House is approximately 19 000 tonnes per 24-hour period. The US Sugar Bryant mill is rated at 19 340 tonnes of cane per 24 hours and the US Sugar Clewiston mill is rated at 23 587 tonnes per 24 hours. The entire Florida industry has employed mechanical harvesting since the late 1990s. Irrigation is provided through an extensive array of lateral and perimeter canals. The bulk of Florida’s sugar land lies between Lake Okeechobee and the Everglades – an ecologically and politically sensitive area. Environmental groups have brought lawsuits against the industry and the State Legislature even attempted to impose a potentially crippling 1 cent per pound tax on all sugar processed and marketed by the industry. While the tax issue failed to pass a public referendum, the industry was forced to create an Everglades clean-up trust fund. Under the States Everglades Forever Act, passed in 1994, land in the Everglades agricultural area is being purchased by the South Florida Water Management District as part of the Everglades restoration effort. Sugar cane growers pay roughly $25.00 per acre to help fund these land acquisitions. The industry has also turned over land once planted to cane for use as land planted with species well suited for the filtration of agricultural run-off waters which would otherwise flow into the Everglades and eventually into the Florida Bay. Chapter 20/page 18
The United States Louisiana Louisiana is home to a growing and complex sugar industry. As recently as 1975, Louisiana supported 36 cane sugar mills. Total production that year was 580 630 tonnes from 308 000 acres planted. A far more efficient industry has emerged over the years as the industry has consolidated. By 1980, the number of mills had been pared by a third to 24. Despite that reduction, total production in 1981–2 was 645 900 tonnes. The total area planted to sugar cane in 1981–2 was only 247 000 acres. The benefits of the sugar program encouraged sugar production – 435 000 acres were planted for the 1998/9 crop, and 490 000 acres for the 2000–01 crop. Production weighed in at a record 1.524 million tonnes from the 18 remaining mills in 1999–2000, and at 1.490 million tonnes in 2000–01. The substantial growth in Louisiana production has provided a consistent and dependable supply for the cane refineries in operation in Chalmette, Louisiana (Tate & Lyle) and in Gramercy, Louisiana (Imperial Sugar Corporation). The Louisiana crop also provides sugar for the Imperial Sugar refinery in Sugarland, Texas, for the period from early October through much of the spring. Only recently have logistical and financial dynamics dictated that a portion of the Louisiana crop be diverted away from the US Gulf discharge range to destinations on the US Atlantic coast. As the entire Louisiana crop is harvested in a relatively short period of time, storage constraints at Gulf refineries and the cost of carrying inventories for as long as 12 months have provided economic incentives to shift sugars on ocean-going barges to destinations from Crockett, California to Baltimore, Maryland. The Louisiana industry has become increasingly efficient in recent years. Despite the halving of the number of mills in the past quartercentury, near-record production of 1.520 million tonnes is expected for the 2001–02 crop. The remaining mills form a diverse industry. While several independent mills continue to operate, there has been much structural consolidation in the Louisiana Industry. Louisiana Sugar Cane Products Incorporated (LSCPI) is a marketing co-operative that handles the production of 10 of Louisiana’s 18 active mills. They are the Alma Factory in Lakeland, with 6350 tonnes grinding capacity per 24 hours; the Cajun Sugar Cooperative in New Iberia, with an 8165 tonne capacity per 24 hours; Caldwell Sugars Cooperative in Thibobaux, with a 5443 tonne capacity per 24 hours; Cora Texas Manufacturing Co in White Castle, with a 9980 tonne capacity per 24 hours; the Leighton Factory in Thibodaux, with a 7711 tonne capacity per 24 hours; the Lula Factory, in Belle Rose, with a 7076 tonne capacity per 24 hours; Saint James Sugar Cooperative in Saint James, with a 6350 tonne capacity per 24 hours; Saint Martin in Saint Martinville, with a 5443 tonne capacity per 24 hours; Saint Mary Chapter 20/page 19
Sugar Trading Manual Sugar Cooperative in Jeanerette, with a capacity of 8165 tonnes per 24 hours; and the Westfield Factory in Paincourtville with a capacity of 6350 tonnes per 24 hours. The Enterprise mill, located in Jeanerette, is related to the Raceland Factory in Raceland and to the Sterling Sugars Inc mill in Franklin by ownership. M.A. Patout & Sons is involved through all or part ownership and is involved in the marketing of raw sugar from all three mills. The Enterprise mill is rated at 14 062 tonnes per 24 hours; the Raceland mill is rated at 9526 tonnes per 24 hours and the Sterling mill at 10 206 tonnes. Several independent mills are in operation in the state: Cinclare Central, located in Brusly, is rated at 4527 tonnes per 24 hours; Evan Hall Sugar Cooperative in Donaldsonville is rated at 6804 tonnes per day; the Glenwood Factory in Napoleonville is rated at 5261 tonnes per 24 hours; the Iberia Sugar Cooperative is rated at 5443 tonnes per 24 hours and the Jeanerette Sugar Company in Jeanerette is rated at 6350 tonnes per day.
Hawaii Hawaiian production has declined steadily since the early 1980s when production was consistently near 1.0 million tonnes annually. In contrast to much of the rest of the industry, the onset of the current sugar program marks a high water mark of sorts for the Hawaiian industry. The 1979/80 crop was the last to see more than 100 000 acres of cane harvested. Production in that year was 1.060 million tons. Both acreage and production have fallen consistently since. Nonetheless, sugar remains a major source of revenue for the Hawaiian islands, along with tourism and pineapples. In 1999, 31 750 acres were planted to cane, and the USDA puts total cane production at 348 362 tonnes. In 1975, 17 mills were active in the Hawaiian islands. By 1987, that number had dropped to 12. That number has since been halved. Three mills closed in 1996, and sugar cane is now produced only on the islands of Maui and Kauai. Three mills remain on each of those islands. Additional rationalization has reduced estimated production for 2000–01 to a mere 217 726 tonnes. On Kauai, Gay and Robinson Inc, a company which first harvested sugar in 1894, operates a mill in Kaumakani which it purchased in 1994. The mill, formerly the Olokele Factory, is rated at 2613 tonnes of cane per 24-hour period. Amfac/JMB Hawaii, Inc. operates the remaining two mills on Kauai – the Lihue Plantation in Kauai’s East, which has a daily grinding capacity of 4246 tonnes of cane per 24-hour period and the Kekaha Sugar in Western Kauai, which has a 24-hour grinding capacity of 2722 tonnes of cane. In September 2000, AMFAC/JMB Chapter 20/page 20
The United States announced its plan to close its remaining sugar plantation at Lihue and to sell its 18 000 acres on Kauai. Under the plan, AMFAC ceased all agricultural operations on Kauai as of 31 December 2000. On the island of Maui, Hawaiian Commercial & Sugar Company operated two mills, the Puunene Factory and the Pa’ia Factory, both located in Puunene, Maui. The Puunene mill is rated at 6532 tonnes of cane per 24-hour period and the Pa’ia mill is rated at 3447 tonnes of cane per day. In the fall of 2000, Hawaiian Commercial & Sugar Company closed the Pa’ia mill, citing depressed sugar prices and the effects of an extended drought. The Pioneer Mill Company, Ltd in Lahaina, Maui is rated at 2613 tonnes of cane per 24-hour period. Pioneer is owned by Amfac/JMB Hawaii Inc, which also operates two mills on Kauai. All raw sugar milled in Hawaii is shipped to the C&H refinery in Crockett, California, for refining. Until the early 1990s C&H was run as a co-operative for the purpose of refining raw sugar on behalf of the Hawaiian sugar industry. The decline of the Hawaiian industry has forced C&H to import substantial quantities of foreign raw sugar to achieve critical efficiencies. While Hawaii has perennially processed cane year-round, production has not been sufficient in recent years to allow for a 12-month cycle.
Texas The Texas sugar industry has been fairly consistent for the last quartercentury. While production has totaled as little as 54 432 tonnes in 1983–4 to as much as 131 543 tonnes in 1995–6, the basic structure of the industry has not changed. One hundred and thirty-three growers in the Rio Grande Valley own the Rio Grande Valley Sugar Growers co-operative. Their production is milled at the W.R. Crowley Sugar House in Santa Rosa, Texas. The mill is rated at 9979 tonnes of cane per 24-hour period. Texas production in 2000–01 jumped to 181 438 tonnes from 150 000 the previous year.
Puerto Rico Following the Spanish American War, Puerto Rico became part of US customs territory by presidential proclamation in 1901. While Puerto Rico has maintained independence from the government in Washington, the island enjoys the same tariff benefits and protection as Hawaii or the mainland US sugar producers. While Puerto Rico’s climate is ideal for the production of cane sugar, a series of factors and events have conspired to undermine the industry. In the early 1950s, Puerto Rico produced nearly one million tonnes Chapter 20/page 21
Sugar Trading Manual of raw sugar from 34 mills. Over 400 000 acres of land was dedicated to cane production, which peaked at 12.5 million tonnes in 1952. For the 2000–01 crop year, the USDA places Puerto Rican production at a mere six tonnes. Only two mills and one sugar refinery remain active on the island. Puerto Rico is a net importer of sugar, importing sugar under the tariff rate quota system, often from the neighbouring Dominican Republic. As the industry has dropped below critical mass, much needed efficiencies have been lost. In 1955–6 Puerto Rico produced 1.138 million short tons of sugar, and had a recovery rate of 11.4%, yielding 3.32 tons per acre planted. For the 2000–01 crop, 6 tons of sugar were produced. The recovery rate was 7.5% and sugar yield per acre was one ton for the first time in three years. With a high labor cost and ageing infrastructure, Puerto Rico is among the highest cost producers on the globe. According to the USDA’s December 1998 Sugar and Sweetener Situation and Outlook Report, the total sugar production costs for the period 1990/1–1994/5 averaged a crippling 47.18 cents per pound. As a result, the government’s Sugar Corporation, which was formed in 1973 when the industry was nationalized, has sustained losses every year since 1974. The reprivatization of the sugar industry was completed in 1998.
Industry structure The US sugar processing industry has undergone wrenching changes since the implementation of the most recent incarnation of the quota system in the early 1980s. One indicator of this is the contraction and consolidation that has swept the industry. In 1982, 14 companies operated 21 separate cane sugar refineries. Raw cane sugar was refined in Boston, Massachusetts, and in Brooklyn and Yonkers, New York; in Philadelphia, Pennsylvania and Baltimore, Maryland; in Port Wentworth, Georgia; at three locations in Florida; at five locations in Louisiana; in St Louis, Missouri; in Sugarland, Texas; in Crockett, California; in Aiea, Hawaii and in Chicago, Illinois. The total melting capacity in 1982 was 27 905 tonnes of raw sugar per day. The cane sugar industry in 1998 is a much smaller, more efficient descendant of that seen just 16 years earlier. There are six surviving companies currently operating 11 cane refineries. Two refineries remain in New York; one in Baltimore, Maryland; one in Port Wentworth, Georgia; three in Florida; two in Louisiana, one in Texas and one in Crockett, California. While ten fewer refineries are in operation than in 1982, improved technologies and efficiencies associated with such consolidation have provided for increased capacity at the remaining plants. While the 21 plants in operation in 1982 had an average
Chapter 20/page 22
The United States daily melting capacity of 1465 short tons, daily capacity at the 11 plants in operation in 1998 averaged in excess of 2000 tonnes per day. Ownership of the remaining refineries has been in almost constant flux for the last decade. A condensed and necessarily chaotic history follows: Tate & Lyle, once the owner of Refined Sugars Incorporated (RSI) in Yonkers, New York, rated at 2090 tons per day, purchased Domino Sugar Corporation in 1988. Domino Sugar owned cane refineries in Brooklyn, New York, rated at 2075 tons per day, Baltimore Maryland, rated at 3060 tons per day, and Chalmette, Louisiana, rated at 3000 tons per day at the time. Anti-trust concerns forced the sale of RSI to a Canadian concern at the time. RSI has changed hands several times since, most recently when Onex Corporation, a Canadian concern, sold the refinery and its Jack Frost brand to a group consisting of two large Florida grower concerns, Florida Crystals and the Cane Sugar Growers Cooperative of Florida. Florida Crystals also owns a refinery in South Bay, Florida, rated at 900 tons per day. In 1995 Tate & Lyle/Domino Sugar purchased the Supreme Sugar Company in Supreme, Louisiana, from Archer Daniels Midland and subsequently closed it down. The plant was rated at 850 tons per day at the time of its closure. Savannah Foods and Industries Inc, which bought Colonial Sugar Incorporated, rated at 2200 tons per day in the mid-1980s, also owns and operates the refinery in Port Wentworth, Georgia, rated at 3300 tons per day. Savannah Foods and Industries was itself purchased by the Imperial Holly Corporation in 1998. Imperial, which in 1999 changed its name to Imperial Sugar Company, also owns a refinery in Sugarland, Texas, rated at 2000 tons per day. In January 2001, Imperial Sugar Company entered into bankruptcy under US Chapter 11. A reorganization plan has been approved, and the company is expected to emerge from bankruptcy in August 2001, pending final approval of the plan. A new cane sugar refinery was built in Florida in 1998 by the United States Sugar Company, a substantial cane sugar producer. The refinery, which is contiguous with the company’s raw sugar mill, is rated at 1800 tons per day but the plant was built with the potential for expansion to 3600 tons per day. The interrelatedness of these companies extends beyond the cane refining industry as Tate & Lyle and Imperial Sugar Company also have a presence in the beet sugar processing business, and the United States Sugar Company has a marketing arrangement with United Sugars, the beet sugar marketing co-operative in the Red River Valley. A more detailed look at the industry’s corporate structure at the refined sugar sales level is revealing. According to USDA the share of the top four refined sugar sellers as
Chapter 20/page 23
Sugar Trading Manual measured by production capacity has risen from 51% in 1983 to 60% in 1989 and to 75% in 1997. After the Imperial Sugar Company’s purchase of Savannah Foods and Industries and the US Sugar Corporation United Sugars marketing arrangement are considered, the top four sellers of refined sugar accounted for an estimated 83% of 1998 refined production. In 1997, only three sugar beet processing companies with no corporate ties to the cane sector were in operation. They were the Amalgamated Sugar Company in Idaho and Oregon and the Monitor Sugar Company in Michigan. There are three sellers of refined sugar from cane. The California and Hawaiian Sugar Company, which previously had co-operative status as a processor of sugars exclusively for the Hawaiian sugar industry, is now a free-standing cane sugar refinery, melting imported sugar as well as raw sugar purchased at armslength from Hawaii. The remaining two cane-only refined sugar sellers are related. Refined Sugars Incorporated was purchased by Florida Crystals and the Sugar Cane Growers Cooperative of Florida as equal partners in 1998. While the co-operative status of the new company implies that 51% of the refinery’s throughput must be the growth of its owners, early evidence suggests that the refinery will serve primarily as an outlet for the production of its producer parents. Florida Crystals also owns a cane sugar refinery in South Bay, Florida, the third cane refinery with no beet sugar affiliation. Three companies have a substantial presence in both the cane and beet sugar industries, the product of an intensive period of horizontal integration and consolidation in the industry during the 1990s. Imperial Sugar Company was the largest seller of refined sugar in the US in 1999. Imperial’s considerable holdings include cane refineries in Georgia, Louisiana, and Texas as well as a substantial beet sugar presence in the Michigan Sugar Company, Holly Sugar Company and Spreckels Sugar Company in California. As of mid-2001, the growers of Michigan Sugar were in the process of buying the company from Imperial Sugar Company. Tate & Lyle owns the Domino Sugar Company, with refineries in New York, Baltimore and Louisiana, as well as Western Sugar Company, a beet sugar processor. As of mid-2001, Western Sugar had been sold to a newly formed entity, the Rocky Mountain Sugar Growers Cooperative, pending the co-op’s ability to attain bank financing. At its annual analysts’ meeting held in May, the company stated that it was in active talks to sell its Domino Sugar subsidiary, an event that will effectively end Tate & Lyle’s tenure in the United States sugar market. United Sugars, the beet sugar co-operative in Minnesota and North Dakota, with its marketing agreement with US Sugars in Florida, is the third beet and cane operation. Given the US sugar policy, cane sugar imports are only allowed to Chapter 20/page 24
The United States the extent that the combined domestic cane and beet sugar crops are insufficient to meet domestic demand. Thus, in years when the domestic beet sugar crop is large (4.300 to 4.500 million tonnes) capacity utilization at US cane sugar refineries is sharply reduced. At the same time, the reduced raw sugar supply, a product of reduced imports, tends to exert upwards pressure on raw sugar prices, effectively squeezing cane refiners’ margins even as their capacity utilization is reduced. In recent years, beet processors, who have regularly offered multiyear supply contracts in search of improved market share in years of relatively high beet supply. Supply- and transportation-related problems have occasionally forced beet processors to enter the market as distressed buyers from cane refiners to remedy oversold conditions. While consolidation among sellers of any product has its own commercial charm, horizontal integration in the intensely protected and managed US domestic industry has additional appeal. The sugar support program in the US, despite the fact that it has many similarly protectionist peers around the globe, is increasingly contentious in light of global movement towards freer trade in general, the North American Free Trade Agreement (NAFTA) in particular. A processor and/or marketer of refined sugar might well fare better than a producer of raw sugar free standing as free trade forces impact on the US sugar economy. Despite the apparent benefits of horizontal consolidation for participants in the market, larger forces have dictated corporate policy as the industry has stumbled into the new millennium. Large beet crops and restricted availability of imported cane sugar under the tariff rate quota system had a detrimental effect on cane refiners’ ability to squeeze out any margin in the late 1990s, and the substantial debt acquired through the process of consolidation essentially precluded the larger cane refiners from showing any constructive results. As mentioned above, Imperial Sugar Company was forced into bankruptcy in early 2001. Imperial closed two beet factories in California and is in the process of selling its Michigan Sugar assets to the company’s growers, providing the growers are able to receive financing. As of early July 2001, Tate & Lyle was in active talks to sell its Domino Sugar subsidiary. Western Sugar has been sold to the newly formed Rocky Mountain Sugar Grower Cooperative at a steeply discounted price, pending the growers’ ability to attain bank financing – no small task given the current climate. Thus, even as certain elements of the industry have undergone meaningful consolidation, the industry is also seeing more diverse ownership in certain areas, in sharp contract to the trend seen as recently as the late 1990s.
Chapter 20/page 25
Sugar Trading Manual
Free trade While many free trade winds have buffeted the US farm sector in the past decade, none has had more impact on the domestic sugar industry than the North American Free Trade Agreement. The NAFTA was officially put into force on 1 January 1994. ‘Side letter’ agreements addressing sugar-related issues were needed for US Congressional approval of the pact. On 4 November 1993, the then US Trade Representative, Mickey Kantor, announced that an agreement had been reached to correct some ambiguity in the original NAFTA regarding the treatment of high fructose corn syrup (HFCS) in determining Mexico’s status as a net surplus producer of sugar. It was agreed that HFCS consumption would be factored in to the formula employed in determining if Mexico was a net surplus producer of sugar. This was done to allay fears held by US congressmen from sugar-producing states that a shift away from sugar to HFCS, like that seen in the US in the early 1980s, would quickly turn Mexico into a net surplus producer. The side letter agreements also limited Mexico’s access to the US market from 1 October 2000 to 30 September 2009 (years 7 to 15 of the agreement) to 250 000 tonnes per year. On 2 September 1997, the Mexican Trade Ministry, while acknowledging an exchange of letters of understanding, formally stated that the side letters represented a ‘technical matter in the case of sugar and for that reason it was not formally sent to the Senate’. Thus, Mexico has stated that it does not recognize the side letter agreements and is eligible to ship its entire surplus production to the US after 1 October 2000 as per the original NAFTA text. The USDA and US Customs hold that the side letters are valid and binding. On 12 March 1998, Mexican Trade and Industry Minister Blanco requested consultations, according to the dispute settlement procedures established under the NAFTA, with the objective of finding a mutually satisfactory solution which would specify technical points that Mexico did not feel were made clear through the side letter agreements and to define clearly the conditions for access of Mexican sugar to the US market after 1 October 2000. Sugar consultations are inextricably linked to permanent duties levied on imports of US HFCS into Mexico ranging from $55.00 to $175.00. A second avenue for legal over-quota Mexican sugar imports into the US market is provided for in the US Harmonized Tariff Schedule, sections 1701.11.50 and 1701.99.50, which specify second tier duty levels for raw and refined sugar respectively. Duty levels for countries that enjoy special trade status with the Caribbean Basin Initiative, Generalized System of Preferences and Most Favoured Nations are fixed at prohibitive levels. Countries with MFN status are faced with a fixed dury of 33.87 cents per kilo for raw sugar and 35.74 cents per kilo for Chapter 20/page 26
The United States Table 20.2 Mexican second tier tariff schedule Year
Tariff basis 100° pol (cents/kilo)
Deduction for each pol degree under 100
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
31.778 28.247 24.716 21.185 17.655 14.124 10.593 7.062 3.531 0
0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0
white sugar for the years 2000 to 2008. Furthermore, agricultural goods shipped into the US are subject to safeguard measures as approved by section 101 of the Uruguay Round Agreements Act, which allows the imposition of additional duties based upon either the value or the quantity of goods imported into the US. These prohibitive duties increase as the value of the target commodity decreases, thus cheaper sugar is subject to a higher tariff, all but precluding high tariff imports from most countries. The duty on Mexican raw and refined sugar, however, is subject to annual reductions, eventually dropping to nil in the year 2008, and Mexico’s NAFTA status exempts it from safeguard statutes. Thus, there is an ever increasing potential for Mexican exports to the US at the second tier level. A schedule of Mexican second tier duty levels as per the US Harmonized Tariff Schedule basis 100° polarization can be seen in Table 20.2. The duty is the same for Mexican whites or raws, but is polarization-sensitive. Thus white sugar with a polarization of 99.8° would incur a higher duty than raw sugar with a polarization of 99°. Thus, through the provisions of the NAFTA, the stage has been set for the first time since 1982 for a foreign country essentially to have unfettered access to the US market. While the Harmonized Tariff Schedule provides a structure for substantial second tier imports from MFN countries, Mexico represents a unique case with regard to the US sugar industry. Second tier imports from Mexico first occurred in the second quarter of 1999. A world raw sugar price of less than 5.00 cents per pound fobs and a US domestic price in excess of 22.5 cents per pound cif dp allowed for second tier imports from Mexico. The USDA estimates that high tariff imports from Mexico will total 108 868 Chapter 20/page 27
Sugar Trading Manual tonnes in 1998–9 and 237 580 tonnes in 1999–2000. Total tariffs paid into the US Treasury on these imports would amount to around 100 million dollars. As stated above, the basis for the US sugar program is the USDA’s ability to maintain imports at levels restrictive enough to preclude loan forfeitures by domestic cane producers or beet processors. While this goal had been attained through the restrictive tariff rate quota scheme for many years, second tier imports are beyond the USDA’s control. The differential between the US market and the Mexican market for raw or refined sugar is the sole determinant of Mexican exports to the US. While the cumbersome US system allows adjustment in the TRQ size up until the release of May WASDE numbers in May each year, it has no provision to reduce total imports after the midMay release. Thus, the US market could potentially be inundated with second tier Mexican sugars, and the raw and/or refined sugar price could fall to loan default levels. A similarly prickly scenario would occur if the USDA anticipated substantial imports of second tier Mexican sugars owing to market conditions in January, March or May of a given year. If, after one or more quota tranches were cancelled due to the threat of Mexican imports, market conditions changed sufficiently to preclude Mexican second tier imports, the domestic market would be caught temporarily undersupplied. The current system does allow, however, for the USDA to increase the quota size at any time during the year. In any case, the injection of free trade dynamics into the otherwise carefully managed US domestic system holds the potential to undo the current system. The structure and disposition of the NAFTA sugar complex in the year 2008, when the tariff on Mexican exports to the US hits zero, will be substantially different from that which now exists. Among the many pressing issues is that of the Mexican bottling industry, which has strong corporate ties to the sugar industry. The Mexican bottling industry’s allegiance to sugar will be sorely tested as the US and Mexican markets achieve ‘level playing field’ status once the second tier tariff drops to zero in 2008. We will be likely to see either a substantially lower US price to reflect Mexican realities, or a move to HFCS by Mexico’s bottling industry with crippling implications for the Mexican sugar industry. At the onset of the new millennium, the Mexico/US sweetener situation remains in flux and disarray. The Mexican industry is in near complete chaos, with many mills in or near bankruptcy and awaiting a government bail out. The US market is seen as the long-term solution to the industry’s woes. The US market, having seen nearly one million tonnes of sugar delivered to government held stocks through preemptive measures or through loan forfeiture, is not able to accommodate broader Mexican access. Through negotiation, Mexican access Chapter 20/page 28
The United States was set at 116 000 tonnes for the 2000–01 program year. Access for 2001–02 had not yet been defined as of mid-2001. Meanwhile, the US is eagerly pursuing a broader Free Trade Agreement of the Americas (FTAA). Brazil, a key potential signatory to the agreement, has insisted that sugar be included in the negotiations, and has stated that it is open hunting season on such special arrangements as the US sugar regime. As work begins in earnest on the farm legislation that will set US farm policy generally and sugar policy in particular for the period from 2003 to at least 2008, the negotiations will be increasingly informed and shaped by the WTO millennium round negotiations, the NAFTA and other free trade works in progress such as the FTAA. The outcome of those talks will do much to determine the winners and losers in the US sugar complex for the next 10 years.
Chapter 20/page 29
21 MERCOSUR and the Andean Community Leonela Santana-Boado UNCTAD
MERCOSUR and the Andean Community Agreement Sugar in the MERCOSUR Agreement Impact of MERCOSUR on members’ sugar economies Sugar in the Andean Community Impact of Andean Community (CAN) on members’ sugar economies Conclusion Appendix A: Trade agreements in Latin America Appendix B: MERCOSUR and CAN in the world sugar economy Appendix C: Centrifugal sugar (thousand tonnes raw value): MERCOSUR members Appendix D: The sugar trade before and after MERCOSUR Appendix E: Ad valorem tariffs in MERCOSUR members
Appendix F: Ad valorem tariffs in Andean group of countries Appendix G: Centrifugal sugar (thousand tonnes raw value) in the Andean Pact Appendix H: The sugar trade before and after the Andean Pact Appendix I: The MERCOSUR Agreement; from LAFTA to MERCOSUR Appendix J: First efforts to integrate the sugar sector
During the last few years, the world economy has evidenced an acceleration of both the globalization, trade liberalization and deregulation processes, as well as the regionalization trend. These conditions have also affected sugar and will be of major importance in coming years. The process of globalization enhanced by the end of the Cold War, and the culmination of the Uruguay Round of GATT negotiations, brought international trade in sugar, as well as further negotiations in this area, into the mainstream of the World Trade Organization (WTO) multilateral trading system. The process of regional integration has not stopped, and has on the contrary gained in strength, with the further development of the European Union and the launching of other regional agreements such as the Free Trade Area of the Americas (FTAA).1 Furthermore, an ‘open regionalism’ is beginning to take place, when trade blocs have already begun negotiations in between them, such as the MERCOSUR– Andean Community Agreement for the Creation of a Free Trade Area (April 1998), or the MERCOSUR–European Community Inter-Regional Framework Cooperation Agreement (December 1994). In the context of the Americas, a number of regional trade agreements are filling these countries’ economies with dynamism, including the Latin American Integration Association (LAIA/ALADI), the Central American Common Market (CACM), the former Andean Group, now Andean Community (CAN), the Group of Three (G3), the Caribbean Community (CARICOM), the Southern Common Market (MERCOSUR) and the North American Free Trade Agreement (NAFTA). Except for Chile and Panama, all Latin American countries belong to one of the regional trade agreements. Numerous bilateral Free Trade Agreements (FTAs) exist, as well as preferential arrangements between countries such as the FTAs that Bolivia and Chile signed with MERCOSUR in 1996 and Peru signed with MERCOSUR in August 2003. Mexico is also negotiating an FTA with MERCOSUR. Six bilateral FTAs exist and there are also four preferential arrangements between Latin American countries and Canada or the USA. The tenth meeting of the EU–MERCOSUR bi-regional negotiations committee took place in Brussels, in August 2003. The next step was the Ministerial Meeting at the Trade Negotiator’s level in Brussels during the second half of November 2003, with a view to analyse the general state of play of negotiations and to take a political decision on the next steps. Both parties agreed on an ambitious and detailed programme of work, the ‘Brussels Programme’, to map out the final phase of the bi-regional negotiations, by the end of 2004. 1
The most recent Ministerial meeting took place on 20–21 November 2003. Chapter 21/page 1
Sugar Trading Manual
21.1 South American trading areas.
At present MERCOSUR is negotiating with the Andean Community on the creation of a free trade area between them by end-2003, in practice covering nearly the whole of South America. MERCOSUR has also started free trade negotiations with South Africa and with EFTA. Chile is negotiating the possibility of a full membership of MERCOSUR. The main objective of this chapter is to focus on the MERCOSUR and CAN agreements (see Fig. 21.1) and to review their impact on sugar production and trade within the region and on the region’s sugar trade with the rest of the world (see Appendices B–J at the end of this chapter for supplementary information).
Chapter 21/page 2
MERCOSUR and the Andean Community
MERCOSUR and the Andean Community Agreement Both MERCOSUR and CAN members also integrate LAIA, which is a wider regional trade scheme established in 1981. It aims at the elimination of trade barriers but does not have a definite schedule for its achievement. MERCOSUR came into existence on 26 March 1991 under the Treaty of Asuncion (Appendix I). The member countries are Argentina, Brazil, Paraguay and Uruguay. It mainly constitutes an integration plan aimed at developing the system of preferences that already existed under LAIA. It began by setting specific dates for achieving the different preferential stages. It established a progressive, automatic tariff reduction schedule with a common external tariff (CET), which was to be instituted by 1995 but has not yet been achieved. However, this agreement allows each nation to have a list of exceptions with those products considered ‘sensitive’ for each of the economies. And in between those, Argentina, Uruguay and Paraguay decided to include sugar, charging it a 20% intra-zone and extra-zone import duty. The main reason claimed for this was the difference in domestic policies concerning sugar among MERCOSUR members. As for Chile, during 1996, tariffs for trade with MERCOSUR were cut on both sides by 30%. From 2000 on they have been falling to zero over four years. A small group of Chilean food and agricultural imports from MERCOSUR will have special treatment. Tariffs on most of these products will start falling in 2006 and reach zero by 2011, though wheat, flour and sugar will retain their existing tariffs from zero to 31%, depending on world prices until at least 2014. To qualify for tariff preferences, goods must have MERCOSUR or Chilean content of at least 60%. In 1995, a common external tariff (AEC: Arancel Externo Común) in four different levels of 5, 10, 15 and 20% was adopted by Colombia, Venezuela and Ecuador as well as a system of ‘price bands’. In 1996, by the Trujillo Act, the Andean Community replaced the Andean Group. In respect to its external relations, MERCOSUR is a very important trading partner for both the USA and the European Union. Improvements in these trade agreements would lead not only to increasing trade, but also in return to boost MERCOSUR’s economic growth by increasing exports. However, differences still need to be settled and fixed; for instance, sensitive farm products such as sugar remain an issue in EU–MERCOSUR negotiations. Concerning the Andean Pact, it was established through the Cartagena Agreement signed by Bolivia, Chile, Colombia, Ecuador and Peru Chapter 21/page 3
Sugar Trading Manual on 26 May 1969. Venezuela acceded to the agreement in February 1973 and, in 1976, Chile decided to withdraw. The agreement established a dynamic constitutional structure for the management and administration of the integration process: the Commission of Government Representatives and a supranational, multilateral body comprising three members. During 1990, plans for economic integration accelerated. The Acta de la Paz, signed in November 1990, put as an objective the achievement of regional free trade by 1992. In January 1992, Colombia and Venezuela eliminated their tariffs for the other Andean countries; Bolivia joined them in October 1992, and Ecuador followed in December 1992, culminating in the achievement of the free trade zone. The Andean Presidents, in the Declaration of Santa Cruz de la Sierra signed on 30 January 2002, stated that Bolivia, Colombia, Ecuador, Peru and Venezuela would apply a common external tariff by 31 December 2003, at the latest, ‘indicating that it would be organized into ‘four levels: 0, 5, 10 and 20. Bolivia will not apply the 20 level.’ On 14 April 2003 the Andean countries completed the necessary agreements for the adoption of a Common External Tariff (CET). Colombia, Venezuela, Ecuador and Bolivia are able to harmonize 100% of the CET, while Peru reconciled 62 percent. The price bands scheme for some agricultural products including sugar provides a tool meant to protect local producers from price swings in international markets. The price bands (high and low) are established taking into account international prices for the last 60 months, and reductions or increases in tariffs are then calculated accordingly for foreign imports.2 In regard to its external relations, the agreement with MERCOSUR received a new impetus after the Andean Community signed the Economic Complementation Accords with Brazil in August 1999, and Argentina in 29 June 2000. In the complementary agreement signed in Brasilia on 6 December 2002, the two parties set a 31 December 2003 deadline for concluding the negotiation of the free trade area. In 2002, the USA decided to renew and enhance the Andean Trade Preference Act, maintaining Venezuela out of that scheme. The same goes for Ecuador, which was negotiating its membership to the GATT Agreement during the Uruguay Round negotiations, and was forced to commit itself to rather more restrictive conditions. The country only had seven years to complete the process of ‘tariffication’. In 2001, it was committed to adopt a tariff that should not exceed the agreed rate for sugar, which is 50%.
2 If the international price is inside the band, the CET is charged. If it is lower, an additional tariff is needed; if it is higher, the tariff is reduced.
Chapter 21/page 4
MERCOSUR and the Andean Community
Sugar in the MERCOSUR Agreement However, owing to internal discrepancies (Appendix J) this ultimate goal was not reached. By March 2000, sugar became the only sector, agricultural or industrial, in which intra-MERCOSUR trade was not liberalized. In December 2001, MERCOSUR countries reconfirmed their compromise to reach a common regime of trade rules, as well as a Common External Tariff, and free intra-MERCOSUR trade in sugar by 2006, and it was proposed that the Brazilian and the Argentine governments would suspend all trade disputes until then. This commitment was based on the need for: 1 The gradual liberalization of sugar intra-MERCOSUR trade. 2 Reduction of the distortions created by the differences in the domestic sugar policies, which is one of the main reasons of discrepancies among MERCOSUR members, particularly between Brazil and Argentina. In August 2002, MERCOSUR’s problems intensified, triggered by the economic and banking crisis in Argentina and its increased spillover effects on the other MERCOSUR members. At the time of writing, MERCOSUR countries have not yet been able to agree to the adjustment of the sugar sector to the unified customs and free internal trade. The conditions for such implementation are under intense negotiations. The claims on distortions created by differences in the domestic sugar policies still have to be solved to keep advancing towards the gradual liberalization of intra-MERCOSUR sugar trade. However, there are macro-economic signs that the situation in the region is gradually recovering from two years of serious economic and financial crisis, which escalated after the problems in Argentina, and both of the newly elected Presidents in Brazil and Argentina have expressed their commitment at reinforcing and completing the internal MERCOSUR programme and its common market by 1 January 2006.
Impact of MERCOSUR on members’ sugar economies The impact of the Uruguay Round on the world sugar sector has had wildly varying outcomes. The effects of regional integration, like MERCOSUR and the Andean Pact on regional sugar trade, are therefore extremely difficult to isolate from the impact of other kinds of worldwide as well as local changes. Chapter 21/page 5
Sugar Trading Manual In effect, local sugar sector changes – such as the privatization process of the sugar industry in Peru, the reduction of inflation in Brazil, the development of the warehouse receipt finance system, the strength of the ‘El Niño’ phenomena, or the most recent depreciation of the real – have an impact as important on sugar supply and demand as customs measures taken under trade blocs’ agreements. Even if there is some concern about regional agreements becoming a barrier that will ultimately reduce trade within the world market, regional integration is an economic tool that, if used properly, should lead to trade creation not only between member countries but also among the integrated economies. Regional integration benefits derive from the existence of certain comparative advantages, linked to geographical proximity, such as: quick delivery, reduced transportation costs and similarity in consumption habits. If some comparison is made between the sugar trade within and outside the region, before and after MERCOSUR, one will note a trend towards an increase in the sugar trade between MERCOSUR members. This relatively strong increase has been essentially the result of trade adjustment owing to the stability created by the potential longterm trade relations. Between 1986–90 and 1991–9, the average yearly exports between MERCOSUR countries increased by 575%, while total MERCOSUR exports increased by 175%. Since the creation of MERCOSUR, the share of sugar exported to countries in the region has increased to an average of 2%, in comparison with 1% in 1990. Concerning imports (which are of more relevance when speaking about trade creation and trade diversion), those from MERCOSUR countries have increased almost twice as fast as total MERCOSUR imports. After the creation of MERCOSUR, the share of sugar imported from countries in the region has increased to an average of 77%, in comparison with 50% in 1990. Since 1991, Argentina has reduced its exports, but increased the share of MERCOSUR deliveries in its total exports from 10 to 12%. At the same time a notable increase in Argentine imports from MERCOSUR has taken place. By 1999, this increase was 88% of total imports, while total Argentinean imports increased by 574% owing to climatic problems. In 1996, all imports came from MERCOSUR (Brazil); the same was also true in 1997, except for 3000 tonnes from Bolivia. It is also important to note the remarkable increase in imports in the case of Uruguay, linked to the country’s policy to reduce sugar production in order to become a refiner of imported raw material, mainly from MERCOSUR countries. How sugar is treated internally within MERCOSUR will have significant impact for the countries involved. How the MERCOSUR sugar Chapter 21/page 6
MERCOSUR and the Andean Community picture will look depends on several political, economic, social and environmental factors. Among others, the most relevant are the following: 1 Changes in the sugar industry and market structures. 2 Production costs – Brazil is the lowest cost producer in MERCOSUR and it is among the lowest cost producers in the world. 3 Tariffs for imports. As mentioned earlier, a 16% CET for sugar and 20% for alcohol was decided (but not yet applied). Once the import duty intra-MERCOSUR is lowered to zero (as eventually may happen) the spread compared to the CET to be applied to non-member countries will be substantial. Moreover, provisions under the GATT Uruguay Round Agreement are available for such differences to be increased. The bound rate, that is to say the ceiling rate of duty to be applied to Third World countries, can be as high as 35%.
Sugar in the Andean Community Sugar has been traded free of duty among the current members of the Andean Community (CAN), excluding Bolivia, since 1992. But once again, sugar is one of the ‘sensitive’ agricultural products and, according to the agricultural protection clause, sugar imports could be subject to volume restrictions, in order either to reduce the deficit in national production or to balance the import price with domestic sugar prices. In November 1994, the CET was adopted in four member countries – Colombia, Ecuador, Peru and Venezuela – and, by that time, they had already drawn up the necessary legislation for a price band system to work. This would be applicable to specific lists of agricultural products, all of which incorporated sugar. The same directive that endorsed the CET laid the foundations for the harmonization of those systems and for the adoption of an Andean price banding structure, which was finished in December 1994. The CET on sugar – cane raws and whites as well as related products – was established at 20% ad valorem. Bolivia retained its national tariff rate of 10% as it is a landlocked country with high transportation costs. As mentioned earlier, the CET (a variable additional duty or a tariff reduction rate) is determined according to the annually established floor and ceiling prices. The reference price (calculated every two weeks) is taken on the basis of retrospective prices at the London International Financial Futures Exchange (LIFFE), contract No. 5 (see also Chapter 14 and Part 7, Appendix 2). All the same, adjustments may still be needed in the price banding system, taking into consideration the possibility of association Chapter 21/page 7
Sugar Trading Manual between MERCOSUR and the CAN as well as the commitments undertaken by the members of the CAN at the Uruguay Round negotiations. In the case of developing countries, such as Colombia, Peru and Venezuela, the ‘tariffication’ process will have to be completed within a ten-year period (by the year 2004). After 2004, countries that may have committed themselves to high tariffs will be afforded sufficient margin for manoeuvre. That is the case of Colombia, which agreed to a tariff rate of 117%, and Peru, which agreed to a tariff rate that would fall from 130% to 68% in the ten-year transitional period. On the other side, Venezuela will be more limited in the implementation of the price banding system, taking into consideration that it committed itself to a bound rate of 40% at the Uruguay Round negotiations. The same goes for Ecuador, as noted above, which only had seven years to complete the process of ‘tariffication’, and in 2001, was committed to adopt a tariff that should not exceed the agreed rate for sugar, which is 50%.
Impact of Andean Community (CAN) on members’ sugar economies As mentioned earlier, there is some concern about regional agreements and complaints that these agreements are reducing trade with non-member countries. If some comparison is made between the sugar trade within and outside the region, before and after the achievement of the free trade zone, the trend shows that there has been a faster increase in trade between Andean Community members. The average yearly total exports of the Andean Community countries increased by 103% between 1988–91 and 1992–9. During the same period, the increase of the average yearly exports within the Andean Community was more than 600%. This is almost exclusively owing to the increase of Colombia’s participation in the Andean Community’s internal trade. It went from 57 000 tonnes in 1988–91 to 393 000 tonnes in 1992–9. Colombian exports have been steadily increasing, except in the years 1995 and 1997. Moreover, in 1997, Colombia accounted for 100% of Ecuador’s total imports, 60% of Venezuela’s total imports (85% in 1996), and 44% of Peru’s total imports. Regarding imports, those from the intra-Andean Community countries have increased by 600%, while the Andean Community total imports have risen only by 78%. Therefore, since the existence of the free zone, the average share of sugar imported from countries in the region has reached 54% in total imports in comparison with 14% before 1992. Chapter 21/page 8
MERCOSUR and the Andean Community How sugar is treated internally and outside the Andean Community will have some impact for the countries involved. How the Andean Community sugar picture will look, depends on, among others, the following factors: 1 The adjustment of the Andean price banding system to the multilateral negotiations at the World Trade Organization. 2 Competitiveness. Colombia is the lowest cost producer in the Andean Community and it is among the cheapest producers in the world.
Conclusion So far the implementation of both MERCOSUR and the Andean Community have influenced four important factors for their economies. They have increased investments, enlarged sugar trade between the integrated economies, changed the production and commercial patterns and created the conditions for a Latin American free trade zone. These positive results suggest that keeping these trade blocs alive and improving them is a goal worth achieving. Even though problems may arise – such as the devaluation of the real (January 1999), leading to an increase in Brazil’s share of world sugar exports from around 6% in 1990 to a peak of 31% in 1999, and the recent recession in Argentina – accepting differences and negotiating over them with an open and realistic attitude leading to an opportune solution is therefore necessary.
Chapter 21/page 9
Sugar Trading Manual
Appendix A: Trade agreements in Latin America
1994 North America Free Trade Agreement (NAFTA) • Canada • Mexico • United States
1990 Group of Three (G3) • Colombia • Mexico • Venezuela
1973 Caribbean Community and Common Market (CARICOM) • Barbados • Jamaica • Bahamas • Montserrat • Antigua and • Trinidad Barbuda and Tobago • Belize • St Kitts • Dominica and Nevis • Grenada • St Lucia • Guyana • St Vincent
1960 Central American Common Market (CACM) • Costa Rica • Honduras • Guatemala • Nicaragua • El Salvador 1969 Andean Pact (Andean Group) • Bolivia • Peru • Colombia • Venezuela • Ecuador
1981 Latin America Integration Association (LAIA/ALADI) • Argentina • Mexico • Bolivia • Paraguay • Brazil • Peru • Chile • Uruguay • Colombia • Venezuela • Ecuador
Chapter 21/page 10
1991 Southern Cone Common Market (MERCOSUR) • Argentina • Paraguay • Brazil • Uruguay
MERCOSUR and the Andean Community
Appendix B: MERCOSUR and CAN in the world sugar economy Production of centrifugal sugar 1999
Exports of centrifugal sugar 1999
MERCOSUR 14% CAN 3%
MERCOSUR 24% CAN 2% Rest of the world 74%
Rest of the world 83%
World total 136 324 504 tonnes
Consumption of centrifugal sugar 1999
MERCOSUR 8% CAN 3%
Rest of the world 89%
World total 126 221 019 tonnes
World total 39 429 891 tonnes
Imports of centrifugal sugar 1999 MERCOSUR 0% CAN 2%
Rest of the world 98%
World total 35 590 716 tonnes
Chapter 21/page 11
Sugar Trading Manual
Appendix C: Centrifugal sugar (thousand tonnes raw value): MERCOSUR members Production (thousand tonnes) centrifugal sugar Country
1999
1999 as % of total South America
1999 as % of total MERCOSUR
Brazil Argentina Paraguay Uruguay Total MERCOSUR Total South America
20 645 1 882 111 9 22 647 27 750
74.3 6.7 0.4 0.03 81.43
91.2 8.3 0.5 0 100
Consumption (thousand tonnes) centrifugal sugar Country
1999
1999 as % of total South America
1999 as % of total MERCOSUR
1999 per capita consumption in kg
Brazil Argentina Paraguay Uruguay Total MERCOSUR Total South America
9 500 1 450 125 101 11 176 15 790
60.1 9.1 0.7 0.6 70.5
85 13 1.1 0.9 100
57.8 40 23.2 31
Exports (thousand tonnes) centrifugal sugar Country
1999
1999 as % of total South America
1999 as % of total MERCOSUR
Brazil Argentina Paraguay Uruguay Total MERCOSUR Total South America
12 466 86 18 0 12 570 13 722
90.8 0.6 0.1 0 91.5
99.2 0.7 0.1 — 100
Imports (thousand tonnes) centrifugal sugar Country Argentina Uruguay Paraguay Brazil Total MERCOSUR Total South America
1999 1 90 7 2 100 1 094
Chapter 21/page 12
1999 as % of total South America
1999 as % of total MERCOSUR
0.09 8.2 0.6 0.1 8.91
1 90 7 2 100
MERCOSUR and the Andean Community
Appendix D: The sugar trade before and after MERCOSUR Countries
Average yearly exports 1991–1999 Total exports (000 mt)
Exports to MERCOSUR (000 mt)
Exports to MERCOSUR %
Exports to other LA %
Brazil Argentina Paraguay Uruguay Total MERCOSUR exports
5 538 142 10 10 5 700
108 17 — — 125
2 12.3 — — 2
6 34 — —
Growth
175%
575%
Countries
Average yearly imports 1991–1999 Total imports (000 mt)
Brazil Argentina Paraguay Uruguay Total MERCOSUR imports Growth
1 63 4 84 152 1402%
Imports to MERCOSUR (000 mt)
Imports from MERCOSUR (000 mt)
Imports from other LA (%)
— 53 4 60 117
— 83 100 80 77
100 8 — 6
2240%
Chapter 21/page 13
Sugar Trading Manual
Appendix E: Ad valorem tariffs in MERCOSUR members Countries
1994
Common External Tariff 1995
1996
Bound rate under GATT
2000/4
Brazil Sugar Alcohol
16 4
16 20
16 4
35 35
35 35
Argentina Sugar Alcohol
20 20
16 20
20 20
35 35
35 35
30 20 external 10 internal
16 20
30 20 external 10 internal
35 35
35 35
20 20
16 20
20 20
35 35
35 35
Paraguay Sugar Alcohol Uruguay Sugar Alcohol
Notes: Argentina: Compensation tax – the difference between the price of the London No. 5 of the last day of the month prior to the import and the average price of the same exchange, registered in the last five years. If the result is positive, the value found will be accrued to the value of the tax to be paid. If negative, the value found will be deducted from the value of the tax, up to the limit of 10%. Brazil: Alcohol is not affected by Decision No. 19/94, which defines a special structure for integration for the sugar industry, and therefore Brazil, in order to meet domestic demand, incorporated in its list of exemptions to the Common External Tariff, the tariff guidelines corresponding to this product. Within the scope of this structure, imports of alcohol and methanol are only subject to a 4% tariff and not 20%, which is the agreed level of the Common External Tariff. Uruguay: A minimum price of US$480.00/mt has been determined. The raw sugar import to be refined is tax exempt.
Chapter 21/page 14
MERCOSUR and the Andean Community
Appendix F: Ad valorem tariffs in Andean group of countries Countries
1993
Common External Tariff 1994
Bound rate under GATT
2000/4
Bolivia Sugar
10
10
40
40
Colombia Sugar
20
20
130
117
Ecuador Sugar
17
20
50
50
Peru Sugar
15
20
130
68
Venezuela Sugar
20
20
40
40
Source: Trade Analysis and Information System, UNCTAD.
Chapter 21/page 15
Sugar Trading Manual
Appendix G: Centrifugal sugar (thousand tonnes raw value) in the Andean Pact Production (thousand tonnes) centrifugal sugar Country
1999
1999 as % of total South America
1999 as % of total Andean Pact
Colombia Peru Venezuela Ecuador Bolivia Total Andean Pact Total South America
2240 655 535 555 293 4278 27750
8 2.3 1.9 2 1 15.4
52.3 15.3 12.5 13 7 100
Consumption (thousand tonnes) centrifugal sugar Country
1999
1999 as % of total South America
1999 as % of total Andean Pact
1999 per capita consumption in kg
Colombia Venezuela Peru Ecuador Bolivia Total Andean Pact Total South America
1280 975 900 400 290 3845 15790
8.1 6.1 5.6 2.5 1.8 24.3
33.3 25.4 23.4 10.4 7.5 100
38.3 42.9 35.5 32.1 35.7
Exports (thousand tonnes) centrifugal sugar Country Colombia Peru Bolivia Ecuador Venezuela Total Andean Pact Total South America
1999 875 21 9 12 917 13722
1999 as % of total South America 6.6 0.1 0.06 0.08 6.6
1999 as % of total Andean Pact 95.4 2.3 1 1.3 100
Imports (thousand tonnes) centrifugal sugar Country Venezuela Peru Ecuador Colombia Bolivia Total Andean Pact Total South America
1999 324 335 25 9 29 722 1094
Chapter 21/page 16
1999 as % of total South America
1999 as % of total Andean Pact
29.6 30.6 2.2 0.8 2.6 65.8
45 46.3 3.5 1.2 4 100
MERCOSUR and the Andean Community
Appendix H: The sugar trade before and after the Andean Pact Countries
Average yearly exports 1992–1999 Total exports (000 tm)
Exports to Andean Pact (000 tm)
Exports to Andean Pact (%)
Colombia Peru Ecuador Bolivia Venezuela Total Andean exports
765 57 15 27 8 872
393 1 2 12 — 408
96.3 0.2 0.5 3 — 47
Growth
103%
615%
Countries
Average yearly imports 1992–1999 Total imports (000 tm)
Imports from Andean Pact (000 tm)
Imports from Andean Pact (%)
Colombia Peru Ecuador Bolivia Venezuela Total Andean Pact
3 314 74 4 330 725
na 127 61 — 205 393
— 32.3 15.5 — 52.2 54
Growth
78%
614%
Chapter 21/page 17
Sugar Trading Manual
Appendix I: The MERCOSUR Agreement; from LAFTA to MERCOSUR The way was paved some time ago for MERCOSUR. Regional agreements have been developing since 1960, when the Latin American Free Trade Association (LAFTA), replaced in March 1981 by the Latin American Integration Association (LAIA), was created. Twenty-six years later, 12 commercial protocols were signed between Argentina and Brazil, symbolizing the first concrete step toward free trade. Other treaties followed, and the foundation was laid with the signing of the Treaty for Integration, Cooperation and Development in 1988. It outlined a schedule of 10 years for the gradual elimination of tariff barriers and harmonization of the macro-economic policies of both countries. This agreement culminated in the 1991 Treaty of Asuncion, when Paraguay and Uruguay joined. It established the goals of creating a common market that would eventually allow free movement of goods, capital, people and services among the member states. The Common Market Council (CMC) and the Common Market Group (CMG) are MERCOSUR’s institutional bodies.
Chapter 21/page 18
MERCOSUR and the Andean Community
Appendix J: First efforts to integrate the sugar sector The first effort towards integration in the sugar sector was made by the private sector in a proposal for an agreement signed in August 1992 by representatives of the four countries, by which Brazilian producers would volunteer to restrict the export of sugar to the other three countries against the adoption of a common ecological fuel, which would be the mix of 10–22% of alcohol anhydrous for each litre of gasoline. At the same time that this agreement was being signed, the Common Market Group decided to create a committee pertaining to the sub-group, Agricultural Policy, in order to – with the support of the subgroups, Industrial and Technological Policy, and Energetic Policy – evaluate and suggest alternatives for a regional policy regarding the sugar and alcohol complex. In April 1993 the committee decided to recommend the rejection of the proposal made by the private sector mainly after the Argentinean and Uruguayan delegations had declared that their respective governments did not foresee any action to adapt their fuel to the quality proposed. It also considered that it did not comply with the rules of the Treaty of Asuncion.
Chapter 21/page 19
22 Sugar markets of the FSU countries Sergey Gudoshnikov International Sugar Organization
Sugar production: trends and developments The European countries Russia Ukraine Moldova Belarus Armenia, Azerbaijan and Georgia The Asian countries Kazakhstan Kyrgyz Republic Uzbekistan Tajikistan and Turkmenistan Conclusion
Sugar consumption: trends and developments Foreign trade in sugar: trends and developments The European countries Russia Belarus Ukraine Moldova Armenia, Azerbaijan and Georgia The Asian countries Kazakhstan and Kyrgyz Republic Tajikistan, Turkmenistan and Uzbekistan Conclusion
National sugar policies and market structures The European countries Russia Ukraine Belarus Armenia Azerbaijan Georgia The Asian countries Kazakhstan Kyrgyzstan
Conclusion Appendix: Statistical analysis
The FSU countries represent the largest destination for the world market and are currently responsible for one-fifth of the world sugar turnover and about 30% of raw sugar imports. Not surprisingly, developments in the region are important in price-formatting patterns on the demand side of the world sugar economy. The disintegration of the Soviet sugar market and the end of the preferential trade with Cuba under the former COMECON arrangements led to dramatic changes in the world sugar economy. Ukraine, the world’s largest beet sugar producer in the 1980s, eventually became a net importer of sugar. Russia almost ceased importing white sugar but has become the leading raw sugar importer. Sugar production has decreased considerably in the region following the sharp reduction in beet areas and the closure of some factories, but new sugar factories have been erected in Uzbekistan and Turkmenistan.
Sugar production: trends and developments In 1990 sugar beet was processed by 312 sugar factories in six republics, composing 193 factories in Ukraine, 96 in Russia, 10 in Moldova, 8 in Kazakhstan, 4 factories in Belarus, and 1 in Georgia. The collapse of the Soviet Union and the extremely painful process of transformation from a centrally planned to a market economy took their toll on the sugar sectors of all countries of the FSU. The sugar industries of the newly independent states were facing a double challenge: to adjust to a new geopolitical environment (the end of the Soviet system of intra-republic co-operation and the preferential sugar trade with Cuba) and to switch to the market economy. The sharp reductions in state subsidies to agriculture resulted in a large reduction in beet areas and, hence, beet sugar production (see Fig 22.1). In 1990 in the USSR (excluding the Baltic states) the harvested area reached 3242 thousand hectares. By 2002 the total beet area in 12 FSU countries had declined to 1784 thousand hectares. Moreover, the sharp fall in agricultural inputs had affected beet yields. The combination of reduced area and lower yields, as well as a considerable reduction in the slicing capacities following the closure of factories, led to sugar production in the region falling from 8.68 m tonnes, raw value, in 1989 to 3.68 m tonnes only in 1999.
The European countries Russia In 1990 Russia had 96 sugar factories with a large variation in individual mill capacities (from 0.6 to 6.1 thousand TBD). By 2002 the number Chapter 22/page 1
3500 3000 2500 2000 1500 1000
8000 6000 4000 2000 0
Sugar production in 000 tonnes
Areas in 000 ha
Sugar Trading Manual
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Beet area
Sugar production
22.1 Beet areas and sugar production in the FSU.
of working factories had fallen to 84, and the industry had lost one-third of its larger mills. As industry rationalization has been a sporadic process, driven by the lack of raw material in a factory’s area rather than by considerations of economies of scale, bigger factories (in the range from four to six thousand TBD) become more vulnerable. Beet sugar production reduced sharply from 3.2 m tonnes, raw value, in 1989 to 1.65 m tonnes in 1999. So far, despite reported heavy investment by Russian sugar trading companies into the aging sugar industry only modest improvements in beet sugar output have been achieved. Another characteristic of the sector is a large-scale imported raw sugar refining. More than two-thirds of its produce currently comes from imported raw sugar processing, and nearly all sugar factories have technological capacity for raw sugar refining. In 2002 fewer than 30 factories did not process cane raw sugar while five factories worked only with imported raw material, not bothering to slice beet at all. The ratio of sugar produced from domestic beet and imported raw sugar testifies that for the overwhelming majority of Russian factories beet sugar has become an auxiliary product or even a by-product, while the lion’s share of output, profit and cash flow comes from raw sugar processing. As a result, raw sugar tolling by Russian factories more than doubled from 2.1 m tonnes in 1993 to 4.4 m tonnes in 2002. Ukraine The Ukrainian sugar industry became the major loser in the post-Soviet environment, with its beet sugar production falling by more than three times from nearly 5 million tonnes, raw value, in 1989 to 1.545 m tonnes in 2002. A total of 193 sugar factories processed beet at the beginning of the 1990s. The average slicing capacity was not high – 2.43 thousand TBD – but the size varied greatly from 1.0 thousand TBD to 9.3 thousand TBD. Today there are still the same number of factories, but only 138 of them processed beet in 2002. The rest of the factories have not formally closed down but have been standing idle for lack of raw Chapter 22/page 2
Sugar markets of the FSU countries material. It is interesting to note that the victims of the industry’s rationalization are not necessarily small and, hence, inherently inefficient sugar mills. As in Russia, the industry’s rationalization is a sporadic process driven by the lack of beet in a factory’s area rather than by considerations of economies of scale. Ukrainian industry experts believe that in the current economic environment small factories with a slicing capacity between one to two thousand TBD have much better chances of survival, since they require only a relatively small and, therefore, more achievable concentration of financial resources. Moreover, in the last years of the Soviet era Ukraine used to refine 2 to 3 million tonnes of, mainly, Cuban raw sugar for further distribution to practically all republics of the USSR. Recently the volume of tolling has reduced to four to five hundred thousand tonnes a year. Moldova The disintegration of the Soviet sugar economy has also left scars on the sugar sector of Moldova, the third largest beet sugar producer in Soviet times. By 2000 three out of a total of ten factories had ceased operation owing to the lack of raw material. Beet area fell from 80 thousand ha in 1991 to 61 thousand ha in 1999. Domestic sugar production reduced from 306 thousand tonnes, raw value, in 1989 to 108.4 thousand tonnes in 1999. Since then domestic production has stabilized at the level of about 125 thousand tonnes. Moldova’s sugar sector became the first one in the FSU in which large-scale Western investment took place. In 1997 Sudzucker (Germany), one of the West European leading sugar producers, acquired control over three factories in Moldova as well as some stocks in a fourth factory. Financial, technological and managerial support provided by Sudzucker was behind the mentioned halt in a decline in beet areas, beet and sugar production achieved by the end of the 1990s. Belarus The beet sugar sector in Belarus is the only example of a reasonably stable situation, and all four factories keep working. Throughout the 1990s beet sugar production was maintained at the pre-independence level of between 135 and 180 thousand tonnes depending on weather conditions. In recent years the sector has even managed to increased production beyond the Soviet-era level. In 2001 the country produced a record 196 thousand tonnes, raw value, and further growth is expected in 2003/04. Belarus also imports raw sugar for tolling. A considerable share of refined sugar is exported, mainly to Russia. In 1999 the country imported 349 thousand tonnes of raws (compared Chapter 22/page 3
Sugar Trading Manual to 198 thousand tonnes in 1989) and exported 222 thousand tonnes (whereas no sugar exports were recorded ten years ago). The government maintains a Soviet-style control on the industry, establishing beet areas, minimum prices for beet and maximum wholesale prices for sugar. Armenia, Azerbaijan and Georgia In the last years of the USSR there was only one factory in the Caucasian republics in Agara, Georgia (one in Armenia was destroyed by an earthquake in 1988). Since 1996 owing to the lack of beet the factory in Georgia has shifted completely to processing raw sugar only. Armenia and Azerbaijan are trying to reduce their import dependence. In 1999 a plan to build a 3000 TBD factory in Azerbaijan was announced. A US$80 m project was approved by the government in 2001. The factory will be constructed by the private sector without any financial involvement of the state. It will take three years to complete. There are some beet plantations there, but the entire crop (42.2 thousand tonnes in 1999) is processed in neighbouring Iran and Turkey. Construction of a new beet sugar plant is also planned in Armenia. In the project, co-financed by the EBRD and the World Bank, a new factory with an annual capacity of around 50 000 tonnes of white sugar was planned to become operational in 2003, but no further information on the project has been released recently. Additionally, the construction of a mini-factory with a daily production capacity of five tonnes of white sugar in the Sevan area has been reported. In 2003, 100 ha were sown to sugar beet.
The Asian countries Kazakhstan In Kazakhstan only five factories out of eight have survived the transition, and one of them processes imported raw sugar only. The beet area decreased from 85 thousand hectares in 1991 to 19.7 thousand hectares in 2002. Beet sugar production dropped from 105 thousand tonnes in 1989 to less then 25 thousand tonnes in 2001. In 2002 domestic production partly recovered and 43 thousand tonnes were produced. The industry also refines imported raw sugar. In 2000 the country imported 241 thousand tonnes of raws compared to one thousand tonnes in 1989. Kyrgyz Republic In neighbouring Kyrgyz Republic beet sugar production was halted in the mid-1980s owing to low profitability. Nevertheless the three existChapter 22/page 4
Sugar markets of the FSU countries ing factories continued refining imported raw sugar. Raw sugar refining more than covered domestic demand, and significant volumes used to be exported to the neighbouring Central Asian republics and Kazakhstan. In 1989 Kyrgyz Republic refined 415 thousand tonnes of raw sugar and exported 226 thousand tonnes of white sugar. In 1991 the newly independent country revived beet sugar production. The beet area gradually grew, and by 1999 reached 28.9 thousand hectares; it has remained stable since then. In 2002 beet sugar output totalled 41.3 thousand tonnes or about 40% of consumption. At the end of 1998 the number of working factories fell to two. Apart from processing beet one of the working factories refines imported raw sugar. In 2002 the country imported 12 thousand tonnes of raw sugar. Uzbekistan Uzbekistan is another example of a concerted attempt to decrease the country’s dependence on sugar imports. Before 1998 there was no sugar industry in Uzbekistan, until Turkish group Turkseker completed the construction of the first refinery in Uzbekistan in October of that year. The plant, situated in the Khorezm area, has a processing capacity of three thousand TBD. It was expected to work 120 days a year, yielding about 40 thousand tonnes of sugar annually. Initially beet was cultivated on 12.5 thousand hectares but in 1999 the area grew to 19 thousand hectares. The first beet harvest totalled 120 thousand tonnes, then 250 thousand tonnes were harvested in 1999 but the following year production fell by 50% owing to bad weather. Sugar production dropped from 21 thousand tonnes in 1999 to only 10.1 thousand tonnes in 2000. Output remained at the same level in 2001. Finally, no beet was harvested in 2002 and facilities to receive, store and process beet were shut down. However, after a US$2 million reconstruction the factory has resumed the large-scale refining of imported raw sugar. In 2002 it processed 200 thousand tonnes of raws, and more than doubled its refining capacity from 450 to 1000 tonnes a day. Tajikistan and Turkmenistan There is no sugar industry in Tajikistan. In Turkmenistan a $30 million sugar refinery became operational in June 1998. The only sugar factory was planned to process 300 thousand tonnes of beet by 2000, harvested from 15 thousand hectares of irrigated land. In 1999 the beet area target was achieved but bad weather and water shortages destroyed beet on all but 2.5 thousand hectares. Total sugar output was just 3.3 thousand tonnes or about 3% of annual consumption. No further information on the domestic sugar situation has been released recently. Chapter 22/page 5
Sugar Trading Manual Conclusion What can one conclude from this brief review of production sugar trends in the 12 FSU countries? Obviously, the situation varies from one country to another. In six states (Azerbaijan, Armenia, Georgia, Tajikistan, Turkmenistan and Uzbekistan) there are no sugar factories or the domestic sugar industry is still in an embryonic stage. In the countries that inherited a sugar industry from the USSR (with the exception of Belarus), the sector is characterized by a severe fall in the supply of raw materials. A sharp reduction in beet areas and extremely low agricultural inputs (if any) have resulted in considerable losses in sugar output. Thus, the vital problem of the sugar industry seems to be poor agricultural raw material service rather than the technological backwardness of the processing sector. It is also important to note that sugar beet remains an essential part of a normal crop rotation in the region and for the foreseeable future farmers will continue to plant beet, which can be used efficiently only for sugar production by sugar factories. Therefore, a complete disintegration of the sugar industry is unlikely. Another critical aspect is the vital importance of raw sugar imports for the survival of the sugar industry in this part of the world. Nonsubsidized sugar factories processing beet for less than four months a year can only survive with additional money made on refining of imported raw sugar between beet harvests. Raw sugar tolling provides for the continued utilization of industrial capacity and the labour force. Industries that have managed to keep this lifeline (such as those in Russia and Belarus) are in better shape than those that have failed (such as in Ukraine). Figure 22.2 illustrates the structure of the sugar production in the FSU.
000 t, raw value
12 000 10 000 8 000 6 000 4 000 2 000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Sugar production from beet
22.2 Sugar production in the FSU.
Chapter 22/page 6
Raw sugar refining
Sugar markets of the FSU countries
Sugar consumption: trends and developments Changes in consumption have been much less dramatic. Industrial use of sugar has fallen considerably all over the region, reflecting both the crisis in the food industry in general and the shrinking intra-trade of sugar-containing products in particular. Direct consumption (about 70% of the total sugar use in the Soviet times) has remained stable. The stable level of the direct use of sugar can be explained by the fact that sugar price inflation has been lower than that of other basic products. From 1991 to 1999, for example, prices for meat in Russia increased in absolute terms by 25 times, for bread by 30 times, for milk by 50 times, while those for sugar grew only by 17 times. As a result, sugar remains the cheapest source of nutritional energy in Russia. Prices for foodstuffs in other FSU countries have generally followed a similar pattern. Obviously, consumption patterns vary from one country to another. The per capita consumption in European FSU countries with food habits similar to those in Northern and Central Europe is high (about 40–45 kg per head a year), while sugar intake in Central Asia is more akin to neighbouring Iran or Turkey (about 20–25 kg per head a year). The collapse of the food industry – in Russia in 1993 the confectionery output fell to 52% of the level of 1990 and that of soft drinks and fruit and vegetables preserves to 23% and 26%, respectively; and the situation in other FSU counties is even worse – did not, however, mean that people have lost their test for sweetness, evident in Soviet times. A considerable part of indirect sugar use through consumption of sugar-containing products had been replaced by imported products. For example, according to the International Cocoa Organization, Russian imports of chocolate and chocolate confectionery had increased from 350 thousand tonnes in 1995 to 615 thousand tonnes in 1997. The sharp devaluation of the rouble in August 1998 and subsequent changes in local currency rates in other FSU countries made imported sugar-containing products prohibitively expensive, boosting the domestic food industry and hence the industrial use of sugar. A recovery of production levels of sugar-containing products has been recorded in both Ukraine and Russia as well as elsewhere in the region. As a result, at the end of the 1990s the sugar consumption level stabilized and began to grow faster than population increases (see Fig. 22.3). In absolute figures FSU sugar use decreased to 8892 m tonnes in 1999, 23% down from 11 918 m tonnes, raw value, in 1989 but then began to grow and reached 10 598 m tonnes in 2002.
Chapter 22/page 7
12000
42 40
11000
38 36
10000 9000
34 32
8000
Sugar consumption in 000 t
Per capita consumption in kg
Sugar Trading Manual
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Per capita consumption Sugar consumption
22.3 Sugar consumption in the FSU.
Foreign trade in sugar: trends and developments Today all FSU countries are sugar net importers, as estimated imports cover more than 70% of sugar consumption in the region.
The European countries Russia Russia occupies the dominant position, with about 70% of the trade flow consumed there. The main development has been the replacement of white sugar imports by large-scale purchases of raw sugar. In 1989 Russia imported (mainly from Ukraine) 2.6 m tonnes of white sugar and 1.1 m tonnes of raw sugar from the world market. In 2002 the country imported 4.4 m tonnes of raw sugar while white sugar imports did not exceed 525 thousand tonnes (mainly from Belarus, EU and Poland – 340, 100 and 44 thousand tonnes, respectively). During most of the last decade Cuba remained the main raw sugar supplier to Russia but in 1999 it was overtaken by Brazil, which delivered (based on Russian customs statistics) 3.1 m tonnes compared to 1.9 m tonnes received from Cuba. In 2000 Cuba regained its position as the leading supplier of raw sugar to the Russian market, but since then Brazil’s dominance has grown (see Fig. 22.4) Belarus Belarus currently is the second largest FSU sugar importer, and in 2002 it imported nearly 600 thousand tonnes of mostly raw sugar. The dominant position here is also occupied by Brazil (437 thousand tonnes). As in Russia, Belarus has managed to increase the size of tolling operations considerably. At present white sugar processed from imported raws not only covers the gap between domestic beet proChapter 22/page 8
Sugar markets of the FSU countries 3500 3000
000 mtrv
2500 2000
from Cuba
1500
from Brazil
1000
from others
500 0 1995 1996 1997 1998 1999 2000 2001 2002
22.4 Geographical structure of raw sugar imports to Russia.
duction and consumption but also provides an attractive export outlet. Using geographical advantage and the political preferences provided by Russia, the Belarus industry has carved out a niche in the Russian market. More than 200 thousand tonnes of white sugar a year were shipped to Russia in 1998, 1999 and 2000. In 2002 Belarus exported to Russia 324 thousand tonnes of whites, making Belarus the dominant and sizable (even by Russian standards) supplier of white sugar to Russia. Ukraine In 1999 Ukraine, which used to be not only the bread basket but also the sugar-basin of the USSR, became a net importer. In 2002 the country’s imports were as high as 474 thousand tonnes of mainly raw sugar (412 thousand tones). The main supplier of raw sugar was Brazil (367 thousand tonnes or 89% of total raw sugar imports) while Russia was the largest supplier of white sugar (36 thousand tonnes or 58% of total white sugar imports). As in Russia, Ukraine tries to limit white sugar imports, preferring raw sugar tolling, which provides not only needed sugar but also employment and the utilization of existing industrial capacity. Apart from official exports a considerable amount of white sugar was reported to be smuggled from neighbouring Russia, Belarus and Moldova owing to the attractive import price parity. In the nature of illicit business statistics are not available, but trade estimates suggest that ‘underreported’ imports by Ukraine could be as high as 0.5 million tonnes in 2002. Robust domestic prices in Russia may create a backflow of contraband sugar (as happened in 2001). Chapter 22/page 9
Sugar Trading Manual Moldova Two seasons of unfavourable weather at the beginning of the current decade reduced Moldova’s production and export availability rather dramatically. In 2000 Moldova was forced to import more than it could export. The volume of the net imports grew from less than 4 thousand tonnes in 2000 to 37 thousand tonnes in 2002. and Moldova can still be considered as self-sufficient in sugar. The prospect of returning to net exporter status is not too good. Production potential is not the main problem, and the industry is confident that the return of normal climatic conditions will boost sugar output, particularly taking into consideration the much healthier financial state of the industry now that Sudzucker, Germany, has acquired shares in four out of seven working factories. The problem is finding an export niche for sugar produced in this landlocked country. Ukraine, an eastern neighbour, does not import white sugar, while high transit costs through Ukraine make Moldavian sugar uncompetitive in Russia and other FSU countries. Sugar net-importing Romania is a more logical option. Indeed, in the second half of the 1990s Moldova delivered annually from 29 to 72 thousand tonnes to Romania. But Moldova has to compete there with subsidized sugar from Western Europe. Since 2000 exports to Romania have not exceeded 10 thousand tonnes a year. Armenia, Azerbaijan and Georgia All three Caucasian counties are fully dependent on imports. As their sugar-processing capacities are limited to one factory in Georgia most of the imported sugar is white. In recent years from total sugar imports of about 430 thousand tonnes a year the only raw sugar delivery was a few cargos of mainly Brazilian sugar to Georgia. In 2002 Brazil replaced the EU as the main supplier of sugar to all three countries, delivering to the area some 167 thousand tonnes, while supplies from the FSU fell to 59 thousand tonnes. National sugar industries are still in an embryonic stage, and it is most likely that the three Caucasian countries (with a combined purchasing power close to 0.5 m tonnes) will remain dependent on sugar imports in the mid and even long terms.
The Asian countries Kazakhstan and Kyrgyz Republic As with the Caucasian countries the level of import dependence of Kazakhstan and the Central Asian countries is very high. Domestic production in Kazakhstan and Kyrgyz Republic, with sugar factories inherited from the USSR, covers less than 10% of internal demand for sugar. Looking into changes in the import structure one can notice a sharp Chapter 22/page 10
Sugar markets of the FSU countries increase in raw sugar purchases. Kazakhstan and Kyrgyz Republic have more than quadrupled raw sugar imports, replacing white sugar deliveries from Ukraine. At present the main suppliers of raw sugar to the region are Brazil and Cuba, responsible for 52% and 38%, respectively, of the total raw sugar imports to Central Asia. Tajikistan, Turkmenistan and Uzbekistan Newborn industries in Turkmenistan and Uzbekistan will need a few more years to reach targeted output, and even then domestic production will remain short of consumption. There is no sugar industry in Tajikistan. Uzbekistan has already decided to cover domestic demand by sugar refined from imported raws rather than domestically produced beet sugar. Taking into account the economic and social benefits of supplementing the local beet industry with tolling, it can be expected that, as the newly created sugar industries of Turkmenistan mature, it may consider buying raw sugar too. The white sugar market is dominated by Uzbekistan, by far the largest regional importer. In 2001 it purchased 458 thousand tonnes out of the region’s total of 696 thousand tonnes. White sugar imports decreased considerably (down to 250 thousand tonnes) in 2002 when massive imports of raw sugar started for the newly reconstructed Khorezm factory. Russia is also an important player in the region. In 2002 it reportedly shipped 256 thousand tonnes to its Central Asian neighbours, but according to the local trade this amount was topped by ‘underreported’ imports of several hundred thousand tonnes. The countries in question are all land-locked, with a lengthy and poorly controlled borderline, and all imports require transit through two if not three countries. At the time of loading a supplier may not know where the cargo will be finally landed. Therefore trade statistics available on both countries of origin and countries of destination should be treated with extreme caution. Not surprisingly, figures provided by leading market analysts contain large and brave assumptions indicating the direction of the trade flow rather than actually traded volumes of a particular country.
Conclusion From the development of FSU imports during the 1990s and first years of the new millennium two important trends can be noted. The first is the increase of net imports of sugar. In 2002 FSU net imports reached 6.667 m tonnes compared to 4.541 m tonnes (including the Soviet republic inter-trade) in 1989. Therefore, production shortfalls over the region were compensated for by higher imports rather than falling consumption. The second is the spectacular growth of raw sugar imports Chapter 22/page 11
Sugar Trading Manual 000 t, raw value
9000 6000 3000 0 1993
1994
1995
1996
1997
White sugar imports
1998
1999
2000
2001
2002
Raw sugar imports
22.5 Sugar imports by the FSU.
at the expense of white sugar. In 1989 the USSR republics received 4.5 m tonnes of raw sugar from the world market and 4.4 m tonnes of white sugar from inter-trade. The white/sugar import ratio reflected the planned system of inter-republic co-operation in sugar – Ukraine received most raw sugar, refined it and distributed white sugar between the sugar-deficit republics. The Soviet white/raw sugar ratio survived the first few years of independence but by the mid-1990s sugarproducing countries had managed to adapt their industrial capacities to processing raw sugar, reducing white sugar purchases from both Ukraine and the world market. In 2002 raw sugar imports were as high as 6.143 m tonnes, while the volume of purchases of white sugar fell to only 1.652 m tonnes (see Fig. 22.5). Taking into account the vital importance of raw sugar imports for the survival of the FSU sugar industry, it is likely that the existing dominance of raw sugar imports will be maintained for the foreseeable future.
National sugar policies and market structures The European countries Russia In Russia state subsidies on beet sugar production and imported raw sugar tolling were finally abolished in 1993, when the government ceased to control or stimulate beet cultivation and sugar production. An unsubsidized beet sugar industry can hardly survive without import protection in competition with cheaper cane sugar or subsidized beet sugar from Western and Central Europe. The liberalized post-Soviet sugar market in Russia started its development without any import protection. In 1992 and 1993 sugar imports exceeded 5 m tonnes compared to only 3.5 m in 1991. It soon became clear that domestic production would disappear if no duty barriers were put on imports. Chapter 22/page 12
Sugar markets of the FSU countries The situation with white sugar imports, considered by Russians the main danger, is quite clear. Starting from 1994 Russia has managed slowly but steadily to build a high border protection against imported white sugar. Currently, white sugar imports are subject to a prohibitive €240/tonne import duty. Raw sugar imports seem to be a much more complicated problem. At one stage cane raw sugar tolling was seen as a panacea. To facilitate raw sugar imports in July 1995 the government even reduced the import duty on raw sugar from 20% to 1%. However, imports of raws went out of control in 1997/98, when 4.3 m tonnes, well in excess of the estimated import demand, were imported. Domestic prices were pushed well below the cost of production of beet sugar, making domestic sugar uncompetitive. Since then Russia has tried a combination of different tariff mechanisms like high seasonal duties and tariff rate quotas (TRQ) with a gradual increase in the level of the import duties on both TRQ and non-TRQ sugar to the current level of €95/tonne and €200/tonne, respectively. How can we explain the unwillingness to consider a seemingly more simple solution of flat higher tariff rates with a level playing field for domestic and imported sugars? As mentioned earlier, the Russian sugar industry is highly dependent on raw sugar imports. Russians want to have their cake and eat it: the industry is interested in keeping domestic beet sugar production running and importing raw sugar, but only within certain quantitative limits and at a reasonable price with a low level of taxation. At the end of 2000 the government introduced TRQs for imports of raw sugar. The main principle of the new regulations is auctioning the rights to import sugar subject to a lower import duty than sugar outside the quota. In 2001, after the first auction, the tax advantage of the quota holders was rather low and on average did not exceed US$10 to US$15/tonnes. This was not enough to deter imports of raw sugar above the quotas. Russia imported nearly 1.5 million tonnes of nonTRQ sugar. The situation improved in 2002. The rights to import 3.65 million tonnes of raw sugar within the low-duty tariff quota in 2002 were sold at an average price of US$51/tonne. The 2002 licence price was lower than in the previous year, with an increase in the tax advantage of the quota holders to US$45/tonne and further to US$70/tonne from July when seasonal duties came into force. The TRQ system was further modified for 2003. On 25 September 2002 the government auctioned TRQ licences for 2003, with 158 lots of 250 00 tonnes each (3.95 million tonnes in total) sold at an average price of €102.60/tonne. The quota-holders import raw sugar, paying import duty of €95.00/tonne compared to a standard duty €200.00/tonne. Market commentators were puzzled by the high price paid by importers for the quota, and a number of interesting Chapter 22/page 13
Sugar Trading Manual Table 22.1 Sugar import regulations in Russia 2004
2003
2002
2001
3.95 Quota is not divided by quarters or semesters
3.65
3.65
3.35
2.65
€95/tonne
0.30 5% but no less than €15/tonne
1.00 5% but no less than €9/tonne
€102.60/tonne
US$50.60/tonne
US$58.18
From US$140/tonne to US$270/tonne
€200/tonne
40% but no less than €120/tonne
30% but no less than €90/tonne
Import duty: White sugar
US$340/tonne
€240/tonne
40% but no less than €140/tonne
30% but no less than €120/tonne
Seasonal duties: Raw sugar
n/a
1.07–31.12 €230/tonne
1.10–31.12 1.07–1.10 50% but no €200/tonne less than €150/tonne
Tariff Rate Quota Raw sugar TRQ (million t) of which, in the I semester
Abolished
in the II semester TRQ rate TRQ licence cost (annual average) Non-Quota Imports Import duty: Raw sugar
Seasonal duties: White sugar
n/a
Sugar Imports (in million mtrv)
2003/04 4.800
1.07–31.12 €270/tonne 2002/03 4.815
1.07–31.12 50% but no less than €180/tonne 2001/02 5.271
for both raws and whites IV quota (from 19 November) 40% but no less than €120/tonne 2000/01 5.733
explanations (such as the collective insanity of the auction participants) were suggested. Yet there was but a small tax advantage for the TRQ holders of about €/3.00 tonne in the first half of 2003. From 1 July 2003, with the introduction of seasonal high duties, the tax advantage increased to €33.00/tonne. At the end of the day, high auction prices are not so much of a surprise. Commercial logic dictates that the final price for such licences will tend to minimize the magnitude of the tax advantage since no company is willing to give a competitor a significant lead. Until recently the majority of the Russian sugar community has believed that the results of the two-tier scheme introduced in 2000 and further modified since then are rather positive. The Russian market is Chapter 22/page 14
Sugar markets of the FSU countries more stable and predictable now. Annual imports fell from 5.6 m tonnes, tel quel, in 1999 to 4.9 m tonnes in 2002. New high and practically prohibitive levels of taxation for the nonTRQ sugar as well as growing licence costs and basic duties on tariff sugar are not welcome in all quarters in Russia. Since the last auction in September 2002, when the government sold sugar import TRQ licences for 2003, a number of senior government officials including Vice Prime Minister and Minister of Agriculture Mr Gordeev and WTO chief negotiator and Vice Minister of Economic Developments Mr Medvedkov suggested that the auction system of quota distribution might be cancelled. The Ministry of Economic Development and Trade proposes to replace the existing tariff quota system by high import duties. The Ministry of Agriculture suggests keeping tariff rate quotas but dropping auctioning rights to bring in sugar within the quotas. No decision on next year’s sugar import regime had been made by the time of writing this chapter (October 2003). In November 2004 the two-tier system is to be abolished and a system of variable tariffs introduced (see Table 22.1). As in most countries all over the world, sugar is a highly political commodity in Russia. The country is now going through the stage of finetuning its national sugar policy. The outcome of this difficult process will determine the future market structure of the world’s leading importer. The last decade has seen the emergence of a new structure for Russia’s sugar import market after more than 70 years of state monopoly of the sugar trade. On the supply side, Sucden, the Parisbased group specializing in the sugar trade, plays the leading role. The group is far from being a newcomer in Russia, maintaining strong positions in the region dating back to Soviet times. In 2001 the group supplied more than 2 million tonnes or more than 40% of the country’s total imports. Sucden also owns or controls a number of sugar factories. Other major international traders operating in Russia and the FSU are also well-known companies, including Cargill, ED & F Man, Glencore, Jan Leon, Luis Dreifus, Tate & Lyle, Vitol, etc. Some of them, like Sucden, are not only suppliers but also consumers of raw sugar imported for refining in factories owned or controlled by them. On the receiving side, Sucden is also among the leading players: in 2002 it imported (i.e. cleared through customs) nearly 700 thousand tonnes of sugar. Cargill and four Russian trading companies occupying top positions in the list of importers accompany Sucden. As shown in Table 22.2, these ‘big six’ dominate the market, controlling 60% of total imports. It is a very competitive market and a top player can fade after a couple of years (as, for example, happened with Minatep or more recently with Rosprod). Some continuity exists, however, and is increasing. For example, all six leading importers in 2003 were already in the list of largest importers four years before. Chapter 22/page 15
Sugar Trading Manual Table 22.2 Players in the Russian sugar market TRQ licences
Imports of raw sugar 000 tonnes, raw value
Total Of which: Sucden Rosagro Prodimex RSK Euroservice Cargill Exima Jan Leon Dominant ED&F Man
2003
2002
2001
2002
2001
2000
1999
3950
3650
3650
4634
5178
4342
6128
650 475 425 400 325 325 150 150 125 100
475 550 550 275 150 275 175 75 175 125
475 725 750 300 325 75 150 50 100 50
632 622 547 319 350 341 206 130 338 211
661 572 691 271 536 339 227 169 276 108
714 498 474 169 653 105 166 — 332 30
546 664 697 69 464 513 158 — 558 70
Source: ISC, Moscow.
Ukraine State subsidies on beet sugar production in the form of the ‘state order’, which guaranteed purchase and payment for the bulk of domestic beet sugar, were abolished in 1995. The absence of financial resources and political pressure by the agrarian lobby forced the industry to adopt the tolling system of beet procurement and sugar distribution. The growers received 74% of sugar produced, leaving the remaining 26% to mills as a tolling fee. The result was the emergence of the uncontrolled and unregulated ‘wild’, or in Russian dikiy, market with cheap sugar offered by desperate cash-strapped beet growers and relatively expensive sugar from mills, which have to cover all their production costs (as well as expenditures in social areas such as medical or child care) by sales of their share in the sugar produced. A substantial part of the country’s sugar resources owned by beet growers is used for barter exchange for fuel, agricultural inputs and technical resources, and dumping prices for sugar were commonly used, in particular, when sugar was exported to Russia. The ‘barterization’ of the domestic sugar economy led to the situation when an ordinary beet grower or sugar processor had neither money nor sugar. In May 1997 the Cabinet of Ministers ratified decree No 490, ‘Regulation of the Sugar Market’. The decree proposed the introduction of a European Union CAP-style system of production and export quotas as well as export losses covered by higher domestic prices. The Chapter 22/page 16
Sugar markets of the FSU countries reform got a mixed reception inside the country and a negative reaction from international financial organizations such as the World Bank and IMF. As a result of pressure, certain clauses that constituted the principal part of the resolution (e.g. minimum prices for beet at about US$25/tonne and sugar at about US$476/tonne) were revoked in August 1997 and the industry remained unsupported and unregulated. Two years later, on 17 June 1999, the Ukrainian Parliament adopted ‘The State Regulation of Sugar Production and Marketing’ to become effective on 1 January 2000. The new law imposed a two-tier quota system. Quotas are allotted for domestic consumption and exports, and are to be allocated through a series of tenders among factories. The imposition of minimum prices for both beet and sugar with an annual revision is also regulated by the law. For the 2000 season beginning on 1 September the quota for the domestic market was established at 1.6 million tonnes. The fixed minimum prices were set at 139 hryvnias (US$25) per tonne of beet containing 16% of sugar and 2000 hryvnias (US$363) per tonne of white sugar. The new law allows beet and sugar purchases on a barter basis, but the equivalent cost of delivered goods has to be equal to or to exceed minimum prices. In 2000/01 the established quota seemed to be higher or, at least, equal to the output projected for 2000/01 while the minimum price for sugar was lower than that of the market. Whether the low may be reinforced in a situation of higher production and lower domestic prices remains to be seen. Imported sugar is normally subject to a custom duty of 50%, but the Parliament and government may introduce lower duties on limited imports to cover expected sugar deficits. In June 2000, after a long struggle in the Parliament, an import quota of 260 thousand tonnes of raw sugar was approved for 2000. The duty was set at 5% of custom value but not less than €5.00 per tonne. A similar quota was adopted for raw sugar imports in 2001. In 2001, however, total imports amounted to 450 000 tonnes, raw value. Out of this, 260 000 tonnes of raw sugar were imported under the tariff rate quota enjoying a preferential tax rate. A further 200 000 tonnes were imported with tax breaks via the existing economic free trade zone and by joint ventures. In 2002 imports remained at a level close to 0.5 m tonnes. Belarus In the mid-1990s all sugar factories were transformed into joint-stock companies, but the state remained the main shareholder. The government keeps control of wholesale and retail prices for beet sugar. Domestic beet sugar production is regulated by the so-called state order covering about 90% of national output. The state finances beet Chapter 22/page 17
Sugar Trading Manual and sugar production through the National Bank at preferential interest rates normally twice lower than the ordinary rate of the Bank. All sugar produced under the state order has to be bought by the Ministry of Trade at prices monitored by the State Committee on Price Control. Sugar production from imported raws is also regulated, with controls of raw sugar supplies through a system of import quotas. The two-tier scheme basically mimics the Russian TRQ system but a considerable part of the quota is centrally distributed. In 2003, out of the total authorized imports of 420 thousand tones, licences for 300 thousand tonnes were centrally distributed between sugar factories and licences for the remaining 120 thousand tonnes were sold at an auction. Both TRQ and non-TRQ sugar is subject to import duties (€95/tonne and €200–230/tonne, respectively). Armenia White sugar imports are subject to 25% import duty and 20% VAT. Azerbaijan Sugar imports and deliveries of sugar to the domestic market are controlled by a limited number of national companies, which actively prevents any participation of foreigners and outsiders in the business. According to the trade, sizeable quantities of ‘underreported’ sugar are coming from Russia. Sugar may be bought in an unofficial physical sugar exchange in Armavir, Russia, paid in cash and then shipped by lorries to Azerbaijan omitting customs and taxation. White sugar import duty is currently 15% of the contract value plus 20% VAT. Georgia The company Kartuli Shakari, the owner of the only sugar factory in the country, dominates the market. As discussed previously, the Agar factory shifted to processing raw sugar only in 1996. The factory, situated 200 km from the main sea terminal, Poti, can refine up to 700 tonnes of raw sugar a day. In 2002 the factory processed about 70 thousand tonnes of raw sugar or 70% of domestic consumption. The rest is covered by white sugar, mainly from Turkey and the EU. Until 1997 Glencore, a London-based trade house, was the only big partner of Kartuli Shakari. The partnership started with irregular deliveries of a cargo a year. Later it developed into an agreement to deliver annually up to 100 thousand tonnes of raw sugar for refining on a consignment basis as well as to finance a US$2 million project of factory modernization. In the event the scheme did not work, the Georgian company won an arbitration case in a Georgian court but the London Chapter 22/page 18
Sugar markets of the FSU countries Sugar Association blacklisted it as an unreliable partner. Since then Glencore has been replaced by two Western trade houses – Cargill and Tradigrain. The new partners have boosted raw sugar tolling in the country to 70 thousand tonnes a year. Currently white sugar imported from outside the FSU is subject to 25% import duty and 20% VAT. Import duty on raw sugar is 12% plus 20% VAT. There is no import taxation on FSU sugar. Kartuli Shakari holds the state licence for duty-free imports of raw sugar and enjoys a preferential VAT rate on sales of white sugar.
The Asian countries Kazakhstan The market is dominated by Sakharny Centr and a local branch of international sugar trader ED & F Man. Both companies produce and sell domestic beet sugar, sugar refined from imported raws as well as import white sugar. Currently white sugar imported from outside the FSU is subject to 30% import duty (but not less than €120/tonne). There are no duties on imported raw sugar. There is also no import taxation on FSU sugar. Kyrgyzstan There is no import duty on raw sugar, and duty on imported white sugar is 10% for non-FSU countries (whites sugar from FSU can be imported tax-free). Both raw and white sugar are subject to 20% VAT. There is no export duty on sugar delivered to neighbouring Kazakhstan, Tajikistan, and Uzbekistan and non-FSU countries. Exports to other FSU countries will be taxed at the rate of 20% of contract value.
Conclusion Finalizing this chapter on major developments in the sugar sector of the FSU countries we can note that sugar is a highly political commodity in the region. The countries in question are now undergoing a stage of formulating and tuning their national sugar policies. The outcome of this difficult process will determine the future market structure of the world’s leading importing region. The importance of consumption growth potential, import dynamics, plans for production expansion and the need for investment cannot be overestimated, and close monitoring of the region’s development is essential for everybody involved in its sugar business.
Chapter 22/page 19
Armenia
Azerbaijan
495.0 465.0 400.0 390.0 360.0 325.0 300.0 310.0 375.0 390.0 390.0
Belarus
Sugar consumption (1000 tonnes, raw value) 1992 70.0 220.0 345.2 153.0 1993 60.0 205.0 337.3 100.0 1994 50.0 180.0 276.4 60.0 1995 50.0 170.0 355.2 70.0 1996 60.0 170.0 358.2 90.0 1997 60.0 123.0 380.3 95.0 1998 65.0 157.5 405.1 100.0 1999 70.0 160.0 357.1 105.0 2000 71.5 160.0 380.5 107.5 2001 73.0 160.0 422.0 110.0 2002 73.5 160.0 409.8 120.0
Georgia
105.0 100.0 87.0 44.8 50.0 45.0 40.0 25.0 30.0 25.0 46.4
Kazakhstan
Sugar production (1000 tonnes, raw value) 1992 0.0 0.0 105.8 2.1 1993 0.0 0.0 129.1 0.9 1994 0.0 0.0 133.6 0.2 1995 0.0 0.0 138.7 0.2 1996 0.0 0.0 143.9 0.0 1997 0.0 0.0 179.2 0.0 1998 0.0 0.0 180.4 0.0 1999 0.0 0.0 151.0 0.0 2000 0.0 0.0 185.9 0.0 2001 0.0 0.0 196.0 0.0 2002 0.0 0.0 162.1 0.0
Chapter 22/page 20 135.0 145.0 130.0 125.0 125.0 110.0 110.0 100.0 110.0 110.0 110.0
15.0 10.0 22.5 35.0 35.0 25.9 35.5 44.8 57.1 28.7 41.3
Kyrgyzstan
Appendix: Statistical analysis Moldova 175.0 175.0 175.0 175.0 175.0 160.0 150.0 125.0 105.0 105.0 110.0
180.0 220.0 167.0 214.6 230.8 203.0 185.6 108.4 102.4 129.9 125.0
Russia 6145.0 5850.0 5400.0 5400.0 5350.0 5308.4 5450.0 5565.2 5706.5 5847.8 6500.0
2436.8 2716.5 1650.0 2241.2 1851.2 1337.2 1369.5 1651.2 1705.3 1756.5 1756.8
Tajikistan 110.0 115.0 100.0 95.0 80.0 70.0 65.0 60.0 60.0 60.0 65.0
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Turkmenistan 100.0 105.0 95.0 80.0 75.0 70.0 70.0 70.0 70.0 70.0 70.0
0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.3 3.5 0.0 0.0
Ukraine 2880.8 2575.0 2492.1 2200.0 2100.0 1800.0 1739.1 1800.0 1875.0 2005.0 2100.0
3823.8 4160.4 3632.2 3801.2 2935.0 2170.0 2041.0 1640.2 1686.2 1802.0 1645.0
Uzbekistan 475.0 450.0 375.0 360.0 370.0 390.0 410.0 435.0 450.0 475.0 490.0
0.0 0.0 0.0 0.0 0.0 0.0 11.4 20.0 11.1 7.0 7.0
Total FSU 11 304 10 582 9 733 9 470 9 313 8 892 9 022 9 157 9 471 9 828 10 598
6 668.5 7 336.9 5 692.5 6 475.7 5 245.9 3 960.3 3 863.4 3 643.9 3 781.5 3 945.1 3 683.6
Sugar Trading Manual
(1000 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
28.1 18.3 11.0 12.8 16.6 17.9 18.9 20.6 21.1 21.6 21.7
tonnes, raw value) 13.2 0.0 11.1 0.0 8.0 0.0 7.1 0.0 33.8 0.0 143.2 35.0 241.5 85.0 256.7 95.0 276.8 10.5 268.7 190.0 336.1 47.8
capita consumption (in kg) 19.0 29.8 33.5 17.2 27.8 32.6 13.3 23.7 26.7 13.3 22.1 34.4 15.9 21.9 34.7 15.8 15.7 36.9 17.2 19.9 39.3 18.4 20.1 34.7 18.8 19.9 38.0 19.2 19.7 42.3 22.9 19.3 41.3
White sugar exports 1992 0.0 1993 0.0 1994 0.0 1995 0.0 1996 0.0 1997 0.0 1998 0.0 1999 0.0 2000 0.0 2001 0.0 2002 0.0
Sugar per 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 15.0 0.0 14.0 6.7 25.1 0.0 3.1 2.1 5.2 2.8 9.3
29.3 27.5 24.5 23.5 22.3 20.6 19.9 20.8 25.2 26.3 26.7 45.0 25.0 30.0 35.0 25.0 39.4 17.6 11.7 3.1 5.7 16.0
30.1 32.0 28.6 27.2 26.8 23.3 23.1 20.7 22.4 22.2 21.2 0.0 5.0 98.0 62.5 101.2 75.7 75.8 57.1 5.0 24.1 38.6
40.2 40.1 40.2 40.3 40.4 37.0 41.1 34.2 28.8 28.8 25.8 320.0 25.0 285.0 121.7 236.1 38.8 36.7 149.2 168.8 201.7 358.5
41.4 34.0 33.5 34.5 35.4 36.1 37.2 38.2 39.2 40.2 44.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
19.7 20.4 17.4 16.3 13.5 11.6 10.7 9.6 9.3 9.6 10.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
26.1 26.8 21.5 19.5 17.9 16.3 15.9 15.1 14.8 14.5 14.6 969.7 1057.5 1476.4 2107.8 1656.3 625.6 115.9 73.9 14.0 7.5 101.1
55.2 49.3 47.8 42.6 40.9 35.4 34.4 35.9 37.8 40.9 42.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
21.9 20.6 16.9 15.8 15.8 16.6 17.0 18.2 18.2 18.6 18.4
1 363 1 124 1 911 2 341 2 078 958 576 646 483 700 907
42.3 36.3 35.3 34.4 34.4 33.5 34.1 34.8 36.0 37.4 40.3
Sugar markets of the FSU countries
Chapter 22/page 21
Armenia
Azerbaijan
Chapter 22/page 22
imports (1000 tonnes, raw 0.0 0.0 137.4 0.0 0.0 40.5 0.0 0.0 22.0 0.0 0.0 99.1 0.0 0.0 405.8 0.0 0.0 310.3 0.0 0.0 348.6 0.0 0.0 432.3 0.0 0.0 451.9 0.0 0.0 587.8
value) 9.0 0.0 0.0 15.1 11.0 0.0 0.0 40.2 0.0 67.8 50.0 56.3 71.8 175.3 5.2 193.0 205.0 245.7 319.7 328.5
Belarus
Raw sugar 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Georgia
505.9 302.4 246.9 382.1 323.9 260.3 246.5 493.1 331.1 336.0 348.6
Kazakhstan
Sugar imports (1000 tonnes, raw value) 1992 92.5 237.1 222.6 134.1 1993 70.0 207.0 299.1 60.9 1994 15.7 143.6 382.0 47.7 1995 53.5 181.0 314.8 64.8 1996 62.4 168.4 184.7 96.6 1997 78.4 103.2 588.8 138.7 1998 68.2 173.6 456.2 187.4 1999 68.1 164.4 435.1 202.8 2000 69.4 161.5 482.2 113.8 2001 73.4 149.5 505.9 306.0 2002 73.6 160.9 592.5 186.4
Kyrgyzstan 25.0 24.7 0.0 107.5 55.8 82.8 0.0 0.0 4.7 12.1
223.8 157.0 52.6 115.2 112.4 115.5 84.9 58.5 63.4 92.1 87.6
Moldova 0.0 0.0 0.0 42.1 14.3 32.7 0.0 0.0 15.5 81.3
5.0 35.0 55.0 0.6 43.0 14.9 32.7 22.7 9.3 30.2 82.4
Russia 2368.0 1124.8 1251.9 1696.1 2667.1 3228.4 6058.9 4783.0 5683.8 4432.0
5143.7 5063.4 2248.2 3186.0 3275.3 2985.0 3732.5 6446.5 5288.3 6003.6 4958.9
Tajikistan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
105.0 139.8 66.6 101.7 85.2 71.4 40.7 72.5 53.9 60.6 68.5
Turkmenistan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
101.0 104.7 65.0 98.3 70.6 93.1 23.9 67.1 74.1 73.7 69.3
Ukraine 221.0 0.0 78.5 435.4 60.3 111.7 327.6 251.0 311.1 412.2
221.0 412.3 9.0 170.6 509.8 77.9 140.9 348.1 323.9 461.3 473.8
Uzbekistan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 221.0
436.9 504.0 308.0 411.6 383.6 407.3 356.1 419.0 442.9 458.0 471.6
Total FSU 2 810 1 246 1 424 2 571 3 220 3 959 6 940 5 752 6 787 6 143
7 429 7 356 3 640 5 080 5 316 4 935 5 544 8 798 7 414 8 550 7 574
Sugar Trading Manual
White sugar imports (1000 1993 70.0 207.0 1994 15.7 143.6 1995 53.5 181.0 1996 62.4 168.4 1997 78.4 103.2 1998 68.2 173.6 1999 68.1 164.4 2000 69.4 161.5 2001 73.4 149.5 2002 73.6 160.9
tonnes, raw value) 161.7 51.9 341.6 47.7 292.8 64.8 85.6 81.5 183.0 127.7 145.9 187.4 86.5 202.8 49.9 73.6 54.0 306.0 4.7 118.6 252.4 190.6 310.3 148.6 255.1 53.5 288.1 85.4 16.3 20.1
132.0 28.0 115.2 4.9 59.7 2.1 58.5 63.4 87.4 75.5
35.0 55.0 0.6 0.9 0.6 0.0 22.7 9.3 14.7 1.1
2695.4 1123.4 1934.1 1579.2 317.9 504.1 387.6 505.3 319.8 526.9
139.8 66.6 101.7 85.2 71.4 40.7 72.5 53.9 60.6 68.5
104.7 65.0 98.3 70.6 93.1 23.9 67.1 74.1 73.7 69.3
191.3 9.0 92.1 74.4 17.6 29.2 20.5 72.9 150.2 61.6
504.0 308.0 411.6 383.6 407.3 356.1 419.0 442.9 458.0 250.6
4 545 2 394 3 656 2 745 1 715 1 585 1 858 1 662 1 764 1 431
Sugar markets of the FSU countries
Chapter 22/page 23
Sugar Trading Manual ARMENIA: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0 0 0 0 0 0 0 0 0 0 0
92 500 70 000 15 698 53 480 62 378 78 384 68 221 68 094 69 413 73 443 73 600
0 0 0 0 0 0 0 0 0 0 0
-92 500 -70 000 -15 698 -53 480 -62 378 -78 384 -68 221 -68 094 -69 413 -73 443 -73 600
70 000 60 000 50 000 50 000 60 000 60 000 65 000 70 000 71 500 73 000 73 500
45 500 55 500 21 198 24 678 27 056 45 440 48 661 46 755 44 668 45 111 45 211
ARMENIA: Imports by country of origin Country of origin
1995
1996
1997
1998
1999
2000
2001
2002
White sugar Brazil Bulgaria EU Iran Russian Fed. Switzerland Thailand Turkey Ukraine Unknown/ Others
0 0 11 424 0 3 038 0 0 740 0 38 278
0 0 2 915 0 240 0 0 995 0 58 228
0 12 028 33 544 682 7 13 190 0 0 2 398 16 535
0 4 728 39 555 140 1 3 816 0 0 0 19 981
0 0 62 850 2 422 0 1 029 0 797 0 996
0 0 51 314 0 195 10 484 0 2 119 7 184
0 0 55 256 231 2 12 835 0 400 0 4 478
56 843 0 8 139 0 1 0 1 630 6 891 0 0
Total
53 480
62 378
78 384
68 221
68 094
69 298
73 202
73 504
Chapter 22/page 24
Sugar markets of the FSU countries AZERBAIJAN: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0 0 0 0 0 0 0 0 0 0 0
237 100 207 000 143 617 180 972 168 433 103 187 173 609 164 355 161 507 149 506 160 920
0 0 0 0 0 0 0 0 0 0 0
-237 100 -207 000 -143 617 -180 972 -168 433 -103 187 -173 609 -164 355 -161 507 -149 506 -160 920
220 000 205 000 180 000 170 000 170 000 122 956 157 474 160 000 160 000 160 000 160 000
70 100 72 100 35 717 46 689 45 122 25 353 41 488 45 843 47 350 36 856 37 776
AZERBAIJAN: Imports by country of origin Country of origin
1995
1996
White sugar Brazil EU Georgia Iran Moldova Persian Gulf Russian Fed. Thailand Turkey Ukraine Unknown/ Others
0 913 0 0 0 0 0 0 0 0 180 059
0 20 003 0 0 0 0 6 717 0 0 0 141 713
Total
180 972
168 433
1997
1998
1999
2000
2001
0 3 422 0 5 265 3 457 5 397 0 0 20 738 62 182 2 089
0 6 114 0 532 4 216 363 787 0 17 032 23 141 121 424
0 14 060 0 2 046 2 827 0 3 286 136 23 441 17 749 100 810
0 10 280 9 970 0 0 0 22 103 0 119 035 0 119
6 562 23 160 0 510 0 820 13 929 100 41 639 0 62 786
30 346 320 11 830 1 232 0 203 14 519 6 845 5 529 56 070 34 026
102 500
173 609
164 355
161 507
149 506
160 920
Chapter 22/page 25
2002
Sugar Trading Manual BELARUS: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
105 760 129 130 133 587 138 696 143 914 179 240 180 415 151 001 185 859 195 987 162 117
222 557 299 113 382 023 314 847 184 694 588 801 456 208 435 087 482 197 505 866 592 473
13 152 11 087 8 044 7 065 33 804 143 153 241 461 256 727 276 785 268 684 336 077
-209 405 -288 026 -373 979 -307 782 -150 890 -445 648 -214 747 -178 360 -205 412 -237 182 -256 396
345 218 337 284 276 414 355 219 358 153 380 327 405 110 357 100 380 484 421 958 409 800
3 695 83 567 314 719 405 978 342 629 587 190 577 242 549 503 560 290 571 501 580 214
BELARUS: Exports by country of destination Country of destination
1995
1996
1997
1998
1999
2000
2001
2002
White sugar Kazakhstan Kyrgyzstan Russian Fed. Turkmenistan Ukraine Unknown
0 0 0 0 0 7065
0 0 0 0 0 33 804
0 0 0 0 0 143 153
138 0 228 390 0 0 12 932
3 872 4 875 235 647 2 122 5 705 4 506
0 547 211 312 474 64 323 129
0 408 154 343 0 113 929 4
0 0 324 232 0 0 11 845
Total
7065
33 804
143 153
241 460
256 727
276 785
268 684
336 077
Chapter 22/page 26
Sugar markets of the FSU countries BELARUS: Imports by country of origin Country of origin Raw sugar Argentina Brazil Colombia Costa Rica Cuba EI Salvador Guatemala Honduras Israel Mexico Nicaragua South Africa Thailand Others Total White sugar Brazil Czech Republic EU Hungary Moldova Poland Russian Fed. Ukraine Others Total Total
1995
1996
1997
1998
1999
2000
2001
2002
0 0 0 0 12 944 0 0 0 0 0 0 0 0 9 069 22 013
0 26 849 0 0 69 528 0 0 0 0 0 0 0 0 2 717 99 094
0 118 700 0 0 243 372 0 13 936 0 13 206 0 0 0 0 16 611 405 825
0 161 792 0 0 95 329 7 706 11 664 0 0 6 370 9 041 14 989 0 3 424 310 315
0 131 735 20 918 0 179 842 0 12 891 0 0 0 0 0 0 3 176 348 562
31 605 134 109 0 0 212 655 31 798 17 538 0 0 0 0 0 0 4 617 432 322
0 182 265 25 678 9 948 53 880 81 956 10 222 18 580 0 0 55 569 8 986 0 4 860 451 944
0 437 466 0 0 133 323 0 7 896 0 0 0 915 0 7 857 335 587 792
6 986 0
0 0
0 5 752
22 28 767
0 0
0 974
0 320
0 1 000
3 078 59 3 541 494 48 219 229 914 543 292 834
789 20 1 495 82 10 039 73 175 0 85 600
1 719 4 522 18 745 50 591 29 133 71 671 843 182 976
15 240 1 624 3 106 74 860 16 302 5 804 168 145 893
52 143 333 48 400 32 924 1 226 3 447 86 525
142 0 0 14 831 30 290 547 3 091 49 875
416 0 0 1 373 48 541 0 3 272 53 922
198 0 260 50 2 672 0 501 4 681
314 847
184 694
588 801
456 208
435 087
482 197
505 866
592 473
GEORGIA: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
2112 915 216 222 0 0 0 0 0 0 0
134 100 60 924 47 703 64 806 96 604 138 718 187 436 202 834 113 797 305 958 186 382
0 0 0 0 0 35 000 85 000 95 002 10 468 190 000 47 808
-134 100 -60 924 -47 703 -64 806 -96 604 -103 718 -102 436 -107 832 -103 329 -115 958 -138 574
153 000 100 000 60 000 70 000 90 000 95 000 100 000 105 000 107 500 110 000 120 000
Chapter 22/page 27
Ending stocks 62 212 24 051 11 970 6 998 13 602 22 320 24 756 27 588 23 417 29 375 47 949
Sugar Trading Manual GEORGIA: Imports by country of origin Country of origin
1995
Raw sugar Brazil Unknown/ Others Total White sugar Brazil EU Turkey Ukraine Unknown/ Others Total Total
1996
1997
1998
1999
2000
2001
2002
0 0
0 15 083
11 000 0
0 0
0 0
14 160 26 087
0 3
22 326 40 461
0
15 083
11 000
0
0
40 247
3
62 787
0 11 304 0 0 53 502
15 217 42 128 0 0 24 176
0 93 806 17 865 13 839 2 208
0 81 419 103 270 2 589 158
0 85 629 116 081 1 114 10
15 759 3 205 54 514 2 70
35 000 46 027 224 906 0 22
58 258 6 066 6 569 35 022 17 680
64 806
81 521
127 718
187 436
202 834
73 550
305 955
123 595
64 806
96 604
138 718
187 436
202 834
113 797
305 958
186 382
KAZAKHSTAN: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
105 000 100 000 87 000 44 750 50 000 45 000 40 000 25 000 30 000 25 000 46 425
505 900 302 429 246 905 382 072 323 944 260 313 246 509 493 141 331 056 335 968 348 574
15 000 0 14 000 6 712 25 126 0 3 115 2 101 5 209 2 817 9 269
-490 900 -302 429 -232 905 -375 360 -298 818 -260 313 -243 394 -491 040 -325 847 -333 151 -339 305
495 000 465 000 400 000 390 000 360 000 325 000 300 000 310 000 375 000 390 000 390 000
242 900 180 329 100 234 120 344 109 162 89 475 72 869 278 909 259 756 227 907 223 637
Chapter 22/page 28
Sugar markets of the FSU countries KAZAKHSTAN: Imports by country of origin Country of origin Raw sugar Brazil Cuba EI Salvador Guatemala Unknown/ Others Total White sugar China EU Kyrgyzstan Poland Russian Fed. Ukraine Unknown/ Others Total Total
1995
1996
1997
1998
1999
2000
2001
2002
0 30 365 0 0 41 498
0 0 0 0 175 319
0 0 0 0 5 212
113 038 68 847 6 977 0 4 176
115 001 71 848 0 0 18 149
90 327 113 973 11 613 24 721 5 102
168 058 19 360 24 450 67 824 40 023
224 322 83 767 0 14 877 5 520
71 863
175 319
5 212
193 038
204 998
245 736
319 715
328 486
13 801 1 056 0 0 0 0 295 352
4 530 5 610 0 0 138 485 0 0
9 070 5 090 20 591 11 440 0 6 958 201 952
1 794 12 239 13 258 5 845 14 207 112 6 016
978 4 522 11 028 209 64 589 491 206 156
0 8 1 418 0 78 853 0 5 047
0 22 2 890 0 13 336 0 2
0 90 793 0 13 182 5 282 741
310 209
148 625
255 101
53 471
287 973
85 326
16 250
20 088
382 072
323 944
260 313
246 509
492 971
331 062
335 965
348 574
KYRGYZSTAN: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
15 000 10 000 22 500 35 000 35 000 25 861 35 522 44 802 57 137 28 710 41 307
223 800 157 000 52 613 115 167 112 390 115 525 84 945 58 539 63 368 92 098 87 624
45 000 25 000 30 000 35 000 25 000 39 371 17 638 11 660 3 122 5 722 15 994
-178 800 -132 000 -22 613 -80 167 -87 390 -76 154 -67 307 -46 879 -60 246 -86 376 -71 630
135 000 145 000 130 000 125 000 125 000 110 000 110 000 100 000 110 000 110 000 110 000
124 800 131 800 46 913 37 080 34 470 26 485 19 314 10 995 18 378 23 464 26 401
Chapter 22/page 29
Sugar Trading Manual KYRGYZSTAN: Imports by country of origin Country of origin
1995
Raw sugar Brazil Cuba Guatemala South Africa Unknown/ Others Total White sugar Belarus China EU Kazakhstan Latvia Lithuania Poland Russian Fed. Ukraine Unknown/ Others Total Total
1996
1997
1998
1999
2000
2001
2002
0 0 0 0 0
0 0 0 0 107 548
0 0 0 0 55 818
37 784 33 686 0 11 108 191
0 0 0 0 0
0 0 0 0 0
3 957 0 0 0 756
0 0 9 935 0 2 173
0
107 548
55 818
82 769
0
0
4 713
12 108
0 1 673 233 0 0 0 0 0 0 113 261
0 54 1 452 0 0 0 0 3 336 0 0
618 436 1 020 11 0 0 360 1 171 815 55 276
0 320 435 0 0 0 3 847 127 444
4 875 218 272 1 749 0 0 978 447 0 50 218
547 0 0 4 566 0 2 384 0 5 859 0 50 012
168 0 14 021 10 0 500 2 223 421 0 70 042
0 0 1 651 12 343 1 880 0 2 327 14 288 2 747 40 280
115 167 115 167
4 842 112 390
59 707 115 525
2 176 84 945
58 757 58 757
63 368 63 368
87 385 92 098
75 516 87 624
MOLDOVA: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
180 000 220 000 166 960 214 570 230 770 203 000 185 560 108 351 102 363 129 895 125 000
5 000 35 000 55 045 574 42 977 14 929 32 654 22 721 9 282 30 247 82 419
Chapter 22/page 30
Exports 0 5 000 97 993 62 528 101 232 75 671 75 791 57 107 5 003 24 052 38 616
Net trade
Consumption
Ending stocks
-5 000 -30 000 42 948 61 954 58 255 60 742 43 137 34 386 -4 279 -6 195 -43 803
175 000 175 000 175 000 175 000 175 000 160 000 150 000 125 000 105 000 105 000 110 000
120 000 195 000 144 012 121 628 119 143 101 401 93 824 42 789 44 431 75 521 134 324
Sugar markets of the FSU countries MOLDOVA: Imports by country of origin Country of origin Raw sugar Brazil Cuba Unknown/ Others Total White sugar EU Poland Russian Fed. Ukraine Unknown/ Others Total Total
1995
1996
1997
1998
1999
2000
2001
2002
0 0 0
0 0 42 067
14 300 0 47
14 094 13 968 4 592
0 0 0
0 0 0
15 517 0 10
45 334 35 783 188
0
42 067
14 347
32 654
0
0
15 527
81 305
75 0 0 0 499
559 0 159 0 192
109 121 0 0 352
0 0 0 0 0
58 1 304 1 358 0 20 001
7080 0 277 1917 8
7 461 1 323 0 4 647 1 289
170 60 0 846 38
574
910
582
0
22 721
9282
14 720
1 114
574
42 977
14 929
32 654
22 721
9282
30 247
82 419
MOLDOVA: Exports by country of destination Country of destination
1995
1996
1997
1998
1999
2000
2001
2002
White sugar Azerbaijan Belarus Romania Russian Fed. Ukraine Unknown/ Others
0 0 62 518 0 0 10
0 0 28 664 72 568 0 0
3 457 0 72 146 0 0 68
4 216 3 106 66 959 0 1 383 127
2 827 333 48 463 0 4 526 958
0 13 4282 678 22 8
0 0 7 377 122 16 553 0
0 260 5 203 11 597 20 876 680
Total
62 528
101 232
75 671
75 791
57 107
5003
24 052
38 616
Chapter 22/page 31
Sugar Trading Manual RUSSIAN FEDERATION: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
2 436 830 2 716 500 1 650 000 2 241 203 1 851 202 1 337 230 1 369 503 1 651 224 1 705 275 1 756 527 1 756 796
5 143 705 5 063 447 2 248 158 3 186 029 3 275 300 2 984 951 3 732 478 6 446 540 5 288 303 6 003 595 4 958 935
320 000 25 000 285 000 121 739 236 108 38 792 36 675 149 157 168 822 201 667 358 509
-4 823 705 -5 038 447 -1 963 158 -3 064 290 -3 039 192 -2 946 159 -3 695 803 -6 297 383 -5 119 481 -5 801 928 -4 600 426
6 145 000 5 850 000 5 400 000 5 400 000 5 350 000 5 308 387 5 450 000 5 565 232 5 706 541 5 847 844 6 500 000
2 670 535 5 391 879 4 048 282 4 245 824 3 900 984 2 875 986 2 491 292 4 874 667 5 992 882 7 703 493 7 560 715
Chapter 22/page 32
Sugar markets of the FSU countries RUSSIAN FEDERATION: Imports by country of origin Country of origin
1995
1996
1997
1998
1999
2000
2001
2002
Raw sugar Australia
17 800
0
20 931
74 627
0
0
0
Brazil Colombia Costa Rica
426 100 71 650 0
325 265 0 0
634 165 39 946 0
1 298 966 0 0
3 115 591 101 850 51 175
1 923 317 273 788 26 348
2 864 172 99 043 104 139
Cuba EI Salvador Guatemala Guyana India Mexico Nicaragua South Africa Thailand Zimbabwe Others/ Unknown
515 100 0 0 0 0 0 0 0 52 100 0 169 150
1 160 751 0 61 957 0 25 908 0 0 30 000 39 412 19 911 32 938
1 631 568 0 25 000 0 12 401 28 000 13 439 114 273 124 786 17 500 5 158
1 433 391 0 274 804 0 0 71 066 0 0 75 521 0 0
1 915 363 78 677 113 940 0 0 0 72 746 166 068 441 177 0 2312
2 149 105 73 001 0 0 0 0 0 0 293 813 21 040 22 566
1 964 642 125 652 207 918 0 0 0 172 910 10 993 76 971 0 57 401
0 201 339 7 104 475 34 706 149 290 2 70 912 109 928 10 794 0 0 100 318 0 483 789 0 10 818
Total White sugar Argentina Australia Belarus Brazil Czech Republic EU India Kazakhstan Korea, Rep. of Kyrgyzstan Latvia Lithuania Mexico Moldova Poland Thailand Ukraine Others Total
1 251 900
1 696 142
2 667 167
3 228 375
6 058 899
4 782 978
5 683 841
443 203 9
0 0 0 89 347 218
0 0 0 31 523 0
0 11 680 0 56 459 0
0 0 215 974 0 0
0 0 239 820 5 842 0
42 807 0 211 707 0 7 191
0 0 140 892 0 3 397
0 0 340 539 61 2 391
227 554 12 935 6 412 5 000 0 1 305 1 413 43 043 45 327 1 140 1 630 1 472 504 26 301 1 934 129
64 260 50 023 25 116 9 289 111 11 622 1 170 0 70 117 2 125 326 1 310 169 3 307 1 579 158
0 32 781 0 0 0 0 0 31 716 0 0 80 515 38 664 65 969 317 784
168 951 0 0 0 0 0 0 0 0 75 523 0 43 655 0 504 103
8 958 0 0 0 480 0 4 063 0 1 477 52 654 0 73 298 206 843 593 435
139 264 0 138 0 1 161 163 15 099 0 80 65 414 0 0 22 301 505 325
104 009 0 1 915 0 2 910 465 12 409 0 0 29 023 0 0 654 295 674
100 330 0 543 13 044 2 905 358 25 0 6 488 43 829 6 902 0 517 517 932
Total
3 186 029
3 275 300
2 984 951
3 732 478
6 652 334
5 288 303
5 979 515 494 997 1
Chapter 22/page 33
Sugar Trading Manual RUSSIAN FEDERATION: Exports by country of destination Country of destination
1995
White sugar Afghanistan Azerbaijan Belarus Georgia Kazakhstan Kyrgyzstan Latvia Moldova Mongolia Tajikistan Turkmenistan Ukraine Uzbekistan Unknown/ Others Total
1996
1997
1998
1999
217 543 0 435 80 870 1 848 109 109 7 065 4 891 7 500 4 783 12 391 978
73 3 739 0 2 174 142 251 40 809 761 109 1 113 2 609 761 2 174 25 109 14 426
0 76 0 87 30 978 652 2 174 152 652 1 413 217 435 1 304 652
0 2 391 0 141 31 957 1 304 98 109 33 120 0 272 163 87
0 3 286 36 000 47 70 782 7 406 924 0 4 523 24 169 486 13 1 242 279
121 739
236 108
38 792
36 675
149 157
2000
2001
2002
0 22 103 0 14 81 175 5 859 114 64 2 690 18 789 2 451 449 34 715 399
163 15 350 53 685 22 14 795 376 0 1 211 289 0 2 702 113 383 690
1 092 18 966 0 2 505 13 189 140 374 20 38 160 128 12 605 0 40 566 90 138 666
168 822
201 667
358 509
TAJIKISTAN: Production, import, export, consumption and stocks, 1992–2000 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0 0 0 0 0 0 0 0 0 0 0
105 000 139 755 66 649 101 738 85 197 71 434 40 707 72 535 53 901 60 649 68 549
0 0 0 0 0 0 0 0 0 0 0
-105 000 -139 755 -66 649 -101 738 -85 197 -71 434 -40 707 -72 535 -53 901 -60 649 -68 549
110 000 115 000 100 000 95 000 80 000 70 000 65 000 60 000 60 000 60 000 65 000
24 000 48 755 15 404 22 142 27 339 28 773 4 480 17 015 10 916 11 565 15 114
Chapter 22/page 34
Sugar markets of the FSU countries TAJIKISTAN: Imports by country of origin Country of origin
1995
1996
1997
1998
1999
2000
2001
2002
White sugar EU Kyrgyzstan Lithuania Poland Russian Fed. Ukraine Unknown
1 738 0 0 0 0 0 100 000
2 362 0 0 0 2 516 0 80 000
0 0 0 26 957 13 022 27 727 3 728
3 216 99 0 30 651 120 1 027 5 594
386 28 320 11 366 0 215 60 220
761 0 2 243 6 906 18 789 0 25 202
9 359 1 438 2 776 1 650 289 0 45 137
16 039 2 186 6 883 15 825 12 605 0 15 011
Total
101 738
84 878
71 434
40 707
72 535
53 901
60 649
68 549
TURKMENISTAN: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0 0 0 0 0 0 0 0 0 0 0
101 000 104 703 65 026 98 282 70 636 93 126 23 850 67 091 74 082 73 739 69 316
0 0 0 0 0 0 0 0 0 0 0
-101 000 -104 703 -65 026 -98 282 -70 636 -93 126 -23 850 -67 091 -74 082 -73 739 -69 316
100 000 105 000 95 000 80 000 75 000 70 000 70 000 70 000 70 000 70 000 70 000
48 000 47 703 17 729 36 011 31 647 54 773 8 623 5 714 9 796 13 535 12 851
Chapter 22/page 35
Sugar Trading Manual TURKMENISTAN: Imports by country of origin Country of origin
1995
1996
1997
1998
1999
2000
2001
2002
White sugar EU Georgia Lithuania Poland Turkey Ukraine Others/ Unknown
3 282 0 0 0 0 0 95 000
32 0 0 0 0 0 70 604
763 0 0 0 0 20 001 72 362
3 086 0 0 3 424 109 10 091 7 140
1 413 0 2 656 11 634 4 539 14 110 32 739
272 0 1 380 17 837 761 0 53 832
1 051 0 397 400 1 632 0 70 259
520 31 780 136 0 1 630 0 35 250
Total
98 282
70 636
93 126
23 850
67 091
74 082
73 739
69 316
UKRAINE: Production, import, export, consumption and stocks, 1992–2002 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
3 823 806 4 160 400 3 632 185 3 801 217 2 935 000 2 170 000 2 040 959 1 640 157 1 686 193 1 801 977 1 545 000
221 037 412 289 8 977 170 598 509 765 77 869 140 852 348 078 323 907 461 277 473 763
969 692 1 057 499 1 476 403 2 107 785 1 656 279 625 606 115 857 73 866 13 950 7 486 101 125
748 655 645 210 1 467 426 1 937 187 1 146 514 547 737 -24 995 -274 212 -309 957 -453 791 -372 638
2 880 846 2 575 000 2 492 072 2 200 000 2 100 000 1 800 000 1 739 136 1 800 000 1 875 000 2 005 000 2 100 000
1 510 835 2 451 025 2 123 712 1 787 742 1 476 228 1 298 491 1 625 309 1 739 678 1 860 828 2 111 596 1 929 234
Chapter 22/page 36
Sugar markets of the FSU countries UKRAINE: Imports by country of origin Country of origin Raw sugar Brazil Cuba EI Salvador Guatemala Hungary South Africa Thailand Unknown/ Others Total White sugar Belarus Brazil Czech Republic EU Hungary Moldova Poland Russian Fed. Others Total Total
1995
1996
1997
37 864 0 0 0 0 0 40 455 134
45 111 175 214 0 0 0 0 14 887 200 167
25 000 0 0 0 3 612 0 29 446 2 231
78 453
435 379
0 91 891 0
1998
1999
2000
2001
2002
21 697 49 400 37 252 0 0 0 0 3 365
183 825 111 304 27 270 15 216 0 0 0 6
171 844 20 807 0 25 534 0 0 0 32 784
238 133 35 455 24 853 0 0 11 623 0 1 012
366 799 30 665 0 8 267 0 0 6 095 344
60 289
111 714
337 621
250 969
311 076
412 170
0 71 612 0
0 0 3 281
0 0 218
5 705 0 0
64 186 0 4 348
123 559 0 5 435
0 0 1 086
135 0 0 72 0 47 92 145
121 0 0 77 2 562 14 74 386
154 3 119 0 10 501 0 525 17 580
24 388 2 1 383 15 98 34 26 138
49 84 4 526 33 13 47 10 457
105 2 22 3 376 258 2 108 74 405
69 31 17 839 4 2 698 566 150 201
0 0 23 375 540 35 500 1 092 61 593
170 598
509 765
77 869
137 852
348 078
325 374
461 277
473 763
Chapter 22/page 37
Sugar Trading Manual UKRAINE: Exports by country of destination Country of destination White sugar Afghanistan Azerbaijan Belarus Bulgaria Estonia Georgia Kazakhstan Kyrgyzstan Lithuania Moldova Russian Fed. Tajikistan Turkey Turkmenistan Unknown/ Others Uzbekistan Total
1995
1996
1997
0 0 0 6 558 0 0 0 0 0 0 1 100 000 0 0 0 1 001 227
0 0 0 0 5 420 0 0 0 0 0 1 323 459 0 0 0 327 400
6 686 37 609 63 967 870 5 716 13 839 6 958 625 1 891 7 632 427 282 10 001 2 518 20 001 8 653
1998
0 25 947 9 457 0 990 2 589 1 060 273 43 1 305 60 435 1 027 41 10 091 823
1999
2000
2001
0 5 866 2 506 0 288 1 114 347 0 0 0 48 160 215 0 14 110 702
0 0 0 0 80 2 0 0 0 2 059 1 0 0 11 775 33
0 1751 0 0 0 0 0 0 0 5648 74 0 0 0 13
2002
0 56 070 0 0 62 35 022 5 282 2 747 0 846 0 0 0 0 270
0
0
11 358
1 776
558
0
0
826
2 107 785
1 656 279
625 606
115 857
73 866
13 950
7486
101 125
UZBEKISTAN: Production, import, export, consumption and stocks, 1992–2000 (Tonnes, raw value) Calendar year
Production
Imports
Exports
Net trade
Consumption
Ending stocks
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0 0 0 0 0 0 11 353 20 000 11 053 7 000 7 000
436 900 504 000 308 033 411 645 383 601 407 321 356 134 418 971 442 896 457 987 471 584
0 0 0 0 0 0 0 0 0 0 0
-436 900 -504 000 -308 033 -411 645 -383 601 -407 321 -356 134 -418 971 -442 896 -457 987 -471 584
475 000 450 000 375 000 360 000 370 000 390 000 410 000 435 000 450 000 475 000 490 000
94 200 148 200 81 233 132 878 146 479 163 800 121 287 125 258 129 207 119 194 107 778
Chapter 22/page 38
Sugar markets of the FSU countries UZBEKISTAN: Imports by country of origin Country of origin Raw sugar Brazil Cuba Guatemala South Africa Others Total White sugar Belarus Brazil Czech Republic Estonia EU Hungary Kyrgyzstan Lao, PDR Latvia Lithuania Poland Russian Fed. Switzerland Ukraine Unknown/ Others Total Total
1995
1996
1997
1998
1999
2000
2001
2002
0 0 0 0 0 0
0 0 0 0 10 302 10 302
0 0 0 0 35 445 35 445
0 0 0 0 16 500 16 500
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
142 730 60 224 2 989 15 152 9 221 104
0 10 870 0
0 0 0
0 0 27 992
869 0 761
277 22 826 0
19 989 726 22 016
0 0 25 420
293 0 2 424
0 20 280 0 0 0 0 0 0 0 0 0 380 495
0 16 020 31 231 22 334 0 6 340 0 10 809 0 0 0 0 0 0 6 522 173 327 25 373 0 0 0 0 11 358 310 173 103 696
5 543 115 762 17 609 2 499 5 435 23 913 1 196 12 173 217 48 043 2 282 151 375
139 106 716 0 1 617 0 0 1 467 110 330 0 0 558 175 041
0 52 363 0 100 0 37 845 40 329 132 411 33 182 1 534 0 103 935
261 110 462 30 0 0 0 14 734 48 697 113 383 0 0 145 000
1 002 32 397 4 0 0 5 035 1 387 8 187 98 314 0 826 100 611
411 645 411 645
373 299 371 876 383 601 407 321
387 677 404 177
418 971 418 971
444 430 444 430
457 987 457 987
250 480 471 584
Chapter 22/page 39
Part 7 Appendices
1 Sugar No. 11 Rules
Coffee, Sugar & Cocoa Exchange, Inc. Rule 11.00 Contract terms – form (a) No Contract for the future delivery of Sugar No. 11 shall be recognized, acknowledged or enforced by the Exchange, or any committee or officer thereof, unless both parties thereto shall be members of the Exchange, provided, however, that members shall offer their contracts for clearance to the Clearing Association which shall become by substitution a party thereto in place of a member, and thereupon such Association shall become subject to the obligations thereof and entitled to all the rights and privileges of a member in holding, fulfilling or disposing thereof. (b) The grades deliverable under Contract No. 11 shall be sound raw centrifugal cane Sugar based on 96 degrees average polarization. Raw sugar is any crystallized sugar product from a cane sugar production facility delivered in bulk. (c) The Sugar deliverable under Contract No. 11 are as follows: (i) Growths of Argentina, Australia, Barbados, Belize, Brazil, Honduras, Colombia, Costa Rica, Dominican Republic, El Salvador, Ecuador, Fiji Islands, French Antilles, Guatemala, India, Jamaica, Malawi, Mauritius, Mexico, Nicaragua, Peru, Republic of the Philippines, South Africa, Swaziland, Taiwan, Thailand, Trinidad, United States and Zimbabwe. (ii) Growths of Cuba and/or Mozambique may be added as deliverable, upon recommendation by the Sugar Committee, by action of the Board by a two-thirds vote of the Board. (iii) A growth or growths may be added or deleted as deliverable, upon recommendation by the Sugar Committee, by action of the Board by a two-thirds vote of the Board; provided that any such addition or deletion shall only affect deliveries in months beyond the last Appendix 1/page 1
Sugar Trading Manual month in which there is an open position at the time of such action of the Board. (d) Allowances for polarization on Sugar deliverable under Contract No. 11 are as follows: (i) For the full degree from 96 degrees to 97 degrees add 1.50% of the Notice Price; for the full degree from 97 degrees to 98 degrees, add an additional 1.25% of the Notice Price; for the full degree from 98 to 99 degrees, add an additional 1.0% of the Notice Price; for the full degree from 96 to 95 degrees, deduct 5.50% of the Notice Price. Fractions of a degree shall be calculated in the same proportions. (ii) Deliverer shall be responsible to Receiver for any proven damages that may be suffered by Receiver because of any sound Sugar delivered upon a No. 11 Contract testing below 95 degrees at the time final weights and tests are taken. (e) CONTRACT NO. 11 New York ________________ 19 ________ (has) (sold) ________________________________ (have) this day (bought) (deliver to) 50 tons of 2240 Standard American avoirdupois pound of sound Raw Centrifugal Cane Sugar in bulk at ____ cents net cash U.S. currency per pound based on 96 degrees average polarization with adjustment for other grades in accordance with Sugar Trade Rule 11.00(d). The sugar delivered under this contract shall have been manufactured no earlier than eighteen calendar months preceding the delivery month specified below. Deliverer shall be responsible for all expenses pertaining to delivery and loading of sugar into the vessel, including freight taxes and other taxes of the country of origin of any nature. Normal pilotage, wharfage charges, customs fees and similar charges pertaining to the entry or exit of the vessel at loading port are for the account of the Receiver. Sugar delivered shall be free and clear of all liens and claims of any kind, which shall be warranted by the Deliverer to the Receiver in making the delivery. The Sugar delivered shall be freely available for export. Delivery during ________________ to be made FOB and stow aboard (trading month) Receiver’s nominated vessel in accordance with Sugar Trade Rule 11.05. Sugar deliverable to be as provided in Sugar Trade Rule 11.00(c). Weight and polarization to be determined as provided in Sugar Trade Rule 11.09 and payment to be made in accordance with Sugar Trade Rule 11.10. Appendix 1/page 2
Sugar No. 11 Rules Either party may call for margin as the variations of the market for like deliveries may warrant, which margin shall be kept good. This contract is made in view of, and in all respects subject to, Rules of the Exchange. ____________________________ (Brokers) (Across the face is the following) For and in consideration of One Dollar to ________ in hand paid, receipt whereof is hereby acknowledged ________ accept this contract with all its obligations and conditions. (f) The Receiver shall provide vessels suitable for the carriage of the Sugar and contracted for under a standard form of Charter Party for Raw Sugar currently in general use in the World Sugar Trade at the time of shipment, or a freighting agreement no less favorable to Deliverer than said Charter Party. The rights and obligations of the Receiver and the Deliverer including but not limited to despatch, demurrage, loading conditions and vessel’s responsibility to the cargo will be governed by the Charter Party unless both the Receiver and Deliverer agree in writing to other terms and conditions. Demurrage and despatch shall be limited to commercially justifiable rates specified in the Charter Party shall be presumed to be commercially justifiable unless the Deliverer established by clear and convincing evidence that any such rate is not commercially justifiable; provided, however, that dispatch shall be one-half or 50% of demurrage. (g) Risk of loss shall pass to the Receiver at the time the Sugar cross the rail of the vessel and title shall pass to the Receiver at the time of effecting payment as provided in Rule 11.10(3). (h) Verbal contracts (which shall always be presumed to have been made in one of the foregoing forms) shall have the same force as written ones, if notice in writing by one of the contracting parties to the other has been given before the close of the succeeding business day. Amended by the Board January 14, 1981; effective June 1, 1981. Amended by the Board October 13, 1982; effective March 29, 1983. Amended by the Board June 11, 1986; effective August 13, 1986 commencing with the January 1988 contract month and all contract months thereafter for the delivery of Barbados sugar. Amended by the Board July 12, 1989; effective February 6, 1990 commencing with the October 1991 contract (polar allowances). Amended by the Board June 12, 1991; effective August 1, 1991. Amended by the Board November 19, 1993; effective January 24, 1994. Amended by the Board October 11, 1995; effective January 10, 1996 (despatch/ demurrage rates ([11.00(f)]).
Appendix 1/page 3
Sugar Trading Manual Amended by the Board April 13, 2000; effective May 1, 2000 [(f)]. Amended by the Board April 9, 2003; effective April 14, 2003 [(f)].
Rule 11.01 Delivery months Sugar contracts shall not be recognized by the Exchange extending beyond a period of 24 months, including the current month. Trading shall be permitted only for the delivery months of January, March, May, July, and October as the Board shall determine from time to time. Trading shall at all times be conducted in any such month contained in a 24-month cycle. Trading in a new delivery month shall be initiated at the opening of trading on the first Exchange business day of the twentythird month preceding any delivery month. Amended by the Board March 11, 1981; effective December 16, 1981. Amended by the Board July 8, 1981; effective April 6, 1982. Amended by the Board November 12, 1986; effective March 31, 1987. Amended by the Board February 15, 1989; effective April 10, 1989. Amended by the Board October 13, 1993; effective October 26, 1993 (closing period). Amended by the Board August 18, 1993; effective November 29, 1993 (24-month delivery period). Amended by the Board March 22, 1995; effective May 2, 1995 (trading hours). Amended by the Board April 16, 1997; effective July 1, 1997.
Rule 11.02 Size of contract, price fluctuation (1) All offers to buy or sell Sugar for future delivery unless otherwise specified, shall be understood to be for 50 tons of 2240 pounds each of Raw Sugar, and offers to buy or sell in larger quantities shall be in multiples thereof. All offers to buy or sell Sugar for future delivery shall be in cents and decimal fractions or a cent, and no transaction in contracts shall be permitted wherein the difference in price shall consist of a fraction smaller than one-hundredth of one cent per pound for each pound of Sugar, nor shall any additional moneyed consideration whatever be allowed. To avoid abnormal price fluctuations of price and injurious speculation incident thereto, the Board may, if and to the extent it deems desirable, impose, increase, decrease, change, suspend or eliminate limits on daily price fluctuations in contracts for delivery of No. 11 Sugar in any month or months, and prescribe the terms and conditions of any such limits. Amended by the Board March 11, 1981; effective April 27, 1981. Amended by the Board July 8, 1981; effective April 6, 1982. Amended by the Board June 8, 1988; effective June 27, 1988.
Appendix 1/page 4
Sugar No. 11 Rules Rule 11.03 Unmatched trades Should the Clearing Association notify any party by 9:30 A.M. of the following Exchange business day that it cannot match a trade reported by him with a corresponding trade of the alleged other party to the transaction, it shall be the duty of the party reporting the transaction to present to the President a memorandum thereof stating that the Clearing Association has advised him of its inability to match the transaction reported by him which notice shall be announced at the opening “call” and posted on the Bulletin Board. It shall then be the duty of such party, in case the contract is not claimed, to buy in or sell out said contract at the expiration of one-half hour after the opening of business on the day of default (being the day after the transaction was made), or, if the opening call shall not at that time be completed, then promptly after the end of such call, promptly notifying the President in writing of such purchase or sale, and to proceed against the other member, when necessary, under the Exchange Arbitration Rules then in effect. Should the Clearing Association notify any party by 9:30 A.M. of the following business day that it has refused to clear a trade reported by him because of its rejection of the corresponding trade of the other party to the transaction, it shall be the duty of the innocent party to present to the President a memorandum thereof stating that the Clearing Association has advised him of its refusal to clear his trade because of its rejection of the corresponding trade of the other party to the transaction. It shall be the duty of the party whose trade was rejected to use his best efforts to correct the situation with the utmost promptness. If the situation shall not sooner be corrected, it shall be the duty of the innocent party to buy in or sell out said contract at the expiration of one-half hour after the opening of business on the day of default (being the day after the transaction was made), or, if the opening call shall not at that time be completed, then promptly after the end of such call, promptly notifying the President in writing of such purchase or sale, and to proceed against the other member, when necessary, under the Exchange Arbitration Rules then in effect. Rule 11.04 Contract binding (a) All contracts for the future delivery of Sugar shall be binding upon members and of full force and effect until the quantity and quality of the Sugar specified in such contract shall have been delivered, and the price specified in said contract shall have been paid. No contract shall be entered into with any stipulation or understanding between the parties at the time of making such contract that the terms of said contract as specified above are not to be fulfilled, or that the Sugar is not to be delivered and received in accordance with said Sections. Appendix 1/page 5
Sugar Trading Manual (b) Subject to the prohibition in paragraph (a), the Deliverer and Receiver may enter into a mutually acceptable written agreement to deliver and receive under conditions other than those stipulated in the Rules. A delivery so made shall be considered complete upon written notification by the Deliverer and the Receiver to the Secretary of the Exchange and to the Clearing Association. The making of any such agreement shall relieve the Clearing Corporation of any further obligations with respect to any Exchange contract involved, and the Deliverer and Receiver shall indemnify the Exchange and the Clearing Corporation against any liability, cost or expense either may incur for any reason as a result of the execution, delivery or performance of such contract or such agreement, or any breach thereof or default thereunder. Amended by the Board November 10, 1982; effective February 1, 1983.
Rule 11.05 Readiness of vessel for sugar (1) (a) Receiver shall declare to Deliverer in writing, the name and expected arrival of the vessel, prior to 5:00 P.M. on a full Exchange business day at least seven calendar days prior to the expected readiness of the vessel at the Sugar loading port and concurrently furnish the President written notification of such declaration. Vessel’s Notice of Readiness shall not be presented earlier than seven calendar days after Receiver has provided Deliverer with such declaration in writing. (b) Receiver shall have the Sugar vessel ready to load port on any day from the first calendar day of the delivery month to and including the fifteenth calendar day of the second succeeding calendar month. Rule 11.06 Last trading day (a) The last trading day for each delivery month in the No. 11 Sugar Contract shall be the last full trading day of the month preceding the delivery month. (b) After the close of business on the last trading day of any delivery month: (1) Each member holding one or more open sales for that month shall issue a “Memo of Deliverer” To the Clearing Association, by 5:00 p.m., stating for each open sales contract the growth of the Sugar (one growth or description only for each sales contract) and the delivery port, provided, however, that a minimum of twenty contracts shall be stated for each port designated in the Memo of Deliverer. Notwithstanding any rule to the contrary, after the close of trading on the last trading day of any sugar delivery month, a clearing Appendix 1/page 6
Sugar No. 11 Rules member shall not carry for its own account or the account of any other person a number of open sales contracts less than twenty in any such delivery month. In any case where a clearing member carries, for the account of any other person, a number of open sales contracts which is less than twenty on the last trading day, the clearing member shall, in such manner as it deems appropriate, buy or sell the minimum number of contracts necessary, so that the contracts in such account equal at least twenty or the account is liquidated. (2) Each member holding one or more open purchase contracts for that month shall issue a “Memo of Receiver” to the Clearing Association, by 5:00 p.m., stating the total number of open purchase contracts for that month (which number shall conform to the unliquidated position on said member’s books) which it will be receiving. (3) Notwithstanding the foregoing provisions of this paragraph (b), if a member transfers any contracts after the close of trading in accordance with Rule 3.06(f): (A) The failure of such member to issue a Memo of Deliverer or Memo of Receiver with respect to such contracts shall not be deemed a violation of this paragraph (b); (B) If any contracts transferred offset any contracts with respect to which the transferee had issued a Memo of Deliverer or Memo of Receiver, such Memo shall be deemed amended to reflect the deletion of the contracts so offset; and (C) If any contracts transferred do not offset any contracts with respect to which the transferee had issued a Memo of Deliverer or Memo of Receiver, the transferee shall issue a Memo of Deliverer or Memo of Receiver with respect thereto by 5:00 p.m. of the Business Day following such last trading day. (c) The Clearing Association, after receiving the Receiver’s and Deliverer’s Memos shall issue to each Receiver, before 10:00 a.m. of the following Exchange business day, (i) a list of all Receivers and (ii) a “Multiple Delivery Notice” for the number of contracts reported outstanding. Each Multiple Delivery Notice shall state for each growth of sugar listed by each Deliverer: (1) the number of contracts; and (2) the delivery port from which delivery will occur. (d) The notice price for Multiple Delivery Notices issued with respect to any delivery month shall be the settlement price for said delivery month on the last trading day for that month. (e) Receivers, with or without additional consideration, may exchange among themselves any of the contracts listed on the Multiple Delivery Appendix 1/page 7
Sugar Trading Manual Notice, at any time up to 3:00 p.m. of the Exchange business day on which the Multiple Delivery Notice is received from the Clearing Association, by noting such exchange on the face of the Multiple Delivery Notice. (f) Not later than 3:30 p.m. of the day specified in paragraph (e), each Receiver holding a Multiple Delivery Notice shall notify, in writing, each Deliverer and the Clearing Association of the name or names of the Deliverer or Deliverers, the number of contracts, the growth of the Sugar and the delivery port from which the Receiver will be receiving Sugar. (g) If the office of a party to whom a Memo of Deliverer, Memo of Receiver, Multiple Delivery Notice or other written notice under this rule is to be given is closed, it shall be sufficient to give such document to the President of the Exchange who shall endorse thereon the day and time of receipt, and post notice thereof on the Bulletin of the Exchange. Amended by the Board April 13, 1988; effective October 31, 1988. Amended by the Board October 13, 1993; effective April 15, 1994, commencing with the May 1996 contract. (20 contracts) Amended by the Board September 10, 1997; effective February 2, 1998 (¶(b)(1)). Amended by the Board December 18, 2001; effective January 2, 2002.
Rule 11.07 (Deleted.) Rule 11.08 (Deleted.) Rule 11.09 Final weights and tests are to be determined as follows: (a) If the sugar is to be shipped to Belgium, Canada, Finland, France, Germany, Holland, Ireland, Japan, Malaysia, Morocco, New Zealand, Portugal, Singapore, Sweden, the United Kingdom or the United States, settlement is to be made on net landed weights and tests taken at port of discharge as customary at said port in accordance with the procedures set forth in paragraph (b) below; provided, however, that regardless of the destination, the Receiver shall have the right, declarable at the time of nomination of the carrying vessel, to require that final settlement be based upon shipper’s weights and tests determined as is customary at loading port at time of loading. (b) Where not contrary to commercial custom, not later than five days prior to the arrival of the vessel at destination port, Deliverer shall appoint weighers and samplers to determine weights and draw samples in concert with the Receiver or his representative. One Appendix 1/page 8
Sugar No. 11 Rules hundred per cent of the sugar shall be weighed and sampled, unless a lesser amount is mutually agreed upon. All expenses of weighing, sampling and testing shall be borne by the Deliverer, unless the sugar is shipped to the United States, in which case Deliverer shall bear the costs at the rates in effect at the port of London, and the remainder of the overall expenses shall be for account of the Receiver. In the event the Deliverer has not made a timely appointment of weighers and samplers, the Receiver shall appoint qualified weighers and samplers and shall within thirty days of completion of discharge of the sugar furnish Deliverer with the customary documentary evidence of weights and tests at the port of discharge and Deliverer shall reimburse the Receiver for the cost of same. Receiver’s failure to provide documentary evidence of weights and tests, where reasonably in the power of the Receiver, shall render him liable to the Deliverer for any damages to Deliverer as a result of such failure. (c) If the sugar is to be shipped to any destination other than those enumerated in paragraph (a) above, final settlement shall be based upon shipper’s weights and tests determined at loading port at the time of loading. Deliverer is to pay all expenses of the weighing, sampling, and testing at port of loading conducted by it. Receiver shall have the right to observe the weighing, sampling, and testing procedures utilized by the Deliverer’s representative at the port of loading. The Receiver shall also have the right, in its sole discretion, upon written notice to the Deliverer at least five days prior to the commencement of loading, to appoint at its own expense an internationally recognized and independent supervision company to conduct weighing, sampling and testing at the loading port at the time of loading. (d) (i) Notwithstanding paragraph (a) and (b) above, in the case where a Receiver ships the sugar on a vessel which carries sugar of more than one origin, Receiver is not entitled to settlement on the basis of landed weights and tests, regardless of destination, and settlement shall be based on weights and tests as determined in paragraph (c). However, if a Receiver nominates a vessel which is scheduled to load sugars of more than one origin, and the Receiver will guarantee to the Deliverer, in writing, at the time of nomination of the vessel that the Exchange sugars being received from the Deliverer will be separately loaded and stowed and separately discharged at a port of discharge in one of the destinations enumerated in paragraph (a) above, the Receiver will be entitled to final settlement based on net weights and tests in accordance with the procedures outlined in paragraph (b). (ii) When the sugar is shipped on a vessel which loads other sugar of the same origin, whether from other Exchange deliveries or Appendix 1/page 9
Sugar Trading Manual in combination with non-Exchange sugar and all of the sugars shipped on the vessel are discharged at a port in one of the destinations enumerated in paragraph (a), final settlement shall be made on net landed weights and tests provided that the total outturn weight and outturn polarization shall be pro-rated among the various parties concerned on the basis of certification of shipping weights and tests taken at the loading port(s) at the time of loading by a recognized organization performing such services in the country of origin at the expense of the Receiver. If the Receiver fails to timely produce such certificates, settlement of the Exchange sugar shall be based on weights and tests as determined in paragraph (c). (e) On the recommendation of the Sugar Committee, other countries may be added to the destinations set forth in paragraph (a) of this rule by majority vote of the Board of Managers. Amended by the Board January 14, 1987; effective March 18, 1987 with respect to deliveries commencing with the October 1988 contract. Amended by the Board July 12, 1989; effective February 9, 1990 commencing with the March 1990 contract. Amended by the Board September 14, 1993; effective November 9, 1993, commencing with the March 1995 contract (Morocco and Portugal). Amended by the Board April 12, 1995; effective July 5, 1995 ([11.09(c)]).
Rule 11.10 Obligations of the Receiver and Deliverer (1) Obligations of the Receiver: (a) Receiver shall name the destination of the Sugar to Deliverer as soon as reasonably possible, but in any event prior to clearance from loading port, unless sooner required by country of origin. (b) Receiver shall give Deliverer complete documentary instructions not later than five days prior to vessel’s arrival at loading port. The Receiver has the right to request specific language and wording in the description of sugar which, unless it is unreasonable, shall be provided by the Deliverer. In the event agreement of such wording cannot be reached, then the description “sound raw centrifugal cane sugar in bulk” shall be used. The burden of proving unreasonableness rests with the Deliverer. Forms acceptable at the port of destination, if required, shall be supplied by Receiver. Deliverer shall have shipping documents made on similar forms as soon as shipment is complete. Bills of lading shall be drawn to order or to order for shipper and signed by the Master or vessel’s agent. (c) Receiver shall be responsible for the release of the bills of lading to Deliverer or his agent at loading port within twenty-four hours of
Appendix 1/page 10
Sugar No. 11 Rules completion of loading. Receiver’s failure to comply with this provision shall make him liable to Deliverer for proven damages. (d) Receiver shall supply Deliverer with copy of Charter Party or freighting agreement as promptly as possible. At any time after nomination of vessel and before delivery of Charter Party or freighting agreement, any information relating thereto shall be given to Deliverer upon his request. (e) Receiver shall be responsible for additional expenses incurred by reason of documentary requests beyond bills of lading and commercial invoices. All consular charges of the country of destination shall be for the account of Receiver. Delays or extraordinary expenses incurred owing to the absence of or distant location of consuls from port of shipment shall be for account of Receiver. (f) Marine and War Risk Insurance on the usual full Lloyd’s conditions to cover payment of losses as interest may appear, payable in U.S. dollars or other freely convertible currency, shall be covered by Receiver at his expense. Satisfactory evidence of such coverage must be given by Receiver to Deliverer at least five calendar days prior to commencement of loading of nominated vessel. In the event satisfactory evidence of coverage is not provided, Deliverer may secure Marine and War Risk Insurance coverage. If a review by an Exchange Arbitration Panel supports Deliverer’s opinion that satisfactory evidence of such coverage was not available to Deliverer five days prior to the commencement of loading of nominated vessel, then Deliverer’s Marine and War Risk Insurance expenses shall be for the account of Receiver. (g) Receiver shall make settlement promptly with Deliverer, in U.S. Currency, for despatch earned at the loading port. (h) Sugar shall not be stowed in refrigerator hatches, hallways, hatchways, bunker space, deep tanks or other unusual places unless requested in writing by Receiver. All extra expenses shall be for the account of Receiver and Deliverer shall also be allowed additional lay time for loading in such places. (i) Any sums payable with respect to any Sugar delivered under an Exchange contract as contributions to the Stock Financing Fund established under the International Sugar Agreement shall be for the account of the Receiver. (2) Obligations of the Deliverer: (a) Deliverer shall provide a safe berth (or a safe anchorage where Deliverer may load by lighter), subject to subdivision (c) hereof, for Receiver’s nominated vessel promptly upon presentation of vessel’s Notice of Readiness. Lay time for Deliverer shall commence at the
Appendix 1/page 11
Sugar Trading Manual beginning of the next working period after presentation of vessel’s Notice of Readiness, whether in berth or not. Once Notice of Readiness has been presented, the vessel shall be berthed (or anchored) promptly and Deliverer shall commence loading promptly. If congestion at loading port prevents the vessel from berthing (or anchoring) promptly, vessel must wait its turn in berth, in accordance with the custom of the port. ➼ Effective with respect to all delivery months through and including March 2003. The loading rate of 1,500 long tons per weather working day (stevedoring holidays excluded) shall apply for despatch and demurrage purposes provided the vessel is capable of receiving at this rate, and provided the vessel has a minimum of four hatches available and accessible, according to the custom of the loading port. If less than four hatches are available and accessible, or if the vessel is otherwise incapable of being loaded at the aforesaid loading rate, the loading rate shall be reduced proportionately. ➼ Effective with respect to the May 2003 delivery month and all delivery months thereafter. The loading rate of 3,000 long tons per weather working day (stevedoring holidays excluded) shall apply for despatch and demurrage purposes provided the vessel is capable of receiving at this rate, and provided the vessel has a minimum of four hatches available and accessible, according to the custom of the loading port. If less than four hatches are available and accessible, or if the vessel is otherwise incapable of being loaded at the aforesaid loading rate, the loading rate shall be reduced proportionately. Following the expiration of lay time for the declared vessel, the Deliverer shall pay (in addition to demurrage) a daily fee to the Receiver equal to a percentage of demurrage at the Charter Party rate while the vessel remains on demurrage in accordance with the following schedule: the 1st period of 15 days: 0% of the daily demurrage rate the 2nd period of 15 days: 50% of the daily demurrage rate for all days thereafter: 100% of the daily demurrage rate (b) Deliverer shall deliver at a loading port berth or anchorage in the country of origin; however, in the case of landlocked countries, delivery shall be made at a berth or anchorage in the customary port of export. Further, in the case of the port of Bangkok, Thailand*, Deliverer shall deliver at no more than two loading facilities within that port. (c) Deliverer shall endeavor to provide the Receiver with the opportunity to sample the sugar intended to be delivered prior to its loading Appendix 1/page 12
Sugar No. 11 Rules but without commitment as to the actual sugar to be supplied at the time of loading. (d) (i) The port nominated by Deliverer must be capable of providing a berth or anchorage that will enable vessels drawing thirty feet to proceed to and depart from such berth or anchorage always safely afloat. However, if permitted by vessel’s draft, a berth of less than 30 feet may be provided. (ii) Notwithstanding paragraph (d) (i) above, the Port of La Romana, Dominican Republic, must be capable of providing a berth or anchorage that will enable vessels drawing twenty-eight feet to proceed to and depart from such berth or anchorage always safely afloat. However, if permitted by vessel’s draft, a berth of less than 28 feet may be provided. (e) Deliverer shall make settlement with Receiver, in U.S. Currency, for demurrage incurred at the loading port. (f) Deliverer guarantees that Sugar delivered hereunder shall be free of restriction with respect to usage at destination. No restrictions as to destination of the Sugar may be imposed by Deliverer except as provided in Sugar Table Rule 11.10(5). (3) Settlements: (a) Where final settlement is made on destination weights and tests, Deliverer shall furnish: (i) Full set of clean on-board bills of lading drawn to order or to order of shipper and endorsed in negotiable form. (ii) Commercial pro forma invoice for 98% of the value of the Sugar basis 96 degrees at the Notice price. (iii) If requested by Receiver within reasonable time, certificate of origin and/or consular invoice, or Deliverer’s guarantee to deliver the same as soon as possible. Final payment shall be made within ten days of presentation of Deliverer’s final invoice accompanied by weight and test certificates. Unless otherwise mutually agreed payment shall be made by wire transfer in same day funds. In the case of total loss or total damage, polarization shall be assumed to be 97.5 degrees and bill of lading weight shall apply. In the case of partial loss or partial damage, (1) the quantitative loss shall be determined as the difference between (a) the outturn weight and (b) the bill of lading weight, less the normal loss in weight as determined by the Refiner’s records for the last three sound arrivals of raw centrifugal sugar from the same country of origin during the twenty-four months preceding arrival; in case of an insufficient number * See Standing Resolution R-23. Appendix 1/page 13
Sugar Trading Manual of previous sound arrivals, normal loss in weight is deemed to be 3/4 of one percent; (2) Sugar damaged to such extent that it cannot reasonably be discharged by Buyer’s normal discharging equipment and methods, or contaminated to such extent with oil or other substances that it cannot practicably be taken into Buyer’s refinery, shall be deemed a salvage loss. (b) Where settlement is made on shipping weights and tests, Deliverer shall furnish: (i) Full set of clean on-board bills of lading drawn to order or order of shipper and endorsed in negotiable form. (ii) Commercial invoice for 100% of the value of the Sugar, basis actual polarization at the Notice price. (iii) Weight and Test Certificates. (iv) If requested by Receiver within reasonable time, certificate of origin and/or consular invoice, or Deliverer’s guarantee to deliver the same as soon as possible. (c) Upon presentation by Deliverer in New York of the required documents for all of a cargo loaded on-board Receiver’s vessel by such Deliverer, Receiver shall pay for the Sugar at the invoice price as provided in (a)(ii) or (b)(ii), without any setoff or deduction whatsoever, between the hours of 10:00 A.M. and 3:00 P.M., within two hours after presentation by the Deliverer which shall be no later than 1:00 P.M. Unless otherwise mutually agreed, payment shall be made by wire transfer in same day funds. (d) (i) At the time Deliverer furnishes bills of lading pursuant to paragraph (a)(i) or (b)(i) hereof, the Deliverer shall so notify the Clearing Association in writing, with a copy of such notice concurrently furnished to the Receiver, and the net amount of variation margin, if any, collected by the Receiver in respect of the contracts pursuant to which Deliverer has made delivery from the time the Multiple Delivery Notice for such contracts was issued shall be collected from Receiver by the Clearing Association and paid to the Deliverer on the second Business Day following receipt of such notice by the Clearing Association, unless the Receiver notifies the Clearing Association that the bills of lading have not been so furnished by Deliverer. Any such notice shall be in writing, with a copy concurrently furnished to the Deliverer, and shall be issued within 24 hours of receipt of the Deliverer’s notice referred to in the preceding sentence. (ii) At the time Receiver makes payment for Sugar pursuant to paragraph (c) hereof, the Receiver shall so notify the Clearing Association, with a copy of such notice concurrently furnished to
Appendix 1/page 14
Sugar No. 11 Rules the Deliverer, and the net amount of variation margin, if any, collected by the Deliverer in respect of the contracts pursuant to which Receiver has made payment from the time the Multiple Delivery Notice for such contracts was issued shall be collected from Deliverer by the Clearing Association and paid to the Receiver on the second Business Day following receipt of such notice by the Clearing Association, unless the Deliverer notifies the Clearing Association that such payment has not been received. Any such notice shall be in writing, with a copy concurrently furnished to the Receiver, and shall be issued within 24 hours of receipt of the Receiver’s notice referred to in the preceding sentence. Notwithstanding anything to the contrary contained in this paragraph, the Clearing Association may collect and pay the net amount of variation margin referred to in this paragraph upon receipt of notice from both Deliverer and Receiver that pro forma or final settlement has been made. (4) The original bills of lading shall be presented by Deliverer in New York on a full banking day (whether or not an Exchange holiday) together with the other necessary documents pursuant to subdivision 3(a) and (b) promptly but in no event later than twenty days after vessel’s clearance of loading port. Deliverer shall be responsible for proven damages to Receiver resulting from failure to present such documents as herein provided. (5) Receiver guarantees to Deliverer: (a) That Sugar delivered under this contract will not be entered for human consumption in the United States as defined by the Sugar Act of 1948 as amended. (b) That no Sugar received under this contract will be used in country of origin. (Except in the case of Sugar delivered of United States origin.) (c) That if the Sugar be the product of a country that is an ACP signatory to the Lome Convention and as such is entitled to preferential treatment in respect to duty or quota in member countries of the European Union, it will not be shipped to those countries. (d) That if the Sugar be the product of a country that is a member of the European Union, such Sugar will not be shipped to any other member country of the European Union. (6) In the event a Receiver requests a document from a Deliverer which is not required to be provided under the Sugar No. 11 delivery rules and it is possible that such document may be obtained by the Deliverer, the Deliverer shall provide the requested document at the earliest possible date and at a cost to the Receiver which is not to
Appendix 1/page 15
Sugar Trading Manual exceed the cost incurred by the Deliverer in obtaining the document per the custom of the trade. Amended by the Board October 8, 1980; effective June 3, 1981. Amended by the Board November 10, 1982; effective February 1, 1983. Amended by the Board February 15, 1989; effective May 30, 1989. Amended by the Board September 14, 1993; effective November 9, 1993, commencing with the March 1994 contract (Recife and Maceio, Brazil). Amended by the Board October 13, 1993; effective April 15, 1994, commencing with the May 1996 contract. (28 ft. Draft.) Amended by the Board April 12, 1995; effective July 5, 1995 ([11.10(2)(c)]). Amended by the Board May 17, 1995; effective October 16, 1995, commencing with May 1997 contract and all delivery months thereafter ([11.10(2)(a)(d)]). Amended by the Board September 13, 1995; effective December 15, 1995 ([11.10(3)(c)]). Amended by the Board September 13, 1995; effective December 15, 1995 (La Romana). Amended by the Board October 11, 1995; effective March 13, 1996, commencing with the May 1996 contract. ([11.10(1)(b)] description of sugar) Amended by the Board October 11, 1995; effective March 11, 1996, commencing with the May 1997 delivery month. ([11.10(2)(a)] Deliverer’s Fee) Amended by the Board March 21, 1996; effective April 29, 1996, commencing with the May 1996 delivery month. ([11.10(2)(b)] Bangkok, Thailand) Amended by the Board June 12, 1996; effective July 29, 1996 (provisions made for payment of deliveries). Amended by the Board April 18, 2001; effective April 24, 2001 commencing with the May 2003 contract (3000 long ton loading rate). Amended by the Board April 9, 2003; effective April 14, 2003 [(3)(c) and (d) and (6)].
Rule 11.11 Arbitration disputes (1) (a) Any dispute arising between members claiming that a member has failed to meet his obligations as Deliverer or Receiver under a Sugar No. 11 Contract traded on this Exchange shall be settled by arbitration in accordance with the provisions of this rule; provided that, if the claimant does not notify the Exchange of such failure within three Exchange business days of the date on which such member becomes aware of such failure, said member shall be deemed to have waived his rights under this section, without prejudice to any other rights or remedies at law or under any other provisions of the Rules of the Exchange. (b) Each notice filed pursuant to subparagraph (a) hereof shall be accompanied by a non-refundable check payable to the Exchange in the amount of $375. (2) Upon receipt by the Exchange of the notice of a member’s failure to meet his obligations, the Exchange shall forward one copy of said Notice to all interested parties. Appendix 1/page 16
Sugar No. 11 Rules (3) A Special Arbitration Committee of three disinterested members of the Committee on Sugar Deliveries shall be appointed by the Chairman of the Board within one business day, or soon thereafter as possible, of the Exchange’s receipt of a notice that a member has failed to meet his obligations. The Special Arbitration Committee shall establish the date, time and place for a hearing. Each Special Arbitration Committee shall determine the procedures to be followed in any hearing before it, except that the following shall apply in every case: (a) each of the parties shall be entitled to appear personally at the hearings; (b) each of the parties, at his own expense, shall have the right to be represented by counsel in any aspect of the proceeding; (c) each of the parties shall be entitled to (1) prepare and present all relevant facts in support of the claims and grievances, defenses or counterclaims which arise out of the transaction or occurrence that is the subject matter of the claim or grievance and does not require for its arbitration the presence of third parties of whom the Exchange cannot acquire jurisdiction and to present rebuttal evidence to such claims or grievances, defenses or counterclaims made by the other parties, (2) examine the other parties, (3) examine any witnesses appearing at the hearing, and (4) examine all relevant documents presented in connection with the claim or grievance, or any defense or counterclaim applicable thereto; (d) the formal rules of evidence shall not apply; (e) no verbatim record shall be made of the proceedings, unless requested by a party who shall bear the cost of such record. If such a request is made, a stenographic transcript shall be taken, but not transcribed unless requested by a party who shall bear the cost of such transcription. (f) Ex parte contacts by any of the parties with members of the Special Arbitration Committee shall not be permitted. (g) The Special Arbitration Committee shall have the power, on the request of any party or on its own motion, to require any person to testify and/or produce documentary evidence in the proceedings as and to the extent provided for in Rule 26.03. (4) To compensate the aggrieved party for the necessary adjustments in his position, the party adjudged in default shall be required to pay to the aggrieved party no less than ten percent of the settlement price determined by the Special Arbitration Committee, or 35/100 of one cent per pound, whichever shall be greater, to the aggrieved party in addition to the settlements outlined below. Appendix 1/page 17
Sugar Trading Manual (5) In the case where a Seller is determined to be in default by the Special Arbitration Committee then: (a) where the settlement price (to be the price for Raw Sugar at the place of default, which represents the value of such Sugar on the day for which the price is determined) determined by the Special Arbitration Committee is higher than the price stated on the Multiple Delivery Notice, the Seller shall be required to pay to the Buyer named on the Multiple Delivery Notice, the difference between the settlement price determined by the Special Arbitration Committee and the price stated on the Multiple Delivery Notice; (b) where the settlement price determined by the Special Arbitration Committee is lower than the price stated on the Multiple Delivery Notice, the Buyer who received such Multiple Delivery Notice shall be required to pay to the Seller the difference between the settlement price determined by the Special Arbitration Committee and the price stated on the Multiple Delivery Notice. (6) In the case where a Buyer is determined to be in default by the Special Arbitration Committee then: (a) where the settlement price determined by the Special Arbitration Committee is higher than the price stated on the Multiple Delivery Notice received by such Buyer, the Seller named on the Multiple Delivery Notice shall be required to pay to the Buyer the difference between the settlement price as determined by the Special Arbitration Committee and the price stated on the Multiple Delivery Notice; (b) where the settlement price determined by the Special Arbitration Committee is lower than the price stated in the Multiple Delivery Notice received by such Buyer, the Buyer shall be required to pay to the Seller named on the Multiple Delivery Notice the difference between the settlement price determined by the Special Arbitration Committee and the price stated on the Multiple Delivery Notice. (7) The Special Arbitration Committee shall render its award in writing adjudging which, if any, party is in default, declaring the settlement price, awarding the amount of money, if any, to be paid by the party in default, and granting any further remedy or relief which it deems just and equitable, which may include the award of money in the amount which exceeds the amounts to be paid pursuant to paragraphs (4), (5) and (6) of this Rule. The award of the Special Arbitration Committee shall be final and binding upon each of the parties to the arbitration, and judgment upon such award may be entered by any court having jurisdiction. In addition, any award, if not complied with within the time specified in the award, shall be enforceable by disciplinary proceedings pursuant to the Rules of the Exchange. Appendix 1/page 18
Sugar No. 11 Rules (8) The payment as prescribed above shall be made without any setoff or deduction whatsoever by the close of business on the second Exchange business day after notification in writing of the Special Arbitration Committee’s award. Payment and settlement of any default as determined above shall be effected through the President of the Exchange. Such payment shall be accepted as final payment, provided the net amount of any variation margins collected by either party in respect of the contracts with respect to which such payment is made from the time the Multiple Delivery Notice for such contracts was issued shall be collected from such party by the Clearing Association and paid to the other party. Amended by the Board December 14, 1994; effective January 23, 1995 (cross reference to new Chapter 26). Amended by the Board July 13, 1995; effective January 15, 1996 (expedited arbitration rules clarified). Amended by the Board August 12, 1998; effective September 16, 1998. Amended by the Board April 9, 2003; effective April 14, 2003 [(8)].
Rule 11.12 Force Majeure Definition (1) For purposes of this rule, Force Majeure is defined as Government intervention, war, strikes, rebellion, insurrection, civil commotion, fire, act of God, or any other such cause beyond a party’s control. Deliverer Force Majeure (2) If a Deliverer is prevented from delivering at the port designated in the contract within the contract period by a Force Majeure situation, he shall immediately notify the Receiver and the Exchange, in writing, of such fact and of the quantity so affected. Within one Exchange business day of the cessation of a Force Majeure situation, the Deliverer shall notify the Receiver and the Exchange, in writing, of such fact. (3) As soon as a Force Majeure situation has ceased, the Deliverer shall guarantee the Receiver time within which to receive delivery of either a) the remainder of the contract period or b) thirty calendar days, whichever is greater. However, if the Deliverer fails to notify the Receiver of the cessation of the Force Majeure situation by 5:00 p.m. of the last day of the original delivery period or if another Force Majeure situation shall occur during any delivery period extended beyond the original delivery period as described above, a financial settlement shall be made between the Deliverer and the Receiver, but the Deliverer shall not be liable for damages. Receiver Force Majeure (4) If a Receiver is prevented from accepting delivery within the contract period by a Force Majeure situation, he shall immediately notify Appendix 1/page 19
Sugar Trading Manual the Deliverer and the Exchange, in writing, of such fact. The period for accepting delivery shall thereafter be extended by thirty calendar days from the date of the issuance of the Receiver’s notice of a Force Majeure situation. If the Receiver fails to accept delivery for any reason (whether or not involving Force Majeure) within said thirty calendar day period, he shall be in default. Settlement (5) The basis for settlement under paragraph (3) above shall be as follows: (a) The Receiver shall sell to the Deliverer sugar equal to the amount stated in the notice letter as required in paragraph (2) above. (b) The Deliverer and the Receiver shall enter into a settlement at a price for raw sugar at the place of default which represents the value of such sugar on the day for which the price is determined as established by a Special Arbitration Committee convened pursuant to Sugar Rule 11.11(3). (c) Any settlement shall be made on or before the second Exchange business day after the expiration of either a) the contract period or b) thirty calendar days after notice of termination of the Force Majeure situation, whichever is greater. Arbitration (6) A member who has received a Force Majeure situation notice under this rule may, within three Exchange business days of receipt of such notice, commence proceedings under Sugar Trade Rule 11.11 in order to resolve any dispute he may have arising from a claim of Force Majeure. (7) The President shall, as soon as is reasonably possible after receipt of such a demand, cause to be appointed and convene a Special Arbitration Committee, which, acting pursuant to Sugar Table Rule 11.11, will as soon as possible hear evidence on the issue of the existence of a Force Majeure situation as defined by this rule. The Special Arbitration Committee shall issue an award stating whether or not such Force Majeure situation has been found to exist. Rule 11.13 Deficiencies and excesses The quantity named in the Multiple Delivery Notice shall be the quantity loaded on Receiver’s vessel. The Deliverer is permitted a tolerance of two percent in excess or deficiency on landed weights. In all cases where there is a deficiency or excess in the landed weights from the weights specified on the face of the contract, and such deficiency or excess is within provided limits, such deficiency or excess shall be settled for at the spot price of Sugar Contract No. 11 the day the vessel Appendix 1/page 20
Sugar No. 11 Rules completed loading of the Sugar; provided, however, that if such day is not an Exchange business day, then on the next Exchange business day. Rule 11.14 Memo of Deliverer As of 5:00 P.M. on the day a Deliverer issues any Memo of Deliverer to the Clearing Association, the port designated in such Memo of Deliverer must be free of conditions which would prohibit the possible loading and clearance of vessels carrying sugar, and there must exist no circumstance of the type described in the first paragraph of STR 11.12(1) which would prevent delivery in compliance with the By-Laws and rules of the Sugar referred to in such Memo of Deliverer. In the event that any such condition or circumstance shall come into existence with respect to the Sugar covered by any Memo of Deliverer at any time after 5:00 P.M. on the day such Memo of Deliverer was issued to the Clearing Association, any Receiver to whom the Clearing Association assigns and delivers a Multiple Delivery Notice shall be obligated to accept the same, and shall not have any claim against either the Deliverer or the Clearing Association as a result of the existence of such condition or circumstance. Rule 11.15 Orders subject to exchange by-laws and rules All orders given to or received by a member of the New York Coffee and Sugar Exchange, Inc., shall in all respects be subject to and in accordance with the By-Laws and rules of the Exchange; and all transactions in Raw Sugar for future delivery shall be in accordance with the By-Laws, rules and prescribed form of contract. Rule 11.16 Application of by-laws on coffee By-Laws governing transactions in Coffee which do not conflict with the Sugar Trade Rules, shall apply to Sugar in the same manner as Coffee. Rule 11.17 (Reserved.) Rule 11.18 (Deleted.) Rule 11.19 Clearing member open position reports to Clearing Association All members of the Exchange, who are members of the Clearing Association, shall report to the Clearing Association not later than Appendix 1/page 21
Sugar Trading Manual 10:00 A.M. of each business day, the number of purchases and sales executed on the prior business day and the number of Sugar contracts which are open on the member’s books for each delivery month at the close of business on such prior business day, except that for the business day prior to the Notice Day of any delivery month said member shall report with respect to such delivery month no later than 5:00 P.M. that same day. Corrections must be filed with said Association not later than 11:00 A.M. of the business day following the day with respect to which any such report is filed, except that in the case of reports required for the day prior to the notice day of any delivery month, corrections must be so filed not later than 10:00 A.M. of the following business day. When the account of any customer (other than the account of a member of the Exchange who is carrying a contract or contracts for his customer or customers) has a long and short position in the same delivery month, only the net position of the customer in that delivery month will be reported to the New York Coffee and Sugar Clearing Association, Inc., as open interest. In the case where a long and short position in the same delivery month is carried by a non-clearing member of the Exchange for a customer, it shall be the responsibility of the carrying member to advise the clearing member that the long and short position is for the account of the same customer. In that event, the clearing member will not report that position to the New York Coffee and Sugar Clearing Association, Inc., as open interest. The purpose of this rule is to enable the Exchange to publish each Exchange business day the open position in Sugar contracts for each month. All members of the Exchange carrying contracts for the accounts of others must act with diligence in reporting and correcting errors in their positions as reported to the New York Coffee and Sugar Clearing Association, Inc., by clearing members or to clearing members by carrying members. Clearing members making corrections in their positions with the Clearing Association subsequent to the publishing of the daily open positions by the Exchange shall promptly file with the President a statement of the details of such correction, the manner in which the error occurred and, if a carrying member be the cause of the error, his name should be supplied. Amended by the Board April 9, 1986; effective May 7, 1986.
Rule 11.20 Reported sales The reported sales for each month, as made each day from the opening of the Exchange until its closing, shall be taken as the full day’s report. Appendix 1/page 22
Sugar No. 11 Rules Resolutions No. 1 Delivery months WHEREAS, Rule 11.01 authorizes the Board to determine which delivery months shall trade in the Sugar No. 11 futures contract; NOW, THEREFORE, BE IT RESOLVED, that trading in the Sugar No. 11 futures contract shall be permitted for the delivery months of January, March, May, July and October. Adopted by the Board February 15, 1989; effective April 10, 1989. Amended by the Board June 13, 2001; effective June 29, 2001 commencing with the January 2003 delivery contract month [January added].
No. 2 Interpretation of sugar rule 11.00 (e) WHEREAS, Rule 11.00 (e) sets forth the terms of the Exchange’s Sugar No. 11 Contract; and WHEREAS, Rule 11.00 (e) provides that the Deliverer shall be responsible for all expenses pertaining to delivery and loading of sugar into the vessel, including freight taxes and other taxes of the country of origin of any nature; and WHEREAS, Rule 11.00 (e) also provides that normal pilotage, wharfage charges, customs fee and similar charges pertaining to the entry or exit of the vessel at loading port are for the account of the Receiver; and WHEREAS as a tariff, known as the INFRAMAR tariff, is imposed at the Port of Paranagua, Brazil, based upon the number of tons of sugar loaded; and WHEREAS, the World Sugar Committee has requested an interpretation as to which party is responsible for INFRAMAR tariff under Rule 11.00 (e); NOW, THEREFORE, BE IT RESOLVED, that the Board interprets Rule 11.00 (e) to mean that the Deliverer of sugar shall be responsible for the INFRAMAR TARIFF. Adopted by the Board August 11, 1999; effective September 15, 1999.
Appendix 1/page 23
2 Sugar No. 5 Rules
Exchange Contract No. 407 No. 5 White Sugar Futures Contract (A) CONTRACT TERMS – Issue Date: 14 June 2002 (B) ADMINISTRATIVE PROCEDURES – Issue Date: 14 June 2002 Delivery Months: August 2003 onwards 1. 1.01
1.02
Interpretation Save as otherwise specified herein, words and phrases defined in the Rules shall have the same meanings in these terms and in the Administrative Procedures. In these terms and in the Administrative Procedures: ‘Administrative Procedures’ means the procedures from time to time implemented by the Board pursuant to the Rules for the purposes of this Exchange Contract. ‘adopted rules’ means the ASSUC Rules and the RSA Rules. ‘ASSUC Rules’ means the ASSUC Sugar Contract No. 2 for EU FOB Stowed Trade, from time to time in force. ‘business day’ means a day on which the market, the Clearing House and banks in London are open for business. ‘Buyer’ in respect of a Contract means the person who is obliged under such Contract to accept transfer in respect of each lot of the delivery amount of sugar and to pay the invoicing amount in respect of each such lot (including, except where the context otherwise requires, the Clearing House as buyer under a registered Contract). ‘Buyer’s Notice of Tender’ means the form identifying the Seller delivered by the Clearing House to the Buyer. ‘Contract’ means a contract made expressly or impliedly in the terms of this Exchange Contract for the sale and purchase of Appendix 2/page 1
Sugar Trading Manual one or more lots for a delivery month and ‘registered Contract’ means a Contract registered by the Clearing House. ‘Contract price’ means the price agreed between a Buyer and a Seller in respect of a Contract. ‘default in performance’ has the meaning attributed to it in term 15.02. ‘delivery period’ means the period commencing on and including the first day of the delivery month, up to and including the last day of the succeeding month, subject to term 16.02. ‘delivery month’ means each month specified as such by the Board pursuant to the Rules. ‘Document Notice Day’ shall have the meaning attributed to it in term 13.01. ‘EDSP’ means Exchange Delivery Settlement Price and has the meaning attributed to it in term 5. ‘European port’ means a port described as such by the Exchange and included in the list published by the Board from time to time pursuant to term 2.02. ‘ICUMSA’ means the International Commission for Uniform Methods of Sugar Analysis referred to in the RSA Rules. ‘invoicing amount’ has the meaning attributed to it in term 8. ‘Last Trading Day’ in respect of any delivery month means the business day immediately preceding the Tender Day. ‘lot’ shall have the meaning attributed to it in term 3.01. ‘Regulations’ means the General Regulations, Default Rules and Procedures of the Clearing House from time to time in force. ‘RSA Rules’ means those parts of the Rules of the Refined Sugar Association relating to white sugar contracts for delivery free on board and stowed, from time to time in force. ‘Seller’ in respect of a Contract means the person who is obliged under such Contract to deliver in respect of each lot the delivery amount of sugar (including, except where the context otherwise requires, the Clearing House as seller under a registered Contract). ‘Seller’s Notice of Tender’ means the form instigating delivery given by the Seller to the Clearing House. ‘Settlement Day’ in respect of each lot comprised in a Contract means the first business day after the Document Notice Day on which banks are open for business in New York. Appendix 2/page 2
Sugar No. 5 Rules
1.03
2. 2.01
2.02
2.03
‘tender’ means the delivery by a Seller of a Seller’s Notice of Tender for sugar pursuant to a Contract. ‘Tender Day’ in respect of any lot comprised in a Contract has the meaning attributed to it by term 10.01. ‘tonne’ means metric tonne of 1000 kilograms. References to a ‘term’ refer to terms hereof, and references to a ‘Rule’ refer to a rule of the Exchange’s Rules. Save where the context otherwise requires references herein to the singular include the plural, and vice versa. Sugars Tenderable Each Contract shall be for white beet or cane crystal sugar or refined sugar of any origin of the crop current at the time of delivery, free running of regular grain size and fair average of the quality of deliveries made from the declared origin from such crop, with minimum polarisation 99.8 degrees, moisture maximum 0.06 per cent, and colour of a maximum of 45 units ICUMSA attenuation index at time of delivery to vessel at the port named in the Seller’s Notice of Tender, as evidenced by a certificate issued in accordance with these terms. Delivery shall be at one of the ports included on the list of ports from time to time published by the Board by General Notice, which shall apply to such delivery months specified in the General Notice as the Board may determine. The Board may from time to time list or de-list a port, which shall have such effect with regard to existing or new Contracts or both as the Board may determine in its absolute discretion. The Exchange gives no warranty and does not make any representation or promise that any port which is included in any list published by the Board pursuant to this term 2.02 has any particular characteristics or facilities or is safe or suitable in any way whatsoever, and the Exchange shall not be liable for any loss, damage, or delay resulting from conditions at any such port. The sugar shall be packed in new sound jute bags, each with a single new polythene liner, of uniform weight of 50 kg net of sugar and each bag and liner having a combined minimum tare of 400 g, save that the Seller shall be entitled to elect in his tender to deliver, in respect of a lot, sugar packed in new sound polypropylene bags, each with a single new polythene liner, of a uniform weight of 50 kg net of sugar and each bag and liner having a combined minimum tare of 160 g. The bags of each lot shall be uniform and suitable for export and, if marked, all shall bear the same mark. Any such marks shall not be contrary to these terms. Appendix 2/page 3
Sugar Trading Manual 2.04
Sugar delivered shall be free of all liens and claims of any kind and shall be freely available for export to any destination except in the case of sugar originating in the European Union which shall only be available for export to destinations outside the European Union.
3. 3.01
Contract Specification Each Contract shall be for one or more lots for the delivery month specified. A lot shall be for an amount of sugar having a nominal net weight of 50 tonnes.
4. 4.01
Price The Contract price shall be in US dollars and cents (with fluctuations of 10 cents) per tonne net free on board and stowed in vessel’s hold at a port included in the list published by the Exchange pursuant to term 2.02. The Contract price shall be exclusive of any United Kingdom value added tax which may be or may become payable thereon.
4.02
5. 5.01
Exchange Delivery Settlement Price Subject to term 5.02, the EDSP for Contracts for a particular delivery month shall be calculated by exchange officials on the Last Trading Day as follows: (a) if (as far as reasonably ascertainable) one or more Contracts for that delivery month have been made in the pit on the Last Trading Day during the period specified for this purpose in the Administrative Procedures, then: (i) if only one Contract has been made, the EDSP shall be the price (as far as reasonably ascertainable) at which that Contract was made; or (ii) if more than one Contract has been made, the EDSP shall be the average rounded down to the nearest 10 cents of the prices (as far as reasonably ascertainable) at which such Contracts were made, weighted by reference to the number of lots (as far as reasonably ascertainable) comprised in each such Contract; (b) if (as far as reasonably ascertainable) on the Last Trading Day, during the period specified for this purpose in the Administrative Procedures, no Contract for that delivery month has been made in the pit but both an offer (or offers) and a bid (or bids) have been made in the pit in respect of a Contract (or Contracts) for that delivery month, then the
Appendix 2/page 4
Sugar No. 5 Rules EDSP shall be the average of the lowest price (as far as reasonably ascertainable) at which such an offer was made and the highest price (as far as reasonably ascertainable) at which such a bid was made and such average shall be rounded down to the nearest 10 cents; (c) if (as far as reasonably ascertainable) on the Last Trading Day, during the period specified for this purpose in the Administrative Procedures, no Contract for that delivery month has been made in the pit and either no offer or no bid has been made in the pit in respect of a Contract (or Contracts) for that delivery month, then exchange officials shall determine the EDSP by reference inter alia to the price at which any offer or bid, as the case may be, in respect of a Contract for that delivery month was made in the pit during such period on such day; or (d) if (as far as reasonably ascertainable) on the Last Trading Day, during the period specified for this purpose in the Administrative Procedures, no Contract for that delivery month has been made in the pit and neither an offer nor a bid have been made in the pit in respect of a Contract (or Contracts) for that delivery month, then exchange officials may in their absolute discretion fix the EDSP at a price determined by them as being consistent with the prices at which any Contracts or any offers or bids in respect of a Contract were made in the pit on the Last Trading Day for the delivery month and period referred to in paragraphs (a) and (b) of term 5.02 below and, if necessary, rounded down to the nearest 10 cents. 5.02
If in the opinion of exchange officials, the EDSP which would result from a calculation made in accordance with paragraphs (a), (b) or (c) of term 5.01 would not be consistent with the prices at which any Contracts or any offers or bids in respect of a Contract were made in the pit on the Last Trading Day for: (a) the relevant delivery month prior to the applicable period referred to in paragraphs (a), (b) or (c) of term 5.01, as the case may be; or (b) any other delivery month during the applicable period referred to in paragraphs (a), (b) or (c) of term 5.01, as the case may be, then exchange officials may in their absolute discretion fix the EDSP at a price determined by them as being consistent with the prices, offers or bids for the delivery month and period
Appendix 2/page 5
Sugar Trading Manual
5.03
referred to in paragraphs (a) or (b) of term 5.02 above, and, if necessary, rounded down to the nearest 10 cents. The Exchange shall publish the EDSP at the time specified for that purpose in the Administrative Procedures. The EDSP shall be final and binding for all purposes.
6. 6.01
Settlement Payments In respect of each lot referred to in a Seller’s Notice of Tender, in addition to any other payment required by these terms, the following payments shall be made by the time specified for that purpose in the Administrative Procedures: (a) where the EDSP exceeds the Contract price, payment by the Seller to the Clearing House or payment by the Clearing House to the Buyer, or both (as the case may require); and (b) where the Contract price exceeds the EDSP, payment by the Buyer to the Clearing House or payment by the Clearing House to the Seller, or both (as the case may require); of an amount calculated as the difference, in US dollars multiplied by 50 in respect of each lot, between the EDSP and the Contract price.
7. 7.01
Payment The Buyer shall make payment to the Clearing House and the Clearing House shall make payment to the Seller of the invoicing amount pursuant to the Regulations and the Clearing House Procedures against first presentation of the following documents in accordance with term 13.03, namely: (a) commercial invoice; (b) complete set of original signed clean on board bills of lading; (c) original certificate of origin; and (d) an original certificate of weight, packing, quality (polarisation, moisture and colour) issued by the Seller’s Supervisor in accordance with these terms. Documents must be taken up and paid for by the Buyer without prejudice to the reference to arbitration of any question in dispute. Should documents not be taken up and paid for by the time specified in term 13.03 and the Administrative Procedures, the Clearing House may, unless payment has previously been made and without prejudice to any other rights or remedies available to it;
7.02
7.03
Appendix 2/page 6
Sugar No. 5 Rules
7.04
7.05
8. 8.01
8.02
9. 9.01
(a) sell the sugar at any time and any difference in price resulting from such sale, together with interest and all charges incurred by reason of the delay, shall be paid by the Buyer to the Clearing House forthwith; or (b) claim damages from the Buyer for non-acceptance of the documents, which damages shall be deemed to include (but shall not be limited to) the invoicing amount. If the invoice against which the Clearing House effect payment is not ready when documents are required to be passed on to the Buyer in accordance with term 13.03, payment of the invoicing amount shall in any event be made by the Clearing House to the Seller and received on account from the Buyer. The Seller and Buyer may mutually agree to take the sugar off the market on any business day from and including the Tender Day to the last day of the delivery period and, in such event, the Clearing House having been so informed in accordance with Clearing House Procedures by 16.00 hours on a business day will settle with the parties at the EDSP by reference to the number of lots tendered. Invoicing Amount The invoicing amount in respect of each lot referred to in a Seller’s Notice of Tender shall be the sum calculated in accordance with the formula: Contract Weight ¥ (EDSP + A) where: EDSP = The EDSP for the relevant delivery month A = Any discounts or allowances made in accordance with term 9. (a) Subject to term 8.02(b), where the sum calculated in accordance with term 8.01 is not a number of dollars and whole cents, such sum shall be rounded to the nearest sum which is a number of dollars and whole cents and the invoicing amount shall be such nearest sum. (b) Where the sum calculated in accordance with term 8.01 is a number of dollars and whole cents and one half of one cent, such sum shall be rounded up to the nearest sum which is a number of dollars and whole cents, and the invoicing amount shall be such nearest sum. Freight Differential For the purposes of calculating the invoicing amount for a Contract in respect of sugar delivered at a port which is not a Appendix 2/page 7
Sugar Trading Manual
9.02
9.03
European port, a freight differential shall be added to the EDSP in accordance with the formula set out in term 8.01. Such freight differential shall be established by the Board from time to time and published by General Notice not later than thirty calendar days prior to the Last Trading Day. The freight differential shall be established by the following steps: (a) The Board shall determine the notional freight rate for cargoes of sugar of 14 000 tonnes on suitable vessels classified 100 A1 at Lloyd’s or in an equivalent register between the Hamburg–Rouen range of ports listed pursuant to term 2.02 and one safe East Mediterranean port. (b) For each port listed pursuant to term 2.02 which is not a European port the freight differential shall be the difference, if any, expressed in US dollars and cents, between the notional freight rate determined under term 9.02(a) above and the notional freight rate for equivalent cargoes between that port and one safe East Mediterranean port. A change in the freight differential for any port shall not affect: (a) a Contract in respect of which a tender has already been made, or (b) a Contract under which the Tender Day falls within the period of thirty calendar days following the date of publication of the change.
10. 10.01
10.02
10.03
Tender Day The Tender Day in respect of a delivery month shall be the fifteenth day preceding the first day of the delivery period for that delivery month, but if the fifteenth day is not a business day the next following business day shall be the Tender Day. A tender shall be made on the Tender Day to the Clearing House in the form of the Seller’s Notice of Tender prescribed by the Clearing House or in such other form acceptable to the Clearing House. The tender must be submitted by the Seller to the Clearing House on the Tender Day by the time specified in the Administrative Procedures. The Buyer’s Notice of Tender shall be delivered in the manner specified from time to time in the Clearing House Procedures by the Clearing House to the Buyer on the Tender Day by the time specified in the Administrative Procedures.
Appendix 2/page 8
Sugar No. 5 Rules 11. 11.01
11.02
11.03
12. 12.01
12.02
12.03
12.04
12.05
Tenders A tender shall not be withdrawn nor substitution allowed except with the consent of the Buyer or, in case of dispute, unless so ordered by the Board. A tender which has been made to the Clearing House in time shall, subject to term 11.01, be accepted by the Buyer as a valid tender for that date. With the consent of the Clearing House, Buyers may exchange, in accordance with the Regulations, Buyer’s Notice of Tender forms with one another by the time specified in the Administrative Procedures. Delivery Delivery shall be in accordance with Rule 7 of the RSA Rules and the Administrative Procedures, save that the notice referred to in the second paragraph of Rule 7 of the RSA Rules shall be a notice of fourteen calendar days and shall be given by the Buyer to the Seller and the Clearing House. Subject to term 12.04, the Seller shall be responsible for all expenses pertaining to delivery and loading of sugar into the vessel, including freight taxes and other taxes of any nature of the country of origin or loading. Subject to term 12.04, the Buyer shall be responsible for all expenses pertaining to pilotage, wharfage, customs fees and similar charges pertaining to the entry and exit of the vessel at loading port. The sugar, whatever its origin or destination, shall be loaded in accordance with the loading provisions of the ASSUC Rules in effect on the Tender Day subject only to the following: (a) the sugar shall be loaded at a rate of no less than 1000 tonnes per weather working day; and (b) the demurrage rate shall be the rate specified in the charter party pursuant to which the sugar is carried, and dispatch shall be half of the demurrage rate. Rule 5 of the RSA Rules shall not apply to Contracts, except where express provision is made for its application in these terms. In the event of a conflict between terms 12.05 to 12.09 inclusive and Rule 6 of the RSA Rules, terms 12.05 to 12.09 inclusive shall prevail. (a) The Seller shall, at his own expense, appoint an internationally recognised independent or, with the written consent of the Buyer, a state supervision firm (‘the Seller’s Supervisor’) to supervise and inspect the loading of the sugar to be delivered to the Buyer. Such appointment shall Appendix 2/page 9
Sugar Trading Manual
12.06
be made not less than 48 hours prior to the Seller commencing loading of the sugar. The Seller shall upon the appointment of the Seller’s Supervisor notify the Buyer of such appointment. (b) The Buyer may, at his own expense, appoint an internationally recognised independent or, with the written consent of the Seller, a state supervision firm (‘the Buyer’s Supervisor’) to supervise and inspect the loading of the sugar to be delivered to the Buyer in conjunction with the Seller’s Supervisor. The Buyer shall notify the Seller of the appointment of the Buyer’s Supervisor prior to the Seller commencing to load the sugar. (c) If the Buyer has: (i) appointed a supervisor in accordance with term 12.05(b), the Buyer’s Supervisor and the Seller’s Supervisor shall conjointly supervise and inspect the loading of the sugar in accordance with term 12.06; or (ii) not appointed a supervisor, the Seller’s Supervisor shall supervise and inspect the loading of the sugar in accordance with term 12.07. The Buyer’s Supervisor (where one has been appointed) and the Seller’s Supervisor (jointly referred to as ‘the Supervisors’) shall comply with the following procedures: (a) The Supervisors shall comply with Rules 5(i) to (iv) of the RSA Rules. (b) The Supervisors shall conjointly take a composite sample of the sugar to be delivered under a Contract part of which shall be divided into three equal parts with any remaining part of the sample being utilised or disposed of as may be agreed between the Supervisors. Each of the three equal parts shall be placed in a separate, new, clean and suitable container, with a seal which only breaks upon opening and which ensures that such container remains airtight until re-opened. Each container shall, in the presence of the Supervisors, be sealed and marked with the name of the vessel, loading port, date of sampling, shipping marks and names of each of the Supervisors. The Seller’s Supervisor shall retain one such part of the sample and the Buyer’s Supervisor shall retain the other two such parts. Each container shall remain sealed. (c) Prior to the sugar being loaded on board the vessel, either Supervisor may object to the condition of the sugar and/or packing or weight of the bags, provided that he shall imme-
Appendix 2/page 10
Sugar No. 5 Rules diately notify the other Supervisor and each Supervisor shall notify his Buyer or Seller, as the case may be, of the objection. The Buyer shall promptly notify the Clearing House of such objection. (d) Upon the vessel having been loaded with sugar to be delivered under a Contract, the Seller’s Supervisor shall issue a certificate of weight, packing and quality (including, without limit, the polarisation, moisture and colour of the sugar) (‘the Supervisors’ Certificate’) in respect of such sugar, provided that the weight, packing or quality of the sugar is either not disputed by the Buyer or if disputed by the Buyer, such dispute has been resolved prior to the issue of the Supervisors’ Certificate. A copy of the Supervisors’ Certificate shall be promptly provided by the Seller to the Buyer. If the Buyer does not notify the Seller and the Clearing House of a dispute under either term 12.06(c) or (e) or, if a dispute is notified by the Buyer, such dispute has been resolved prior to the issue of the Supervisors’ Certificate, the Supervisors’ Certificate shall be conclusive evidence as to the weight, packing and quality of the sugar, in the absence of fraud or manifest error. If the Buyer disputes: (i) the weight or packing of the sugar under term 12.06(c) and such dispute remains unresolved, then the Supervisors’ Certificate shall be prima facie evidence, and not conclusive evidence, as to the weight or packing of the sugar which is in dispute; or (ii) the quality of the sugar under term 12.06(c) or (e) and such dispute remains unresolved, then the Supervisors’ Certificate shall be disregarded as conclusive evidence as to the quality of such sugar and any Chemist’s Certificate issued under term 12.06(j) shall apply, provided that if a Chemist’s Certificate is not issued under term 12.06(j), the Supervisors’ Certificate shall be regarded as prima facie evidence of the quality of such sugar. (e) The Buyer may dispute the quality of the sugar to be delivered under a Contract no later than two working days after either such sugar has been loaded on board the vessel or receipt of the Supervisors’ Certificate, whichever is the later, provided that he has notified the Seller, of the objection. The Buyer shall promptly notify the Exchange and the Clearing House of such dispute, providing details of the Appendix 2/page 11
Sugar Trading Manual name of the vessel, loading port, date of sampling, shipping marks and the name of the Buyer, Seller and each Supervisor. (f) If the Buyer has notified the Exchange of a dispute in respect of the quality of the sugar in accordance with term 12.06(e), the Buyer shall instruct the Buyer’s Supervisor to send promptly by air courier the part of the sample held by the Buyer’s Supervisor, as defined in term 12.06(b), directly to the Exchange. The Buyer shall be responsible for ensuring that a sample is cleared by HM Customs and Excise. (g) Subject to term 12.06(h), the Exchange shall deliver the sample which it receives at its premises from either Supervisor to an analytical chemist approved by the Exchange and contained in a list published by the Exchange from time to time by General Notice. The Exchange shall provide the analytical chemist with details of the name of the vessel, loading port, date of sampling, shipping marks and the name of the Buyer, Seller and each Supervisor, as notified to the Exchange under term 12.06(e).The analytical chemist shall analyse the sample in accordance with term 12.06(j). (h) If the Exchange receives a sample which has a broken seal then the Exchange shall, in its absolute discretion, determine whether to deliver such sample to the analytical chemist for analysis. If the Exchange, in its absolute discretion, rejects the sample, it will notify the Buyer and the Seller that the sample arrived with a broken seal. (i) Immediately upon receiving a notification from the Exchange under term 12.06(h), if: (i) the sample is the first sample sent by the Buyer’s Supervisor, the Seller shall instruct the Seller’s Supervisor to send promptly by air courier the part of the sample held by it, as defined in term 12.06(b), directly to the Exchange on the same terms as term 12.06(f) and the Exchange shall deliver such further sample to the analytical chemist in accordance with terms 12.06(g) and (h); (ii) the sample is the second sample, sent by the Seller’s Supervisor, the Buyer shall instruct the Buyer’s Supervisor to send promptly by air courier the other part of the sample held by it directly to the Exchange on the same terms as term 12.06(f) and the Exchange shall Appendix 2/page 12
Sugar No. 5 Rules
12.07
12.08
deliver such further sample to the analytical chemist in accordance with terms 12.06(g) and (h); and (iii) the sample is the third sample, sent by the Buyer’s Supervisor, the Supervisors’ Certificate shall be prima facie evidence as to the quality of the sugar. (j) The analytical chemist shall analyse the sample in accordance with internationally recognised methods for sugar analysis and any methods established from time to time by ICUMSA to establish whether such sample meets the quality requirements of the sugar under term 2.01. The analytical chemist shall issue a certificate as to the quality of the sugar a copy of which shall be immediately provided to each of the Seller and the Buyer (‘the Chemist’s Certificate’). The Chemist’s Certificate shall be conclusive evidence as to the quality of the sugar, in the absence of fraud or manifest error. (k) The Buyer shall pay all costs and expenses relating to or arising out of any sample sent by a Supervisor, and the analysis of a sample by an analytical chemist, in accordance with this term 12.06 (including, but not limited to, transportation, excise duty, import duty or other charges levied by customs at the port of export or import, analysis and certification costs in relation to such sample). If the Chemist’s Certificate is in favour of the Buyer, then the Seller shall indemnify the Buyer in relation to any such costs and expenses. The Seller’s Supervisor shall comply with the following procedures: (a) The Supervisors shall comply with Rules 5(i) to (iv) of the RSA Rules. (b) The Seller’s Supervisor shall issue a certificate of weight, packing and quality (including, without limit, the polarisation, moisture and colour of the sugar) a copy of which shall be promptly provided to the Seller (‘the Seller’s Certificate’). The Seller’s Certificate shall be prima facie evidence as to the weight, packing and quality of the sugar. The Exchange shall not be liable in respect of any cost, loss, damage, claim or expense of any nature suffered or incurred by any person for: the performance or non-performance of any analytical chemist which the Exchange approves; any determination, act or omission of the Exchange, its officers, employees, agents or representatives in respect of a delivery or failure Appendix 2/page 13
Sugar Trading Manual
12.09
13. 13.01
13.02
13.03
14. 14.01
to deliver any sample, or the details relating to a sample, to the analytical chemist; or from any other act or omission of the Exchange, its officers, employees, agents or representatives in respect of the Seller, Buyer or a Supervisor performing or failing to perform its obligations at any port listed by the Exchange from time to time. If either party has a claim, or wishes to bring a claim, as to the quality, weight or packing of the sugar arising out of any provision of terms 12.04 to 12.07, it may refer such claim to arbitration in accordance with these terms. Presentation of Documents Advice in writing of presentation of documents, which must give the name of the ocean vessel, must be received by the Clearing House from the Seller on the Notice of Presentation of Documents form in the manner specified from time to time in the Regulations not later than by the time specified in the Administrative Procedures on any business day within twenty calendar days of the bill of lading date. The day on which such advice is given to the Clearing House shall be known as the Document Notice Day. Documents as prescribed in term 7.01 shall be presented by the Seller to the Clearing House in the manner specified from time to time in the Regulations on the day following such advice by the time specified in the Administrative Procedures, being a day on which banks are open for business in both London and New York. The Clearing House shall pass on documents to the Buyer without delay but, provided the Clearing House has been notified and documents have been presented to it by the times specified in the Administrative Procedures, the Buyer shall be bound to take up and pay for such documents on the same day by the time specified in the Administrative Procedures without prejudice to the reference of any claim or dispute to arbitration. New Legislation If after consultation with the Clearing House the Board shall in its absolute discretion determine that a change of legislative or administrative provisions of the United Kingdom or any state or territory or the European Union, or of an institution or market organisation in any country or group of countries, has affected, is affecting or is likely to affect the normal course of business, the Board shall have power to vary the terms of Contracts in
Appendix 2/page 14
Sugar No. 5 Rules
14.02
14.03
14.04
14.05 15. 15.01 15.02
15.03
any way it deems necessary or desirable for restoring or preserving the orderly course of business. Such variation may be made notwithstanding that it may affect the performance or value of existing Contracts (or of such existing Contracts as may be specified by the Board). Without limitation of its powers hereunder the Board will use its best endeavours to keep any variation to the minimum considered reasonably necessary to achieve the purpose of this term. Any determination made by the Board pursuant to this term 14 shall be published by General Notice. A variation of contract terms made hereunder shall take effect at such time and for such period as the Board shall declare but (without prejudice to term 14.02 above) shall not take effect earlier than the day on which such General Notice is issued. A Contract affected by a variation under this term 14 shall remain in full force and effect subject to such variation and shall not be treated as frustrated or repudiated except so far as may be allowed by the Board. A variation made by the Board under this term may be modified or revoked by a subsequent variation made hereunder. Default in Performance The provisions of this term 15 shall be subject to the default rules from time to time in force of the Clearing House. For the purposes of this term 15, a reference to a ‘default in performance’ shall, subject to term 15.04, be construed as including an actual failure by a Seller or a Buyer under term 15.02 in performing its obligations under a Contract or an anticipated failure. An anticipated failure is one which the Clearing House, in its reasonable opinion, considers will occur and in respect of which the Clearing House considers that it should take action under the provisions of this term 15. A Buyer or a Seller shall be in default in performance where: (a) he fails to fulfil his obligations under a Contract by the time and in the manner prescribed in accordance with these terms, the Rules and the Administrative Procedures and the Regulations; (b) he fails to pay any sum due to the Clearing House in respect of a registered Contract by the time specified for that purpose in the Administrative Procedures; or (c) in the reasonable opinion of the Clearing House, he is in default in performance. Appendix 2/page 15
Sugar Trading Manual 15.04
Errors in a notice, which are determined in the Clearing House’s absolute discretion to be clerical errors which can be readily rectified and are rectified, shall not be treated as constituting a default in performance.
15.05
Subject to terms 15.06(b) and 15.10, if it appears to the Clearing House that a Seller or a Buyer is in default in performance under a registered Contract, the Clearing House shall notify the Exchange of the default in performance and may, in its absolute discretion: (a) take such steps as it deems appropriate to facilitate a mutually acceptable resolution of the default in performance. A resolution of a default in performance may be on such terms and take such form as is acceptable to the Clearing House, to the Seller and to the Buyer. Such terms may limit some or all of the rights of the Seller, the Buyer or the Clearing House to refer any matter concerning or arising out of a default in performance (or the resolution thereof) to arbitration under term 17; (b) without prejudice to any of its other rights under this term 15, refer to the Board any dispute or issue arising between any of the parties. If upon such reference, the Board is of the opinion that the default in performance is of minor significance it shall determine any such dispute or issue between such parties upon such evidence as it may deem relevant and convey its findings to such parties who shall forthwith accept such determination and shall implement its terms without question, provided that such acceptance and implementation shall be without prejudice to the right of any party to refer the dispute or any related dispute to arbitration under term 17; or (c) take any steps whatsoever which may appear desirable to the Clearing House for the protection of the Clearing House or of the Seller or Buyer not in default in performance including, without prejudice to the generality of the foregoing, any steps in order to perform its obligations to a party under a registered Contract.
15.06
If, within five business days of the default in performance having come to the attention of the Clearing House: (a) the steps taken by the Clearing House have not led or are not likely to lead to a resolution of the default in performance; or (b) the Clearing House has not taken any steps and the default in performance remains unresolved,
Appendix 2/page 16
Sugar No. 5 Rules the Clearing House will refer the matter to the Board. If upon reference of the dispute or issue to the Board, the Board is of the opinion that the default in performance may not be determined by the Board in accordance with term 15.05(b), then (if the dispute or issue is one which has arisen before the time of tender) each lot the subject of the dispute or issue shall be the subject of cash settlement at a price fixed by the Board in consultation with the Clearing House. The price may at the Board’s absolute discretion take account of any compensation that the Board may consider, on the evidence before it, should be paid by either party to the other. 15.07
Any cash settlement price fixed under term 15.06 shall be binding on the parties. No dispute as to the price may be referred to arbitration but the completion of cash settlement shall be without prejudice to the right of either party to refer the dispute or issue between them to arbitration under term 17.
15.08
Any costs, claims, losses, taxes or expenses of whatsoever nature suffered or incurred by the Clearing House in connection with any steps taken by the Clearing House in relation to a Contract to which the default in performance relates shall be paid by the Buyer or Seller who is in default in performance. Any steps taken by the Clearing House in relation to a default in performance shall be without prejudice to any rights (including rights to refer matters to arbitration under term 17), obligations or claims of the Buyer, the Seller or the Clearing House in relation to a Contract to which the default in performance relates.
15.09
A Buyer or Seller who is in default in performance under this term 15, shall forthwith pay to the Clearing House any sums payable by him under term 8 and any sums payable pursuant to this term 15.
15.10
Notwithstanding that a Buyer or Seller may be in default in performance under this term 15, the Clearing House may in its absolute discretion determine not to exercise or to delay in exercising any of its rights under this term 15, and no failure by the Clearing House to exercise nor any delay on its part in exercising any of such rights shall operate as a waiver of the Clearing House’s rights upon that or any subsequent occasion, nor shall any single or partial exercise of any such rights prevent any further exercise thereof or of any other right.
15.11
A Buyer, a Seller or the Clearing House may refer a dispute or issue arising out of a default in performance under this term Appendix 2/page 17
Sugar Trading Manual
15.12
16. 16.01
15 (subject always to the application of provisions of terms 15.05, 15.06 and 15.07) to arbitration under term 17. The provisions of this term 15 relating to steps that may be taken by the Clearing House, where there appears to the Clearing House to be a default in performance by a party to a registered Contract, may be varied, or different steps may be substituted therefore by the Board from time to time. Any such variation or substitution shall have such effect with regard to such existing and/or new Contracts and registered Contracts as the Board may determine. Force Majeure At any time before the time of tender on the Tender Date and in respect of events before such time: (a) for the purposes of this term 16.01, ‘Force Majeure Event’ shall mean an event which occurs before the Tender Date which is beyond the reasonable control of either party to a Contract and which delays, hinders or prevents the performance in whole or in part by a party of his obligations under the Contract (other than an obligation to make a payment), including, without limitation, act of God, storm, flood, earthquake, fire, explosion, malicious damage, accident howsoever caused, strike, lock-out, labour dispute, riot, civil commotion, war whether declared or undeclared, armed conflict, use of force by authority of United Nations, act of terrorism, act of government or other national or local authority or any agency thereof, breakdown of machinery, and unavailability, restriction, failure or delay in or computer or data processing systems or communication or energy supplies or bank transfer systems; (b) the failure for whatever reason of a computer or other electronic facility to accept a notification made by a Seller of a Buyer (other than the Clearing House) as required by these terms and the Administrative Procedures shall not be a Force Majeure Event; (c) a party to a Contract shall not be entitled to rely upon this term 16.01 unless such party has notified the Clearing House and the Exchange in writing immediately after such party has become aware (or after it ought reasonably to have become aware) of such Force Majeure Event, and has continued to seek to perform its obligations in accordance with the Contract (in which event it shall be entitled to such relief with effect from the commencement of such Force Majeure Event). The notice shall state the date on
Appendix 2/page 18
Sugar No. 5 Rules
16.02
which the Force Majeure Event commenced and the effects of the Force Majeure Event on such party’s ability to perform its obligations in accordance with the Contract, including an estimate of the period of the Force Majeure Event; (d) upon the request of the Clearing House or the Exchange, a party seeking relief under this term 16.01 shall promptly provide such other information as required by the Clearing House or the Exchange as soon as reasonably practicable to assist the Board in determining whether a Force Majeure Event has occurred. If a Force Majeure Event has occurred, neither party will be deemed in default in performance of its obligations under a Contract if such party was unable to perform its obligations as a direct result of the occurrence of such Force Majeure Event nor will any penalty or damages be payable if and to the extent that performance of any obligation is hindered or prevented by a Force Majeure Event; (e) subject to any steps taken at any time by the Board under emergency powers in the Rules and subject to the default rules from time to time in force of the Clearing House, if the Board determines under term 16.01(d) that a Force Majeure Event delays, hinders or prevents a party from performing any obligation under a Contract for a period of at least five business days beyond the time limit fixed in or under the Contract any lot or part thereof not delivered to the Buyer shall be the subject of cash settlement at a price to be fixed by the Board in consultation with the Clearing House in their absolute discretion. Such price shall be binding on the parties. No dispute as to the price may be referred to arbitration but the completion of cash settlement shall be without prejudice to the right of either party to refer any dispute arising out of the Contract to arbitration under the Rules. At any time from the time of tender on the Tender Date and in respect of circumstances or events which occur after such time: (a) should ice in a port, war, strikes, rebellion, insurrection, political or labour disturbances, civil commotion, fire, stress of weather, act of God or any cause of force majeure (whether or not of like kind to those before mentioned) beyond the Seller’s control prevent directly or indirectly within the delivery period specified in the Contract, the supply to or delivery at a port listed pursuant to term 2.01 Appendix 2/page 19
Sugar Trading Manual in whole or in part of the sugar allocated by the Seller against the Contract, the Seller shall immediately notify the Clearing House of such fact and the quantity so affected. If the Seller is prevented from advising the Clearing House immediately through circumstances beyond his control he shall notify the Clearing House as soon as possible; (b) upon given such notice, the delivery period shall be extended as follows: (i) where the force majeure event(s) prevents performance for up to three days, the delivery period shall be extended by seven days; (ii) where such event(s) prevents performance for more than three days, the delivery period shall be extended by forty-five days; (c) the Seller shall notify the Clearing House immediately that the force majeure event(s) terminates. If delivery is still prevented at the end of the forty-five day extended delivery period, the Board shall immediately fix a price for invoicing back and the quantity of sugar affected shall be invoiced back to the Buyer at that price. The price fixed may at the Board’s absolute discretion take account of any compensation that the Board may consider, on the evidence before it, should be paid by either party to the other. No other dispute as to the invoicing back price may be referred to arbitration; (d) should the Buyer be prevented from accepting delivery of the whole or part of the sugar within the delivery period by reason or loss or delay of the vessels declared due to ice in a port, war, strikes, rebellion, insurrection, political or labour disturbances, civil commotion, fire, stress of weather, act of God or any cause of force majeure (whether or not of like kind to those before mentioned) beyond the Buyer’s control, the Buyer shall immediately notify the Clearing House of such fact; (e) if the Buyer is prevented from advising the Clearing House immediately through circumstances beyond his control he shall notify the Clearing House as soon as possible. Upon giving such notice, the delivery period for the affected quantity shall be extended, without extra charge to the Buyer as follows: (i) where the force majeure event(s) prevents the Buyer from accepting delivery for up to three days, the delivery period shall be extended by seven days; Appendix 2/page 20
Sugar No. 5 Rules (ii) where such event(s) prevents the Buyer from accepting delivery for more than three days, the delivery period shall be extended by forty-five days; (f) the Buyer shall notify the Seller immediately that the force majeure event(s) terminates. If the Buyer is still prevented from accepting delivery at the end of the forty-five day extended contract delivery period the Board shall immediately fix a price for invoicing back and the quantity of sugar affected shall be invoiced back to the Buyer at that price. The price fixed may at the Board’s absolute discretion take account of any compensation that the Board may consider, on the evidence before it, should be paid by either party to the other. No other dispute as to the invoicing back price may be referred to arbitration; (g) if performance of the contract is prevented by a force majeure event more than once during the delivery period (as extended in accordance with these terms) the provision of these terms shall apply to each such event. However, in no circumstances shall that delivery period be extended for more than forty-five days; (h) these provisions shall apply notwithstanding the occurrence of events which would otherwise frustrate the Contract; (i) the party claiming force majeure shall within fourteen days from the initial notification of the facts relied upon deliver to the Clearing House evidence of the existence of those facts. If evidence is not delivered in accordance with this provision, the right to invoke force majeure shall be forfeited unless an arbitration tribunal in its absolute discretion decides otherwise. 17. 17.01
Arbitration Any dispute arising out of a Contract shall (subject to terms 15, 16.02(f) and 19.03 to the extent that they apply) be referred to arbitration under the Rules relating to arbitration. The arbitration shall be conducted in accordance with the arbitration rules in force at the time of reference.
17.02
The determination and payment of an invoicing back price shall not limit the jurisdiction of arbitrators to make such award as they deem proper on the issue before them. No dispute arising from or in relation to any invoicing back price fixed by the Board under these terms shall be referred to arbitration under the Rules. Appendix 2/page 21
Sugar Trading Manual 17.03
Terms 17.01 and 17.02 apply only to a dispute arising before the time of tender on the Tender Day. A dispute arising on or after the time of tender on the Tender Day shall be referred to arbitration in accordance with term 19.03.
18. 18.01
Rules, Administrative Procedures etc. Every Contract shall be subject to the Articles and the Rules and the Regulations insofar as applicable notwithstanding that either or both of the parties to it be not a member of the Exchange or of the Clearing House. In case of any conflict between the Administrative Procedures and these terms or the Rules, the provisions of these terms and the Rules shall prevail and in the event of any conflict between these terms and the Rules, the Rules shall prevail.
18.02
19. 19.01
19.02
19.03
19.04
20. 20.01
20.02
Adopted Rules From the time of tender on the Tender Day a Contract shall be subject to the RSA Rules, except where otherwise stated in these terms or the Administrative Procedures and, in the event that sugar originating in the European Union is delivered, to the ASSUC Rules as fully as if the same had been expressly set out herein and in the tender. To the extent that the RSA Rules are inconsistent with the ASSUC Rules the latter shall prevail. Subject to term 19.04, to the extent that the adopted rules are inconsistent with these terms and the Administrative Procedures the adopted rules shall prevail. All disputes arising in respect of an event occurring at any time from the time of tender on the Tender Day shall be referred to the council of the Refined Sugar Association for settlement in accordance with its rules relating to arbitration, subject always (where the Clearing House is a party) to Rule 6.2.1. Term 2.03, terms 12.03 to 12.09 inclusive and term 16 shall prevail over the provisions of the adopted rules. Law and Jurisdiction Every Contract shall be governed by and construed in accordance with English law. Subject to terms 17 and 19.03, any question arising therefrom shall be subject to the jurisdiction of the English courts. The provisions of neither the Convention relating to a Uniform Law on the International Sale of Goods, of 1964, nor the United Nations Convention on Contracts for the International Sale of Goods, 1980, shall apply to Contracts.
Appendix 2/page 22
Sugar No. 5 Rules 21. 21.01
Non-Registered Contracts In respect of a Contract which is not a registered Contract (‘non-registered Contract’) these terms shall be modified so as to require and allow that a Contract to be registered with the Clearing House under the Rules and the Regulations is capable of being so registered, and to facilitate the performance of such registered Contract (and of any intermediate Contract) in accordance with these terms and the Administrative Procedures. Modifications may also be made to the terms of a non-registered Contract if, without such modifications, it may not be possible to perform such Contract by the applicable times specified in these terms and the Administrative Procedures. Without prejudice to the generality of the foregoing, all references in these terms to payment or dealing between the Buyer or the Seller and the Clearing House shall be modified so as to require a similar payment or dealing directly between the Buyer and the Seller party to such non-registered Contract. Issue Date: 14 June 2002
Administrative Procedures Last Trading Day At 17.30 hours Trading in the Contract delivery month shall cease. After 17.30 hours The Exchange will publish the EDSP. The EDSP will be determined in accordance with term 5. The prices, offers or bids used for the calculation of the EDSP pursuant to term 5.01 shall be those during the one minute period immediately preceding cessation of trading. Tender Day (Last Trading Day + 1 business day) By 11.00 hours Remaining open positions automatically become delivery contracts. Sellers deliver the Seller’s Notice of Tender form, to the Clearing House in accordance with the Clearing House Procedures. After 11.00 hours Sugar allocated to Buyers by the Clearing House in accordance with the Clearing House procedures. The Clearing House delivers to the Seller the Arrangement for Delivery – Notice to Seller form, identifying the Buyer. Appendix 2/page 23
Sugar Trading Manual By 15.00 hours
The Clearing House delivers to the Buyer the Buyer’s Notice of Tender form, identifying the Seller.
Tender Day + 1 business day By 9.00 hours All payments required by term 6.01 to be made by the Buyer and the Seller shall have been completed. By 12.00 hours Buyers may exchange Buyer’s Notices of Tender, and must inform the Clearing House. Delivery Day(s) - 14 calendar days By 16.00 hours Buyer informs Seller and the Clearing House of the name of the vessel for delivery using the Vessel Nomination/Details form, such notification to be made in accordance with the Clearing House Procedures. Document Notice Day By 12.00 hours Seller gives notice to the Clearing House of presentation of documents using the Notice of Presentation of Documents form such notification to be made in accordance with the Clearing House Procedures. Settlement Day By 9.00 hours By 11.00 hours
The Clearing House debits Buyer via PPS. Seller lodges delivery documents with the Clearing House in accordance with the Clearing House Procedures. By 12.00 hours The Clearing House advises Buyer that documents are available to take up. After 12.00 hours The Clearing House credits Sellers via PPS. Buyer collects delivery documents from the Clearing House in accordance with the Clearing House Procedures. Issue Date: 14 June 2002
Appendix 2/page 24
3 Standard physical contracts
Introduction There is no standard contract form except those that appear in The Sugar Association rules for both raw sugar and refined sugar. As it happens, these are merely aide-mémoires to those concocting their own contracts for sale or purchase of white or raw sugar on c and f, cif or fob terms. Some examples of Standard Physical Contracts are contained in this appendix. The major origins of sugar, such as Brazil, Cuba, Thailand, South Africa and Australia, have their own terms but most do differ slightly from customer to customer. The danger of trading an origin on ‘standard terms’ is that what one party feels are standard terms and what another party thinks are standard terms might be different in one, or more, small way which might be crucial when it comes to delivery. Generally, business is done by telephone on ‘standard terms’ but it is prudent in a written confirmation of the business to lay these out in full to ensure that there is no misunderstanding. Any differences are best put right at that time rather than during shipment when it may become a major problem.
Brazil Some years ago, there was a state seller, the IAA (Instituto do Alcohol I Azucar). There were basic standard terms and conditions but in those days Brazil exported only bulk raw sugar and 45 ICUMSA white sugar. Now, there are myriad private sellers with many different qualities, particularly of white sugar, each with different contract terms. The message, therefore, is that each contract must be negotiated down to the final small print and must not allow for ‘standard terms to be enough’. Specifically, however, caution has to be suggested in some of the lower quality white sugars where vessels start loading only to find that the buyer’s supervisor at load tests the quality to find it not of the minimum contract quality. It then becomes a big question what to do Appendix 3/page 1
Sugar Trading Manual as the vessel already has sugar on board. Maybe the safe contract solution is to make sure quality is tested before sugar goes on board the vessel. More recently, we have seen standard loading terms for all ports in Brazil change, particularly for bulk sugar. As private companies invest in modern and more efficient loading terminals rather than the old state system, its standard loading conditions have become a thing of the past. Those sugar trading companies with their own facilities (or to use the grain expression ‘elevators’) have the right to charter their own vessels with whatever loading rate they see fit, which might attract certain vessels at certain rates which otherwise might prefer other dry cargo business. Of course, if they sell their sugar to other sugar operators, they can offer much lower loading rates and, thereby, be sure of good despatch earnings. It is fair to say that, in the last decade, sugar is becoming much nearer to grains in the emphasis and importance of loading rates and charter party terms covering this. One thing in this respect that has changed as regards raw sugar is that North Brazil rarely sells sugar on No. 11 terms. This used to give a benefit to receivers who might want to ship to a country on the No. 11 list which permits out-turn weights and tests – such as Morocco. Now terms are ‘standard Brazilian terms’ which need to be fully agreed by both sides but it is generally regarded as shipped weights and tests amongst other terms. One other item that is always a major bone of contention in Brazil is the enormously high cost of disbursements there which the vessel nearly always passes to the charterer to pay. The strength of the Brazilian unions means they are always having strikes (fortunately, most are of very short duration) and so the chances of these high disbursements being reduced in the near future seem unlikely. Cuba Like Brazil, Cuba has no standard terms but the majority are the same, particularly their standard loading terms which are covered by Rider No. 1. There are some terms and conditions well known to the trade that need some analyzing and watching. The island is split into two coasts when it comes to loading. Normally, the state seller, Cubazucar, will nominate one or two ports in the north of the island or one or two ports in the south. One anomaly which is perhaps a surprise to some is its use of the UK ‘polarization scale’ which it demands for sales direct to Russian companies and end users. Cuba, unlike Brazil, is, however, happy to grant out-turn weights and tests to those countries nominated as such in The Sugar Association Rule Book but where past experience has highlighted abnormal loss in weight, such as in Egypt or Morocco, then Appendix 3/page 2
Standard physical contracts it will insist on a maximum loss that it will absorb between shipped and landed weights. Thailand It is generally accepted that the standard Thailand contract, to those not familiar with it, has a number of eccentricities in it which can be a stumbling block to those unaware. For example, the Thailand loading conditions give the seller the right to load at up to three different ports out of a choice of four. Some of these ports are loaded alongside and some can be loaded from barges in the river. As can be seen, therefore, if it is at the seller’s option, then it is possible that the vessel may be required to load at up to three berths. Currently, vessels can charge anything between US$1.00–2.00 per metric ton for each extra berth. In addition, the question of insurance has to be considered which, under The Sugar Association of London terms, calls for cover from warehouse to warehouse but if this involves loading in the river as against alongside fixed berths, there can be additional premiums charged by insurers to cover this perceived additional risk. This brings up the question of shipped versus landed weights. Thailand sells only on shipped weights but they do give a discount of one eighth of 1% to compensate for any difference between, say, shipped weights Thailand to landed weights Japan. It has to be said, however, that the track record of Thailand over the last decade would indicate that sometimes that one eighth of 1% does not cover the actual weight loss. Another point to note is that the contractual loading rates are not only expressed in long tons as against metric tons but also they differ between Bangkok, Sriracha and Laemchabang which have 1000 long tons and Kohsichang which has 750 long tons. Another area of difference which has occurred as a result of the new 1999 Sugar Charter Party is that the loading rate is not in line with the new charter party, particularly with reference to the number of hatches. Another area of concern has been that ‘notice of readiness’ will only be accepted after the holds have been certified clean and dry by an independent surveyor whether in berth or not. We have seen a number of disputes concerning this. The question of bags also throws up some concerns; firstly, in the case of raw sugar where the standard terms always used to have a bagged option but, more recently, this is not always the case and, therefore, caution needs to be exercised when one is covering second-hand business. With bags, there has also been concern shown on white sugar as regards the minimum tare of the jute and the liner being only 400 grams. Another recent problem has occurred regarding payment terms which calls for the letter of credit to the original shipper to be opened and in order before the notice of readiness can be accepted. Many Appendix 3/page 3
Sugar Trading Manual recent business has been held up when companies in a long string find that the vessel is not loading because the original buyer did not have the letter of credit in order before notice of readiness could be accepted. Examples of physical contracts are as follows: BRAZIL a) 150 ICUMSA Brazilian white sugar in bags: Quantity 14 000 (fourteen thousand) metric tons minimum/maximum. Quality Brazilian white crystal sugar with minimum polarisation 99.7 degrees, maximum moisture 0.1%, maximum ash 0.07% and maximum colour 150 ICUMSA units all final at the time and place of shipment. Packing Packed in new brown polypropylene bags with a polythene lining of 50 kilos net weight each. Bags to be suitable for export and with a minimum combined tare of 170 gms. Bags to be marked with commodity, crop year, country of origin and net weight. Origin Brazil. Parity FOB Stowed Santos, Brazil. Shipment Seller to have the sugar ready to load on one or more vessels at buyer’s option presenting at load port during . . . . . . . . . [date] at Buyer’s option. Buyer to give to Seller 10 calendar days notice of vessel(s) expected readiness to load with such notice to be given at Seller’s office during regular working office hours. Destination Any destination at Buyer’s option excluding USA. Price To be established by SEO (Seller’s Executable Orders) of 280 lots of the . . . . . . [date] contract of the London No. 5 White Sugar futures contract less a discount of US$ . . . per net metric ton. The resulting price to be expressed in United States dollars per net metric ton FOB stowed Santos, Brazil. Appendix 3/page 4
Standard physical contracts Seller is allowed to commence pricing upon conclusion of the contract. Pricing to be completed at the latest by . . . . . . . . . . . . . [date]. If the pricing is not completed by this latest date Buyer retains the right at his sole discretion to price the lots remaining unpriced on the following market days at prevailing market levels. Payment By one or more irrevocable letters of credit opened by a first class bank in Europe nominated by the Buyer. The letter(s) of credit to be available for payment at sight at opening bank’s counters in Europe against presentation of usual shipping documents established in accordance with the requirements of the countries of destination and as per the Rules of the Refined Sugar Association of London. The letter(s) of credit charges of opening bank in Europe for Buyer’s account. All other L/C charges for Seller’s account. The letter(s) of credit to be opened after completion of the pricing as per price clause above. Settlement Weight, quality and packing all final at time and place of shipment as per the certificates of a first class supervision company at Buyer’s option and expense or in case Buyers do not nominate a supervision company as per shipper’s certificates or at Seller’s option as per the certificates of a first class supervision company at Seller’s option and expense. Loading terms 1500 metric tons basis 4 workable hatches available at the commencement of loading per weather working day of 24 consecutive hours. If less than 4 hatches then pro rata. All other terms and conditions as per the Sugar Charter Party 1999. Demurrage/Despatch Demurrage to be paid by Seller to Buyer at the relevant charter party rate. Despatch to be paid by Buyer to Seller at the relevant charter party rate. Despatch rate to be half the demurrage rate for all working time saved for discharging. For each vessel demurrage or despatch to be paid within 60 days of completion of discharge against presentation of laytime calculation, debit note, copy of notice of readiness and a copy of the statement of facts. Export licence The Seller shall be responsible for obtaining any necessary export licence. The inability of Seller to obtain export licence shall not be grounds for declaration of force majeure. Appendix 3/page 5
Sugar Trading Manual Insurance Marine and war risk insurance shall be covered by the Buyer at his expense in accordance with RSA Rule 16 and Appendix 1. Seller is entitled to satisfactory evidence of such insurance if they so request it. Force majeure The performance of this contract is subject to force majeure as defined by the Rules of The Refined Sugar Association. Arbitration Failing an amicable solution any disputes or conflicts arising out of this contract shall be referred to The Refined Sugar Association for settlement in accordance with the rules relating to arbitration. This contract shall be governed by and construed in accordance with English law. All other terms and conditions This contract is subject to the Rules of The Refined Sugar Association as fully as if the same had been expressly inserted herein, whether or not either or both of the parties to it are members or are represented by a member or members of the Association. In case of any alteration written or typed on the face of this contract which is inconsistent with the rules such written or typed alteration shall prevail. BRAZIL b) Raw sugar in bulk: Quantity . . . . . . . . (. . . . . . . . . . .) metric tons . . . . . . . per cent more or less at Buyer’s option and at contract price. Quality Raw Cane Sugar of a fair average quality and the current crop at the time of shipment with minimum polarisation 96 degrees and maximum polarisation 99.49 degrees at time of shipment. All sugar to be within contractual specifications. Packing In bulk. Origin Brazil. Parity FOB Stowed trimmed . . . . . . . . . . . . . . . . . . . . Delivery Seller to have the sugar ready to load on Buyer’s vessel(s) presenting at loadport on any day during . . . . . . . . . . . . . . . . . Appendix 3/page 6
Standard physical contracts [date]. The Buyer shall give at least 7 calendar days notice of vessel(s) arrival at load port. Price To be established by SEO (Seller’s Executable Orders) of . . . . . lots of the . . . . . . . [date] N° 11 contract of the New York Coffee Sugar and Cocoa Exchange Inc. less a discount of US$ . . . . . . (. . . . .) per metric ton. The resulting price to be expressed in United States dollars per metric ton of 2204.62 pounds each, in bulk, basis 96 degrees polarisation at time of shipment FOB Stowed . . . . . . . . . . . . . . . . ...... Pricing to be completed at the latest by 15 days before the expiry of the futures contract against which pricing is being effected. If the pricing is not completed by this latest date Buyer retains the right at his sole discretion to price the lots remaining unpriced on the following market days at prevailing market levels. Polarisation Premiums Buyer will pay to Seller polarisation premiums of 3.75% calculated on the FOB Stowed price. Payment By irrevocable letter(s) of credit to be opened by first class bank in Europe nominated by the Buyer. The letter(s) of credit to be available for payment at opening bank’s counters in Europe against presentation of usual shipping documents established in accordance with the requirements of the countries of destination and the CSCE No. 11 Sugar Rules. The letter(s) of credit charges of opening bank in Europe for Buyer’s account. All other L/C charges for Seller’s account. The letter(s) of credit to be opened after completion of the pricing as per Price clause above. Arbitration/Default 1. Failing an amicable solution any dispute, controversy or claim arising out of this contract shall be referred to The Sugar Association of London for settlement in accordance with the rules relating to arbitration and this contract shall be governed and construed in accordance with English law. 2. Notwithstanding the above, for any quantity of sugar delivered under this contract that becomes the subject of a delivery through the Clearing Association of the Coffee, Sugar and Cocoa Exchange Inc. in New York (The Exchange) under Appendix 3/page 7
Sugar Trading Manual contract No. 11 the parties agree that any dispute, controversy or claim arising out of or relating to or in connection with this contract, or breach, termination or validity thereof shall be referred to the Exchange for arbitration in accordance with their arbitration rules. The duly appointed arbitration panel whose award shall be final and binding upon the parties and judgement upon which may be entered by any court having jurisdiction shall, apart from interest, costs and fees, award damages in accordance with the rule 11.11 sections 4 to 7 of the sugar No. 11 contract of the Exchange with the price in this contract replacing any reference to a multiple delivery notice price. 3. Should paragraph No. 2 above be applicable but for any reason whatsoever the Exchange refuses or is unable to arbitrate the dispute shall be referred to The Sugar Association of London for settlement in accordance with their arbitration and English law to apply. In the event of a default by Seller relating to the sugar delivered or to be delivered against one delivery period, Buyer, without prejudice to his claim for damages/cost/consequences of such default may at his sole discretion cancel the contract for the tonnage remaining to be delivered against subsequent delivery periods with any loss thereby incurred being for Seller’s account. Force Majeure 1. As per the terms and conditions of Rule 226 of The Sugar Association of London. 2. Notwithstanding the above for any quantity of sugar delivered under this contract that becomes the subject of a delivery through the Clearing Association of the Coffee, Sugar and Cocoa Exchange Inc. in New York (The Exchange) under contract No. 11 the parties agree that terms and conditions of Rule 11.12 shall apply but with no notices to be given to the Exchange and the word ‘receiver’ being replaced by ‘Buyer’ and the word ‘Deliverer’ replaced by ‘Seller’. Any settlement price if not amicably agreed to be established by arbitration. Other Terms Where not inconsistent with the above and except for the rules directly concerning the clearing association the CSCE No. 11 Sugar rules will apply to this contract as if the same had been expressly inserted herein whether or not either or both parties to it are members or are represented by members of the exchange with the word ‘receiver’ being replaced by ‘Buyer’ and the word ‘Deliverer’ replaced by ‘Seller’ whenever they appear. Appendix 3/page 8
Standard physical contracts CUBA Origin Cuba Quantity ----------- metric tonnes Quality Cane raw sugar of fair average quality and of the current crop with minimum polarisation of 96 degrees at time of shipment. Destination World destination except South Korea, Canada and Israel. In case destination Portugal, Finland, France and United Kingdom to be mutually agreed. Shipment Period Vessel to present during . . . . . . . Packing In bulk Price Price will be . . . . premium/discount versus – lots New York CSCE (month) Number 11 FOBs one or two South Cuban ports or one or two North Cuban ports at Seller’s option basis 96 degrees polarisation in bulk. Loading Conditions As per Standard Cuban Terms (Rider No. 1). Payment Cash against first presentation of shipping documents. Settlement The final invoice shall be made up on the mean shipping/outturn polarisation and on the net shipping/landed weight in accordance with rules of the Sugar Association of London at time of shipment. If settlement is based on the shipping weight and polarisation, the Seller shall be responsible for the weighing, taring and sampling of the sugar at his expense at port(s) of loading. The Buyer shall have the option of appointing for his own account and at his expense a representative to supervise the weighing, taring and sampling of the sugar. If settlement is based on outturn weight and polarisation, the Buyer shall be responsible for the weighing, taring and sampling of the sugar at his expense at port(s) of destination. The Seller shall have the option of appointing for his own account and at his expense a representative to supervise the weighing, taring and sampling of the sugar. Appendix 3/page 9
Sugar Trading Manual Settlement of degrees above 96 degrees mean shipping/ outturn polarisation shall be calculated on the price as per the United Kingdom or International scales as per custom of the country of destination. For destination Egypt, settlement to be based on shipping weight and polarisation. For destination Algeria, Tunisia and Morocco, outturn weight and tests would apply but weight loss would be restricted to a maximum of 0.2 per cent. Rules/Force Majeure/Arbitration and other terms All in accordance with The Sugar Association of London. Cuban Terms Rider No. 1 Fobbing and loading terms. Loading of sugar shall be made at one or two safe and suitable ports in the north or one or two safe and suitable ports in the south of the Republic of Cuba, one or two safe berths each port at Seller’s option, in vessels nominated by Buyer. Buyer will charter vessels to load sugar against this contract under terms and condiitions established in the usual charter party form actually in force for sugar shipment from Cuba. For shipments in bulk, vessels with internal divisions in hatches are not acceptable. Maximum draft for vessels 33 feet and 200 meters for length. Notice of vessel’s nomination to be given by Buyer to Seller at least 10 days before vessel’s estimated readiiness to load and master of vessel to cable Seller 7 calendar days and 72 hours off Cuba and 24 hours before arrival at first loading port. Seller to give loading ports to Buyer within 4 calendar days after receiving the 7 days notice before arrival of vessel to Cuba. Vessels are to receive cargo as fast as possible and Seller is to supply cargo at the average rate of 2000 metric tons per weather working day in accordance with the custom of the port, Saturday afternoons, Sundays and holidays excepted, even if used, in default of which demurrage is to be paid by Seller at charter party rate, for all time lost. Notice of vessel’s nomination to be given by Buyer to Seller at least 10 days before vessel’s estimated readiness to load and master of vessel to cable Seller 7 calendar days and 72 hours off Cuba and 24 hours before arrival at first loading port. Seller to give loading ports to Buyer within 4 calendar days after receiving the 7 days notice before arrival of vessel to Cuba. Vessels are to receive cargo as fast as possible and Seller is to supply cargo at the average rate of 2000 metric tons per Appendix 3/page 10
Standard physical contracts weather working day in accordance with the custom of the port, Saturday afternoons, Sundays and holidays excepted, even if used, in default of which demurrage is to be paid by Seller at charter party rate, for all time lost. If cargo is loaded faster than above rates despatch earned at charter party rate, for all time saved, to be for account and benefit of Seller. Laytime is reversible between different loading ports. Settlement of demurrage/despatch to be effected directly between Buyer and Seller. Laytime for loading at each loading port shall commence to count the next working period after captain reports ship’s arrival and readiness for loading whether the vessel is in berth or not, Saturday afternoons, Sundays and/or holidays excepted. Such notice of readiness to be given during regular office hours only, in accordance with the custom of the port. The Seller is to arrange proper stowage of sugar and undertakes to load and stow same in such a way as to ensure good conditions of sugar but stowage to be in any case at ship’s risk and her responsibility. Rates of loading based on vessel having at least four hatches available at the commencement of loading. If less than four hatches are available the rates of loading are to be reduced pro rata. Time employed in shifting vessels between loading ports and different anchorages or places of loading within the same port or its jurisdiction not to count as laytime. In case vessels load at only one port the Seller has the option to three shiftings within the port or its jurisdiction, free of charge. Overtime in loading is to be for account of the party ordering same. Crew overtime for account of the ship. Strikes or lock-outs of men, or any accidents or stoppages on railways and/or canal and/or river by any cause, or other causes occurring beyond the control of the Seller which may prevent or delay the loading are always excepted and will not count as laytime. Buyer shall supply Seller three copies of covering charter party before arrival of vessel to Cuban ports, otherwise particular details to be passed on to Seller by telex and charter party to be sent later. In the event of the Buyer failing to provide tonnage in accordance with the delivery schedule of the contract, the Seller has the right to invoice and deliver the sugar in warehouse at Buyer’s risk and expense but the Seller shall deliver out of store Appendix 3/page 11
Sugar Trading Manual to FOB Stowed without charge except the actual cost of storing and the proved loss of holding over the sugar. On chartering vessels a provision shall be included in the charter party that the following fobbing expenses are not for shipper’s account. 1. Extra cost for stowage in deep-tanks, refrigerator hatches, hallways and other unusual places. 2. Dunnage and cost of laying same. 3. Opening and closing of hatches. 4. Use of steamer’s winches, power, lights, slings suitable for loading and discharging sugars, and ropes. 5. Cost of stood off work on account of breakdown of winches. EUROPE ASSUC SUGAR Contract No. 2 For EU FOB Stowed Trade 1999 Seller: Buyer: Quantity: . . . . . . . Net Metric Tons net weight min/max. . . . pct more or less at Buyer’s option Quality: White Crystal Sugar, Minimum Polarisation 99.8° otherwise EEC No. 2 Quality. Origin: One or more EU origins at Seller’s option. Packing: New sound single polythene-lined jute bags of 50 kilos net weight each, of minimum combined tare 400 grams each, suitable for export and with or without Seller’s/factory markings at Seller’s option. Delivery: To one or more vessels presenting ready to load during . . . . . . . ................................................. Buyer to give Seller not less than 14 days’ notice of vessel(s) expected readiness to load. Such notice to be given on a business day in Seller’s country prior to 16.00 hours London time to be effective that day. Price: . . . . . . . . net per Metric Ton net FOB & Stowed one nominated EU port per vessel, Seller’s quay(s). Appendix 3/page 12
Standard physical contracts Loading: The Seller shall load sugar at a rate of [. . . . .] per weather working day of 24 consecutive hours basis 4 or more hatches, if less than 5, pro rata, with time from 17.00 hours on Friday or on a day prior to a public holiday, to 08.00 hours on Monday or on a day after a public holiday excepted even if used. Time to count from the beginning of the next working period after notice has been tendered in writing during normal office hours, Saturdays, Sundays and official public holidays excepted. Demurrage and dispatch as per Charter Party rate for Seller’s account, reasonable current market rates for like type and size of vessel to apply. Despatch half demurrage rate. All other terms in accordance with Sugar Charter Party 1999. Buyer to give Seller copy of the Charter Party or relevant details thereof, prior to vessel (s) commencing to load. Destination: Destination to be outside EU. The sugar shall physically leave the geographical area of the EU without undue delay after loading has been completed, and shall not be re-imported into the EU. If required by Seller, Buyer shall provide, as required by EU regulations and/or at Seller’s cost, documentary proof that the sugar has been customs-entered for free circulation into a third country outside the EU. Weight, Quality, Quantity & Packing: All final at time of shipment as per manufacturer’s factories’ or their appointed agents’ certificates, or at Seller’s option as certified by internationally recognised independent superintendents at Seller’s expense. However, Buyer still retains his rights under Contract Rule 5 of the Refined Sugar Association. Payment: By net cash against presentation of documents in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . as set out in Contract Rules 17, 18 and 19 of the Refined Sugar Association. Charter Party Bills of Lading shall be acceptable. Documents presented before 11.00 hours shall be paid value next Banking day. Title: Title to goods shall not pass until Buyer has made payment for the goods in accordance with Seller’s instructions. Insurance & Taxation: Both as per Refined Sugar Association Rules. Appendix 3/page 13
Sugar Trading Manual Force Majeure, Arbitration and all other terms and conditions: This Contract is subject to the rules of the Refined Sugar Association as fully as if the same had been expressly inserted herein, whether or not either one or both of the parties to it are members of the Association. All disputes arising out of this Contract shall be referred to the Council of the Refined Sugar Association for settlement in accordance with the rules relating to arbitration. Uniform Law on International Sales of Goods Exclusion of Conventions: Unless the Contract contains any statement expressly to the contrary, the provisions of neither the Convention relating to a Uniform Law on the International Sale of Goods, of 1964, nor the United Nations Convention of Contracts for the International Sale of Goods, of 1980, shall apply thereto. THAILAND TSTC Whites Quantity 12 000 (twelve thousand) metric tons minimum/maximum.
Quality Thailand Cane White Sugar of 1998/1999 crop year with minimum polarisation 99.8 degrees, maximum moisture 0.08 per cent and maximum colour 100 ICUMSA units. All final at time of shipment. Origin Thailand. Packing Packed in polypropylene bags with a polythene lining of 50 kilos net weight each with standard manufacturers marks. Delivery During . . . . . . . . . . . . . . . . . [date] at Buyer’s option with Buyer to give to Seller not less than 7 (seven) working days notice of vessels expected readiness to load with such notice to be given on a working day at Seller’s office during normal office hours. Partial shipment is allowed with a minimum of 500 metric tons per shipment. If the quantity shipped is less than 500 metric tons, the Buyer shall pay an extra fee of US$1.60 (one point six zero) per metric ton. This is not applicable to the contract’s last shipment.
Appendix 3/page 14
Standard physical contracts Price Price to be established by AA (Against Actuals) transaction of 240 lots of the . . . . . . . . . . . 1999 contract of the London No. 5 White Sugar Futures Market plus a premium of US$ . . . . . . . . . . . . (. . . . . . . . . . . .) per net metric ton. The AA to be posted at a time to be mutually agreed between Buyers and Sellers. The resulting price to be expressed in United States dollars per net metric ton FOB Stowed Bangkok and/or Sriracha and/or Laemchabang and/or Kohsichang. Equivalent of metric ton: 1000.000 kilograms. : 2204.62 pounds. Equivalent of long ton: 11 016.000 kilograms. : 2240.000 pounds Delivery At one or two safe berths at Bangkok and/or to complete loading at Sriracha or Laemchabang. Or at the Seller’s option, vessel will present at Sriracha and/or Laemchabang. If loading cannot be completed at Bangkok, Sriracha or Laemchabang, then the Seller will complete loading at Kohsichang, at the Seller’s expense, except marine insurance as provided in the insurance clause of this contract. Loading rates at Bangkok/Sriracha/Laemchabang to be 1000 long tons and at Kohsichang to be 750 long tons per weather working day, Saturday afternoons, Sundays and holidays excepted, even if used. All rates of loading are based on a minimum of five hatches being available at commencement of loading. If less than five hatches are available, loading rates to be reduced pro rata. Vessel having less than five hatches, but with any hatch exceeding fifteen metres in length and able to work two gangs simultaneously with ship’s gear, shall have such hatch counted as two hatches. The Buyer to give the Seller minimum 7 (seven) working days written notice of vessel’s estimated readiness to load. Time to be counted shall begin at the next working period after the Seller receives the Buyer’s vessel declaration in ordinary office hours. The vessel declaration must include the following details: A. Vessel name and estimated time of arrival. B. Destination.
Appendix 3/page 15
Sugar Trading Manual C. D. E. F. G.
Notify party. Description of the sugar. Exact quantity to be shipped. Packing. Other information required by the Thai Government’s regulations, if any, upon the Seller’s advanced notifications.
Vessel’s written notice of readiness to be tendered in ordinary office hours and will be accepted after ship’s holds properly swept, cleaned and dried to the satisfaction of independent surveyor, whether in berth or not. The Buyer shall endeavour to supply the Seller with copy of the relevant Charter-Party prior to the tendering of written notice of readiness. The Buyer to provide the Seller with relevant Charter-Party details i.e. demurrage/despatch rates, total quantity to be shipped and description of the vessel prior to tendering of written notice of readiness. Laytime for loading shall begin at the next regular working period after written notice of readiness has been accepted in ordinary office hours, time from noon Saturdays to 8.00 a.m. Mondays and from 5.00 p.m. preceding a holiday (or local equivalents) until 8.00 a.m. next regular working day excepted, even if used. Time employed in shifting anchorages of loading places within the same port or its jurisdiction not to count as laytime, and shifting expenses to be for the Buyer’s account. The Buyer shall be responsible for the release of the B/L to the Seller at the loading port within 24 hours of completion of loading, Saturdays, Sundays, and holidays excepted. The Buyer’s failure to comply with this provision shall make the Buyer liable to the Seller for proven damages, which confine to financial costs (at prevailing minimum overdraft rate in Thailand) of the delay due to reasons other than force majeure, if such delay is not caused by shipper. Demurrage/despatch rates at loading port(s) shall be as per relevant Charter-Party rates. In case of dispatch earned at loading port(s), the Buyer shall make settlement promptly with the Seller. In case of demurrage incurred at loading port(s), the Seller shall make settlement promptly with the Buyer. Other terms and conditions are subject to the rules of the standard Sugar Charter-Party 1969 (Revised 1977). In case of any alteration written or typed on the face of this contract which is inconsistent with the rules of standard Sugar Charter-Party Appendix 3/page 16
Standard physical contracts 1969 (Revised 1977) such written or typed alteration shall prevail. Destination World destination. Settlement Shipping weight, quality and packing to be final at time of shipment as per independent supervision company certificates at the Seller’s choice. Draft survey results are not applicable in the B/L issuance. The final invoice shall be made upon the shipping weight and in accordance with the Rules of The Refined Sugar Association. The Seller shall be responsible for the weighing and sampling of the sugar at his expense at the port(s) of loading. The Buyer shall have the option of appointing for his own account a representative to supervise weighing, sampling and loading of the sugar. Insurance Marine and war risk insurance including the risk while transported by lighter(s) at/and from Bangkok, Sriracha, Laemchabang to/at Kohsichang, shall be effected by the Buyer with first class insurance companies in accordance with the Rules of The Refined Sugar Association. Payment Net cash in US dollars for 100 per cent of invoice value without any deduction and/or set off whatsoever to Seller’s designated bank account in Geneva against presentation in Geneva of the required shipping documents as per the DOCUMENTS clause of this contract. Documents The following basic documents are to be presented by the Seller: A. A complete set of signed clean ‘on board’ bill(s) of lading. B. Certificate of origin. C. Certificate of weight, quality and packing. D. Commercial invoice. The Seller will provide the Buyer, free of charge, with no more than three sets per shipment. Extra sets of such documents, if required by the Buyer, will be provided at the cost to the Buyer at US$75.00 per set. In addition to the above documents the Seller shall, if requested not later than seven days prior to the commencement of loading of the vessel, include in the presentation for payment other Appendix 3/page 17
Sugar Trading Manual documents customarily required by, and acceptable to, the authorities in the country of destination. Any such additional documents requested with less than the above notice shall be supplied by the Seller as soon as possible but absence of such additional documents due to short notice shall not preclude payment. If requested by the Buyer, the Seller shall have any document referred to in (B), (C) or (D) above or any additional document as above visaed in accordance with the requirements of the country of destination. Any costs incurred in obtaining additional documents in accordance with the above mentioned paragraph and any visa charges shall be for Buyer’s account. The Seller shall not be responsible if, for reasons beyond his control, any additional document referred to above or any visas are unobtainable and inability by the Seller to obtain such documents or visas shall not preclude payment. The Buyer shall give the Seller, prior to tendering of written notice of readiness, copies of such documents and forms as are required by, and are acceptable to the customs at port of destination, including full details of such consular certificates as are required. The Seller shall prepare shipping documents on similar forms as soon as shipment is completed, but he should not be held responsible for any delay, owing to the absence of or distant location of consuls from port of shipment. Taxation Any existing or future taxes or levies in the nature of taxes which are imposed on the sugar, freight or shipping by the country of destination affecting this contract shall be for the account of the Buyer. Any existing or future taxes or levies in the nature of taxes which are imposed on the sugar, freight or shipping by the country of origin affecting this contract shall be for the account of the Seller, except in case of freight tax on the ocean freight rate, if any, which shall be for the account of the Buyer. Title Title to the goods shall not pass until Seller has received payment for the goods in accordance with Seller’s instructions. Force Majeure The performance of this contract is subject to Force Majeure as defined by the Rules of The Refined Sugar Association. Arbitration Failing an amicable solution any disputes or conflicts arising out of this contract shall be referred to The Refined Sugar Appendix 3/page 18
Standard physical contracts Association for settlement in accordance with the rules relating to arbitration. This contract shall be governed by and construed in accordance with English law. ISA Fee If any, shall be shared equally 50% by the Buyer and 50% by the Seller. All other terms and conditions This contract is subject to the rules of The Refined Sugar Association as fully as if the same had been expressly inserted herein, whether or not either or both of the parties to it are members or are represented by a member or members of the Association. In case of any alteration written or typed on the face of this contract which is inconsistent with the rules such written or typed alteration shall prevail. STANDARD THAI RAWS CONTRACT 1. Quality: Thailand Cane Raw Sugar of a fair average quality of the current crop with a minimum polarisation on wet basis of 96 degrees at time of shipment and in case destination is Japan, a maximum polarisation on wet basis of 97.99 degrees at time of discharge at destination. 2. Quantity: .............................................. 3. Packing: In bulk. The Buyer has the option to take delivery of part or all of these sugars packed in new sound jute bags suitable for export of about 100.00 (one hundred) kilograms net weight each with minimum tare 1.1 kilograms, option declarable latest 7 (seven) working days prior to ETA of vessel(s) in which case the Buyer shall pay the Seller a premium OF US DOLLARS . . . . . . . . . . . . . . PER METRIC TON on such quantity shipped. 4. Shipment: (4.1) . . . . . . . . . . . . . . . . . . . . . . at the Buyer’s option. (4.2) Partial shipment is allowed with minimum of 500 metric tons per shipment. If the quantity shipped is less than 500 metric tons, the Buyer shall pay an extra fee of US dollars 1.60 per metric ton. This is not applicable to the contract’s last shipment and contract with the total quantity less than 500 metric tons. Appendix 3/page 19
Sugar Trading Manual 5. Price: (5.1) US dollars . . . . . . . . per metric ton FOB and Stowed/Trimed Bangkok and/or Sriracha and/or Laemchabang and/or Kohsichang, polarisation 96.00 degrees basis, in bulk. (5.2) Equivalence of metric ton = 1000.00 kilograms = 2204.62 pounds Equivalence of long ton = 1016.00 kilograms = 2240.00 pounds 6. Delivery: (6.1) At one or two safe berths at Bangkok and/or to complete loading at Sriracha or Laemchabang. Or at the Seller’s option, vessel will present at Sriracha and/or Laemchabang. If loading cannot be completed at Bangkok, Sriracha or Laemchabang, then the Seller will complete loading at Kohsichang, at the Seller’s expense, except Marine Insurance as provided in the insurance clause of this Contract. (6.2) Loading rate to be as follows: Bangkok 1000.000 long tons, Sriracha 1000.000 long tons, Laemchabang 1000.000 long tons, Kohsichang 750.000 long tons, Per weather working day, Saturday afternoons, Sundays and holidays excepted, even if used. All rates of loading are based on a minimum of five hatches being available at commencement of loading. If less than five hatches are available, loading rates to be reduced pro rata. Vessel having less than five hatches, but with any hatches exceeding fifteen metres length and able to work two gangs simultaneously with ship’s gear, shall have such hatch counted as two hatches. (6.3) The Buyer to give the Seller minimum 7 (seven) working days written notice of vessel’s estimated readiness to load. Time to be counted shall begin at the next working period after the Seller receive the Buyer’s vessel declaration in ordinary office hours. The vessel declaration must include the following details: a Vessel name and estimated time of arrival. b Destination. Appendix 3/page 20
Standard physical contracts c Notify party. d Description of sugar. e Exact quantity to be shipped. f Packing. g Other information required by the Thai Government’s regulations, if any, upon the Seller’s advanced notifications. The declaration to be effective after the unrestricted irrevocable letter(s) of credit as per the payment clause of this contract has been duly received by the Seller. (6.4) Vessel’s written Notice of Readiness to be tendered in ordinary office hours and will be accepted after ship’s holds properly swept, cleaned and dried to the satisfaction of independent surveyor, whether in berth or not. The Buyer shall endeavour to supply the Seller with copy of the relevant Charter Party prior to the tendering of written Notice of Readiness. The Buyer to provide the Seller with relevant Charter Party details i.e. demurrage/despatch rates, total quantity to be shipped and description of vessel prior to tendering of written Notice of Readiness. (6.5) Laytime for loading shall begin at the next working period after written Notice of Readiness has been accepted in ordinary office hours, time from noon Saturdays to 8:00 a.m. Mondays and from 5:00 p.m. preceding a holiday (or local equivalents) until 8:00 a.m. next working day excepted, even if used. Time employed in shifting anchorages or loading places within the same port or its jurisdiction not to count as laytime, and shifting expense to be for the Buyer’s account. (6.6) The Buyer shall be responsible for the release of the B/L to the Seller at loading port within twenty-four hours of completion of loading, Saturdays, Sundays and holidays excepted. The Buyer’s failure to comply with this provision shall make the Buyer liable to the Seller for proven damages, which confine to financial costs (at prevailing minimum overdraft rate in Thailand) of the delay due to reasons other than force majeure, if such delay is not caused by shipper. (6.7) Demurrage/Despatch rates at loading port(s) shall be as per relevant Charter Party rates. Appendix 3/page 21
Sugar Trading Manual In case of despatch earned at loading port(s), the Buyer shall make settlement promptly with the Seller. In case demurrage incurred at loading port(s), the Seller shall make settlement promptly with the Buyer. (6.8) Other terms and conditions are subject to the rules of Standard Sugar Charter Party 1969 (Revised 1977). In case of any alteration written or typed on the face of this contract, which is inconsistent with the rules of Standard Sugar Charter Party 1969 (Revised 1977) such written or typed alteration shall prevail. 7. Loading: The use of dog hooks for bag loading is allowed. 8. Destination: World destination excluding US Quota. 9. Settlement: (9.1) For sugar in bulk or in bags: shipping weight, quality and packing shall be final as per independent supervision company certificates at the Seller’s choice. The final invoice shall be based on the B/L net weight less 1/8 of 1.00 per cent (one eighth of one per cent). Draft survey results are not applicable in the B/L issuance. (9.2) Subject to the last paragraph of this clause polarisation shall be final at loading port(s). Polarisation premiums shall be calculated on results at loading port(s) and the contract price with settlement of degree above 96.00 degrees polarisation as follows: – For every full degree above 96.00 degrees to and including 97.00 degrees, add 1.50 per cent (one point five zero per cent). – For every full degree above 97.00 degrees to and including 98.00 degrees, add an additional 1.25 per cent (one point two five per cent). – For every full degree above 98.00 degrees to and including 99.00 degrees, add an additional 1.00 per cent (one per cent). – Fractions of a degree shall be calculated in the same proportions. In case destination is Japan, Seller shall be responsible for any proven damages that may be suffered by Buyer due to sugar Appendix 3/page 22
Standard physical contracts polarising in excess of 97.99 degrees on wet basis at time of discharge. (9.3) The Seller shall be responsible for the weighing and sampling of the sugar at his expense at the port(s) of loading. The Buyer shall have the option of appointing for his own account a representative to supervise weighing, sampling and loading of the sugar. 10. Insurance: Marine insurance subject to raw sugar clauses, institute war clauses and institute SRCC clauses, with warehouse to warehouse conditions including the risk while transported by lighter(s) at/and from Bangkok, Sriracha, Laemchabang to/at Kohsichang, shall be effected by the Buyer with first class insurance companies. 11. Payment: (11.1) The Buyer will establish through first class overseas bank(s), advised through Thai bank(s) in Bangkok, the unrestricted irrevocable letter(s) of credit not later than 7 (seven) working days from receipt of the Seller’s instructions. (11.2) Payment for 100 per cent (one hundred per cent) invoice value shall be made against letter(s) of credit against required shipping documents as per the document clause of this contract. (11.3) Any banking charges outside Thailand shall be for the account of the Buyer. 12. Documents: (12.1) The following basic documents are to be presented by the Seller: A. A complete set of signed clean ‘on board’ bill(s) of lading. B. Certificate of origin. C. Certificate of weight and quality. D. Commercial invoice. The Seller will provide the Buyer, free of charge, with no more than three sets per shipment. Extra sets of such documents, if requested by the Buyer, will be provided at the cost to the Buyer at US$ 75.00 per set. Appendix 3/page 23
Sugar Trading Manual (12.2) In addition to the above documents the Seller shall, if requested not later than seven days prior to the commencement of loading of the vessel, include in the presentation for payment other documents customarily required by, and acceptable to, the authorities in the country of destination. Any such additional documents requested with less than the above notice shall be supplied by the Seller as soon as possible but absence of such additional documents due to short notice shall not preclude payment. (12.3) If requested by the Buyer, the Seller shall have any document referred to in 12.1 (B), (C) or (D) or in 12.2 above visaed in accordance with the requirements of the country of destination. Any costs incurred in obtaining additional documents in accordance with 12.2 above and any visa charges shall be for the Buyer’s account. The Seller shall not be responsible if, for reasons beyond his control, any additional documents referred to in 12.2 above or any visas are unobtainable and inability by the Seller to obtain such documents or visas shall not preclude payment. (12.4) The Buyer shall give the Seller, prior to tendering of written Notice of Readiness, copies of such documents and forms as are required by, and are acceptable to the customs at port of destination, including full details of such Consular Certificates as are required. The letter(s) of credit amendment(s) for such document requirements of each shipment shall reach the Seller prior to completion of loading. (12.5) The Seller shall prepare shipping documents on similar forms as soon as shipment is completed, but he should not be held responsible for any delay, owing to the absence of or distant location of consuls from port of shipment. 13. Taxation: (13.1) Any taxes or levies in the nature of taxes which are imposed on this sugar by the country of destination affecting this contract, shall be for the account of the Buyer. (13.2) Any taxes or levies in the nature of taxes whatsoever imposed by the country of origin affecting this contract shall be for the account of the Seller, except in case of Freight Tax on the Appendix 3/page 24
Standard physical contracts Ocean Freight rate, if any, which shall be for the account of the Buyer. 14. Force majeure: The performance of this contract is subject to Force Majeure as defined by the Rules of The Sugar Association of London. 15. Arbitration: All disputes arising out of this contract are hereby submitted to The Sugar Association of London for settlement in accordance with the Arbitration Rules of the Association. 16. ISA Fee: If any, shall be shared equally 50 per cent by the Buyer and 50 per cent by the Seller. 17. Rules: This Contract is subject to the Rules of The Sugar Association of London as fully as if the same had been expressly inserted herein, whether or not either or both of the parties are Members or are represented by a Member or Members of the Association. In case of any alterations written or typed on the face of this contract which is inconsistent with the Rules, such written or typed alterations shall prevail. Further to above terms, in adjunct with docs clause, shippers have agreed to charge the following fees for additional documents: 1. Analysis and health certificate: USD 500.00/sample 2. Radioactivity measurement certificate: USD 50.00/set of document 3. GSTP/Form A: USD 25.00/set of document 4. Phytosanitary certificate: USD 150.00/shipment 5. Legalisation: as the case may be
Appendix 3/page 25
4 Sugar Charter-Party 1999
Sugar Charter-Party 1999 DATE . . . . . . . . . . . . . . . . CHARTERERS/ OWNERS
DESCRIPTION OF VESSEL
It is this day mutually agreed BETWEEN . . . . . . . . . . . . . . . . Charterers 1. and Owners . . . . . . . . . . . . . . . . . . . . . . . . . of the good motor vessel called the . . . . . . . . . . . . . . . . . . . . . . . . . . . . highest class . . . . . . . . . . . . . . . . (and to be of that class for the duration of the voyage), Last Special Survey: . . . . . . . . . . . . . . . . . . . . . . . Flag: . . . . . . . . . . . . . . . . Built: . . . . . . . . . . . . . . . . Call Sign: . . . . . . . . . . . . . . . . 2. G.T./N.T: . . . . . . . . . . . . / . . . . . . . . . . . Type: . . . . . . . . . . . . . . . . . . .Summer deadweight (salt water): . . . . . . . . . . . . . . . . . . . . . . Fully loaded draught (summer marks) salt water: . . . . . . . . . . . . . . . . . . . . LOA/Beam: . . . . . . . . . . . . . . . . Engines located amidships/aft: . . . . . . . . . . . . . . Number of Holds/ Hatches: . . . . . . . . . . . . . . . . . . . . . . . . Hatch Sizes: . . . . . . . . . . . . . . . . . . Gear (including vessel’s union purchase capacity): . . . . . . . . . . . . . . . . . . Tunnel shaft, if any, to be floored over. Speed: . . . . . . . . . . . . . . . . . . . Bale/Grain Cubic:( . . . . . . . . . . . . . . . . . . . . ) Last . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cargoes: . . . . . . . . . . . . . . . . (a) Owners guarantee that the vessel is fully insured for Hull and Machinery risks. Owners guarantee that the vessel is insured with . . . . . . . . . . . . . . . . . for the amount of USD . . . . . . . . . . . . . . . . and Appendix 4/page 1
Sugar Trading Manual
POSITION
Appendix 4/page 2
that the vessel will remain fully covered for the duration of this voyage. (b) Owners guarantee that the vessel is fully P & I covered with . . . . . . . . . . . . . . . . . . . and that the vessel will remain fully covered for the duration of this voyage. (c) Owners guarantee that the vessel will not change flag/class/Ownership/ Managers/P & I Club coverage during the currency of this Charter-Party without Charterer’s prior consent. (d) Owners guarantee: (i) that the vessel carries and will do so for the duration of the voyage all certificates and other documentation whatsoever required by her flag, state authorities and/or the authorities at any place of call under this Charter-Party, and (ii) that, from the date of coming into force of the International Safety Management (ISM) Code in relation to the vessel and thereafter during the currency of the voyage both the vessel and ‘the Company’ (as defined by the ISM Code) shall comply with the requirements of the ISM Code. Upon request the Owners shall provide the Charterers with a copy of the relevant document of compliance and Safety Management Certificate. Compliance by the Owners with the provisions of this Clause 2(d) is a condition of this Charter-Party the breach thereof will entitle the Charterers to claim damages for any costs/consequences arising as a result and/or at any time cancel this Charter-Party. 3. Now . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . that the said vessel being tight, staunch, strong and in every way fitted for the voyage including the fulfilment of all documentary requirements for the service contemplated
Sugar Charter-Party 1999
LOADING AREA
DESCRIPTION OF CARGO
DISCHARGING AREA
EXCEPTIONS
by this Charter-Party, shall with all CharterParty speed, 4. weather permitting, sail and proceed to . . . . . . . . . . . . . . . . and there load always afloat, or safe aground where vessels of similar size are accustomed to lie in safety, at ONE or TWO safe ports, ONE or TWO safe loading berths and/or safe loading anchorages each port, as ordered, from the Factors of the said Charterers, a full 5. and complete cargo of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . metric tons . . . . . . . . . . . . . . . . . . . . per cent net weight in Charterer’s/Master’s option, as sole cargo only, which the said Charterers bind themselves to ship, always under ship’s deck in cargo holds only. The said cargo to be brought to and taken from alongside, free of expense and risk to the ship, and being so laden shall proceed with all Charter-Party speed as directed to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . or so near thereunto as she may safely get always afloat or safe aground where vessels of similar size are accustomed to lie in safety, and there deliver the same in ONE or TWO safe discharging berths and/or safe discharging anchorages each port as ordered, on being paid freight ‘as per agreement’. 6. The Act of God, perils of the sea, fire on board, in hulk or craft, or on shore, crew, enemies, pirates, and thieves, arrests and restraints of princes, rulers and people, collisions, stranding, and other accidents of navigation excepted, even when occasioned by negligence, default, or error in judgement of the Pilot, Master, mariners or other servants of the Shipowners. Not answerable for any loss or damage arising from explosion, bursting of boilers, breakages of shafts, or any latent defect in the machinery or hull, not resulting from want of due diligence by the Owners of the ship, or any of them, or by the ship’s Husband or Manager.
Appendix 4/page 3
Sugar Trading Manual AGENTS
TAXES/DUES/ DISBURSEMENTS
Appendix 4/page 4
7. At port(s) of loading and discharging Owners to appoint, employ and to be solely responsible for Agents, as selected by Charterers without risk or liability to Charterers, for all ship’s business, owners paying the agency fees. 8. Except for the taxes and/or dues specified below all taxes and/or dues on vessel and/or freight at load/discharge ports to be for Owners’ account and all taxes and/or dues on cargo to be for Shippers’ account at load port(s) and Receivers’ account at discharge port(s). (a) In BRAZIL Brazilian Merchant Marine Renewal Tax, Quota da Provedencia, Contribuicao da Uniao and Port Utilisation Tax to be for Shippers’ account. All other customary taxes and/or dues on the vessel to be for Owners’ account. (b) In GERMANY Quay, Weight and Tonnage Dues to be for Shippers’ account. (c) In MOROCCO Peage Dues to be for Receivers’ account. (d) In SPAIN Tonnage Tax to be for Owners’account. (e) In PORTUGAL Gold Dues (Commercial Maritime Tax) to be for Receivers’ account. (f) In YEMEN Compulsory shore cranage to be for Receivers’ account. (g) In SRI LANKA Sri Lankan Tonnage Dues to be for Owners’ account. (h) In FINLAND Finnish Fairway Dues to be for Owners’ account. (i) In GHANA Ghana Shippers’ Council Service charge to be for Owners’ account. At all ports of loading and discharging all customary port charges including pilotage
Sugar Charter-Party 1999
FREIGHT PAYMENT
and harbour dues on the vessel to be for Owners’ account. Owners to put load and discharge port Agents in funds prior to vessel’s arrival. In the event that Owners fail to put Agents in funds prior to vessel’s arrival and vessel’s berthing/commencement of loading/discharging/sailing is delayed, then Owners to be fully responsible for all/any delays/costs/consequences that may arise either directly or indirectly as a result. 9. Freight payable per metric ton net Bill of Lading weight being in full of all taxes and/or dues stipulated to be for Owners’ account as per Clause 8, Port charges, Pilotages, and Harbour dues on the vessel. The freight is deemed earned upon the safe arrival of the vessel and right and true delivery of the cargo at destination. The freight to be paid in United States Currency to Owners’ Bank .................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owners to advise their New York corresponding Bank, otherwise Charterers not to be responsible for late receipt of freight by Owners . . . . ..................................... . . . . . . . . . . . as follows: 90% (Ninety per cent) of the estimated freight less commissions, estimated loading despatch and extra insurance, if any, to be paid within seven days of sailing from final loading port, provided that signed clean bills of lading are released immediately to Shippers on completion of loading, stating ‘Freight payable as per Charter-Party’. The balance of freight, from which load and discharge despatches are to be deducted (allowing for any estimated loading despatch already deducted) or to which load and discharge demurrages are to be added, as applicable, to be paid on right and true delivery of the cargo and surrender and agreement of timesheets and statements of facts and signed notice of readiness, with Owners’ calculations of any demurrage or despatch incurred at loading and discharging ports. Appendix 4/page 5
Sugar Trading Manual
LIEN
CESSOR
NOTICES
Appendix 4/page 6
Any advance on freight made to Owners in order to obtain ‘Freight Prepaid’ Bills of Lading is not recoverable from the shipowners if the vessel and/or cargo is lost by reason or as a consequence of any of the excepted perils as listed in Article IV, Rule 2 of the Hague Visby Rules. 10. It is also agreed that the Owners of the said vessel shall reserve to themselves the right of lien upon the cargo laden on board for the recovery and payment of all freight, deadfreight and demurrage (if any). 11. Charterers liability to cease when cargo is shipped and Bills of Lading signed, except as regards payment of freight, deadfreight and demurrage (if any). 12. Notice on fixing and 20, 14, 10 and 7 days provisional notice, 72, 48 and 24 hours definite notice of ETA at loading range or first loading port is to be sent by Master by cable/telex to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owners or Master to keep Charterers fully informed of any change in ship’s position prior to loading. Owners to be responsible for all consequences and damages of whatsoever nature and howsoever arising in the event of Owner’s or Master’s failure to keep Charterers fully informed of any change in ship’s position prior to loading. Owners to advise Charterers whether they intend to bunker prior arrival at loadport and/or their bunkering plans prior to sailing from last load port. Charterers to nominate first (or sole) loading port on receipt of the 72 hours definite notice to Owners or their Agents. Nomination of additional loading port (if any) to be declared 24 hours prior to sailing from previous port, and any nomination given earlier not to be regarded as a final declaration. Master to send a cable/telex to Charterers (cable/telex address . . . . . . . . . . . . . . . . . . ) on departure from last loading port, giving the gross and net quantities, and number of
Sugar Charter-Party 1999
LAYDAYS/ CANCELLING
13.
STEVEDORES F.I.O.S.T.
14.
TALLYMEN
15.
MATE’S RECEIPTS AND BILLS OF LADING
16.
bags stated on Bills of Lading, also sailing date, and ETA at discharging range, or first discharging port. On sailing from final load port Master to cable/telex Charterers every 48 hours vessel’s ETA basis intended discharge area or port. Should the vessel be delayed on passage for any reason longer than 24 hours Master to immediately cable/telex Charterers reason for delay with revised ETA and Owners responsible for all consequences and damages of whatsoever nature and howsoever arising in the event of Owners or Master failing to do so. Laydays for loading not to count before the ................................... . . . and if the ship is not ready to load by the . . . . . . . . . . . . . . . . Charterers have the option to cancel this Charter-Party, declarable latest upon vessel’s arrival at loading port. Stevedores for loading, stowing, trimming and discharging to be employed by Charterers or Shippers/Receivers at their expense and under Master’s control. Stevedores shall be considered as Owners servants, and the Charterers/Shippers/Receivers are not to be responsible for any negligence of whatsoever nature, default or error in judgement of the stevedores employed. Shore tallymen to be employed by the Vessel at the expense of the Vessel. Quantity stated on Bills of Lading to be conclusive evidence against the ship as to the number of bags of sugar shipped, errors and obvious fraud excepted. Ship to be responsible for any number of bags short delivered of signed Bill of Lading quantity. Clean Mate’s Receipts to be signed for each parcel of sugar when on board, and Master to sign Bills of Lading in accordance therewith as presented by Charterers or Shippers. Master to reject any cargo that would involve the clausing of Mate’s Receipts and/or Bills of Lading. If Bills of Lading are issued showing a destination at any time Appendix 4/page 7
Sugar Trading Manual
PREPARATION FOR LOADING AND DISCHARGING
Appendix 4/page 8
prior to official declaration in accordance with Clause 20, such destination not to constitute a declaration of discharging port(s). If this situation occurs, Owners or their Agents will authorise Charterers or nominated Agents without reservation or delay, the amendment, addition and/or deletion with regard to destination shown on Bills of Lading, or, to the signing of new sets of Bills of Lading, Charterers or their Agents delivering up old sets of Bills of Lading in exchange. Bills of Lading to be released and forwarded to Shippers or their Agents for each parcel immediately on completion of loading such parcel. In the case of a single Bill of Lading covering the entire cargo such Bill of Lading to be released immediately on completion of loading. 17. Ship’s holds to be odourless and free from insects, properly swept, cleaned and dried to the satisfaction of Shippers’ and/or Charterer’s Agents before loading. Ship’s holds to be washed down only if cargo injurious to sugar carried previously, and if done, holds to be completely dry before tendering notice of readiness. Charterers have the right to arrange a condition survey and/or hose test prior to commencement of loading which to be at Charterer’s expense for which purposes a Lloyds Agent or Salvage Association Surveyor will be used where possible, failing which a mutually agreed Surveyor shall be used. (a) BAGGED CARGO. Ship to provide and lay sufficient dunnage and mats or Kraft paper, and to be so dunnaged so as to effectively protect and prevent the bags coming into contact with the edges of beams and stringer-plates. If cargo is stowed in refrigerator hatches, alleyways, bunker hatches, deep tanks or other awkward places, Owners shall pay the extra labour costs of loading and/or discharging from such places. The loading and discharging rate shall be half the Charter-
Sugar Charter-Party 1999
GENERAL
Party loading and discharging rate for cargo carried in such places. No paint or other injurious substance to be used by the ship for marking the bags, the ship to be responsible for all loss or damage caused thereby. No bags to be cut for stowage purposes. Ship to be responsible for all loss sustained in the event of bags being cut. (b) BULK CARGO. No cargo to be loaded in deep tanks or other awkward places. All cargo battens, tween-deck hatch boards, dunnage and ship’s gear and stores, etc., to be removed prior to loading and stowed in compartments not containing sugar. Spare propeller if carried in hold, to be properly boxed in. The removal and replacement of beams, hatch covers, tents and tanktop lids, as and when required by Charterers, to be carried out by ship’s crew, at ship’s expense at both ends. Owners consider the vessel suitable for grab discharge. Tanktops, tunnel shaft and exposed pipe lines to be effectively protected by Owners. Bleeding holes in the coamings to be securely covered, and bilge limbers to be sealed. Damage by grabs (if any) to be settled directly between Owners and Stevedores, Charterers incurring no responsibility therefor. Vessel’s holds not to be ventilated during the voyage. All ventilators to be sealed and any access of fresh air to the cargo to be strictly prevented. At discharging port(s) the collection of sweepings from the holds, bilges and coamings to be done by the Stevedores at Receiver’s expense, and time used to count as laytime. Vessel not to take any fresh or ballast water on board at discharging port(s) until the vessel has completed discharge. 18. Vessel to be in possession of a valid Appendix 4/page 9
Sugar Trading Manual certificate of efficiency for winches and derricks/cranes for the duration of this Charter. Vessel to supply at both ends, at all times, free of charge to Charterers, winches and derricks/cranes, power, and gear in good working order at all hatches including ropes as required for loading and discharging sugar, also full lights for night work on deck and in the holds, if required. In the event of a breakdown of a winch and derrick/crane or winches and derricks/cranes by reason of disablement or insufficient power and/or failure of lights, the laytime to be extended pro-rata for the period of such inefficiency in relation to the number of working gangs available. If on demurrage, time lost pro-rata to be deducted from same. Owners are to pay in addition the cost of labour affected by the breakdown, either stood off or additionally engaged including the hire of shore gear, or as otherwise regulated by the custom of the port. The Shippers and/or Consignees will be permitted to load and discharge outside ordinary working periods and during excepted periods, the Owners providing free of charge all vessel’s facilities, including services of Officers and Crew. Understood rates of loading and discharging in the Charter-Party are based on a minimum of four hatches being available at commencement of loading and discharging; if less than four hatches are available, loading and/or discharging rates to be reduced pro rata. Vessel having less than four hatches, but with any hatch exceeding fifteen metres length (or less at Charterers’ discretion) and able to work two gangs simultaneously with ship’s gear, shall have such hatch counted as two hatches. All opening and closing of hatches and tweendeck hatches, including the handling and shifting of beams, at loading and discharging ports is to be done or paid for by Appendix 4/page 10
Sugar Charter-Party 1999
LOADING LAYTIME
the vessel, and time used not to count as laytime. 19. At each loading port, even if loading commences earlier, laytime for loading to begin at 1400 hours if written/cabled/telexed notice of readiness to load is tendered to Agents before noon and at 0800 hours next working day if written/cabled/telexed notice of readiness is tendered to Agents after noon. Notice of readiness to be tendered to Agents in ordinary office hours, Saturdays afternoon, Sundays (or local equivalents) and holidays excepted, whether in berth or not. Laydays at the average rate of . . . . . . . . . . . . . . . . . . . . . . . . . .metric tons calculated on gross weight provided vessel can receive at this rate, per weather working day of 24 consecutive hours, time from noon Saturdays to 0800 hours Mondays (or local equivalents) and from 1700 hours day preceding a holiday until 0800 hours next working day excepted, even if used, shall be allowed to the said Charterers, for loading and waiting for orders. Time employed in shifting anchorages and/or loading places within the same port or its jurisdiction not to count as laytime, and shifting expenses to be for Owner’s account. At loading port(s) in the event of congestion Master has the right to tender notice of readiness at the customary waiting place in ordinary office hours by cable/telex to Agents whether in berth or not, whether in port or not, whether in free pratique or not, whether customs cleared or not. Time proceeding from customary waiting place to loading berth/anchorage not to count as laytime. If the loadport surveyor is unable to attend the vessel at the customary waiting place and after vessel’s arrival at loading berth/anchorage the vessel fails her survey, laytime/demurrage shall cease from such failure until the vessel’s holds are passed accordingly. Appendix 4/page 11
Sugar Trading Manual DISCHARGING NOTICES
DEVIATION
DISCHARGING LAYTIME
Appendix 4/page 12
20. Master to cable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 4, 2 days and 24 hours off discharging port or range, giving his ETA. Charterers to declare first (or sole) discharging port to Owners or their Agents upon receipt of Master’s 4 days notice. Each additional discharging port (if any) to be declared to Owners or their Agents latest 24 hours prior to sailing from previous port, and any nominations given earlier not to be regarded as a final declaration. Owners to be responsible for all costs, consequences and damages of whatsoever nature and howsoever arising in the event of Owners or Master’s failure to keep Charterers fully informed of any change in ship’s position prior to arrival at discharging port(s). 21. The ship has liberty to call at any port or ports on the route for fuel or other supplies, and to sail without pilots also to tow and assist vessels in distress for Owner’s benefit, or to be assisted in all situations and to deviate for the purpose of saving life or property. 22. At each discharging port, even if discharging commences earlier, laytime for discharge to begin at 1400 hours if written/ cabled/telexed notice of readiness to discharge is tendered to Agents before noon and at 0800 hours next working day if written/cabled/telexed notice of readiness is tendered to Agents after noon. Master has the right to tender notice of readiness from the customary waiting place in ordinary office hours. Notice of readiness to be tendered to Agents in ordinary office hours Saturdays afternoon, Sundays (or local equivalents) and holidays excepted whether in berth or not. Ship to discharge at the average rate of ( . . . . . . . . . . . . . . . . ) metric tons calculated on gross weight provided vessel can deliver at this rate, per weather working day of 24 consecutive hours, time from Saturdays noon to 0800 hours Mondays (or local equiv-
Sugar Charter-Party 1999
DEMURRAGE DESPATCH
WAITING
alents) and from 1700 hours day preceding a holiday until 0800 hours next working day excepted, even if used. Time employed in shifting anchorages or discharging places within the same port or its jurisdiction not to count as laytime, and shifting expenses to be for Owners’ account. At discharging port(s) in the event of congestion Master has the right to tender his notice of readiness by cable/telex in ordinary office hours to Agents whether in berth or not, whether in port or not, whether in free pratique or not, whether customs cleared or not. Time proceeding from customary waiting place to discharge berth/anchorage not to count as laytime. 23. If longer detained in loading and/or discharging ports, demurrage to be paid at the rate of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . per day, or in proportion for any part of a day. Ship to . . . . . . . . . . . . . . . . . . pay per day, or in proportion, despatch money for all working time saved at both ends. Laytime to be non-reversible between loading and discharging ports, but may be reversible at Charterer’s option between the ports of loading or the ports of discharging. Demurrage or despatch to be settled directly between Owners and Charterers in accordance with the terms, conditions and exceptions of this Charter-Party. 24. In the event that Charterers require the vessel to wait at any time prior to arrival at destination, Owners agree to instruct the Master to anchor at any safe place on passage in international waters or in Charterer’s option at waiting place at discharge port. In respect of such Charterers are to pay Owners USD . . . . . . . . . . . . . . . . per day or pro rata inclusive of bunkers but less commission. However, if the vessel waits at a place where the vessel is able to tender her notice of readiness then Charterers may elect to commence laytime as per CharterParty. Appendix 4/page 13
Sugar Trading Manual OVERTIME
EXTRA INSURANCE
SEAWORTHY TRIM
STRIKES AND FORCE MAJEURE
GENERAL AVERAGE TIME BAR
ARBITRATION Appendix 4/page 14
25. Overtime to be for account of the party ordering it. Officers and Crew overtime always to be for account of the vessel. If ordered by Port Authorities at loading/discharging ports to be for Shippers’/Receivers’ account. 26. Any extra insurance for cargo and/or prepaid freight owing to vessel’s age and/or class and/or flag and/or Ownership to be for Owner’s account, and same to be deducted without documentation from freight. 27. Should more than one load or one discharge port be used vessel to be left in seaworthy trim to Master’s satisfaction for voyage between ports of loading or ports of discharging. 28. In the event that whilst at or off the loading place or discharging place the loading and/or discharging of the vessel is prevented or delayed by any of the following occurrences: strikes, riots, civil commotions, lockouts of men, accidents and/or breakdowns on railways, stoppages on railway and/or river and/or canal by ice or frost, mechanical breakdowns at mechanical loading plants, government interferences, vessel being inoperative or rendered inoperative due to the terms and conditions of employment of the Officers and Crew, time so lost shall not count as laytime or time on demurrage or detention. 29. General Average, if any, shall be settled in London, as per York–Antwerp Rules 1994 and subsequent amendments. 30. Either party shall be discharged and released from all liability in respect of any claim or claims which either party may have under this Charter-Party and such claim or claims shall be totally extinguished, unless such claim or claims have been notified in detail to either party in writing within 12 (twelve) months from completion of discharge of the appropriate cargo under this Charter-Party. 31. All disputes from time to time arising out of,
Sugar Charter-Party 1999
ARAB BLACK LIST
SUB-LET
SATELLITE TRACKING
or in connection with, this Charter-Party shall, unless the parties agree forthwith on a single arbitrator, be referred to the final arbitrament of two arbitrators, one to be appointed by each of the parties, with power to such arbitrators to appoint an umpire. The arbitrators shall be commercial men with knowledge of shipping and freight matters or members of the London Maritime Arbitrators Association. The arbitration to take place in London. If a party fails to appoint an arbitrator within 14 days of being called to do so, the other party may, in order to complete the arbitration tribunal, apply to the President of the LMAA for the appointment of an arbitrator on behalf of that party. The award of the sole arbitrator, two arbitrators or the umpire (as the case may be) shall be final and binding on both parties. No award shall be questioned or invalidated on the grounds that any of the arbitrators is not qualified as above, unless objection to his acting be taken during appointment. By mutual agreement the parties also have the option to adopt London Maritime Arbitrators Association Small Claims Procedure. This Charter-Party is governed by and construed in accordance with English Law. 32. Owners guarantee that the vessel fixed under this Charter is not wholly or partially owned by Israeli interests, and will not call at any Israeli ports from date of fixture until completion of discharge of this cargo. Owners further guarantee that this vessel is not on the Arab Black List, and undertake to provide a certificate from Arab Authorities, if so required, and allow Bills of Lading to be so attested, if requested. 33. Charterers have the option of sub-letting this Charter-Party, they remaining responsible to Owners for payment of freight and due fulfilment of terms of this Charter-Party. 34. If required by Charterers/Shippers/ Receivers or the cargo underwriters, a Appendix 4/page 15
Sugar Trading Manual
CERTIFICATES
35.
BREAKING UP
36.
PROTECTIVES
37.
SECRECY
38.
OWNERS
Appendix 4/page 16
satellite tracking device may be placed on the vessel at the port of loading, carried free of charge and removed prior to completion of discharge. If required by Charterers, Owners undertake to issue or otherwise supply any letters or certificates in connection with vessel’s classification, registration, age, flag, gear, details of vessel’s entry into P and I Club or any other certificates required by Charterers. Owners guarantee that this vessel has not already been sold for breaking up nor will be sold for breaking up during the currency of this Charter-Party. War Risks Clauses 1 and 2, Both-to-Blame Collision Clause, New Jason Clause and P & I Bunkering Clause are deemed to be incorporated in this Charter-Party. Under no circumstances are Owners and Brokers concerned in the fixture of this vessel to divulge any details of this fixture whatsoever to anyone outside their own organisation. CHARTERERS
5 Sugar No. 14 Rules
Appendix 5/page 1
Sugar Trading Manual
Appendix 5/page 2
Sugar No. 14 Rules
Appendix 5/page 3
Sugar Trading Manual
Appendix 5/page 4
Sugar No. 14 Rules
Appendix 5/page 5
Sugar Trading Manual
Appendix 5/page 6
Sugar No. 14 Rules
Appendix 5/page 7
Sugar Trading Manual
Appendix 5/page 8
Sugar No. 14 Rules
Appendix 5/page 9
Sugar Trading Manual
Appendix 5/page 10
Sugar No. 14 Rules
Appendix 5/page 11
Sugar Trading Manual
Appendix 5/page 12
Sugar No. 14 Rules
Appendix 5/page 13
Sugar Trading Manual
Appendix 5/page 14
Sugar No. 14 Rules
Appendix 5/page 15
Sugar Trading Manual
Appendix 5/page 16
6 Organic sugar – Demand potential and supply availability
Organic food trade has rapidly become an important segment of the overall food market and growth is set to continue. Among the factors underpinning demand for organically grown products are: concerns about the environment and side effects of the intensive agricultural production systems, health and food safety concerns (publicised problems such as pesticide residues in food, E coli, bovine spongiform encephalopathy, etc.), and fundamental ethical objections to the application of new technologies (such as GMO biotechnology) to food production. The share of organic foods as a segment of the grocery market is increasing, although currently it accounts for only 2–4% of total spending on food in developed countries. There, according to the ITC UNCTAD/WTO, the share of organic food is expected to reach 5–10% of total food sales by the year 2005, indicating a large longterm potential.1 Sugar, for the time being, is only a sideline commodity in the fastgrowing world market of organic products. However, taking into account a rapid expansion of the latter on the one hand, and an overall importance of sugar (particularly in the form of sugar-containing products) in the human diet on the other, one may suggest that its niche in the market of organic products will experience a sound growth in the future.
Organic agriculture – basic concepts The concept of organic farming is based on a holistic viewpoint. According to the Guidelines for the Production, Processing, Labelling and Marketing of Organically Produced Food of the Codex Alimentarius Commission of the Joint FAO/WHO Food Standards Programme,2 ‘Organic agriculture is a holistic production management system which promotes and enhances agroecosystem health, including biodiversity, biological cycles, and soil biological activity. It emphasizes the use of management practices in preference to the use of off-farm inputs, taking into account that regional conditions require locally adapted Appendix 6/page 1
Sugar Trading Manual systems. This is accomplished by using, where possible, cultural, biological and mechanical methods, as opposed to synthetic materials, to fulfil any specific functions within the system.’ Organic agriculture does not apply agro-synthetic pesticides and fertilisers. Organic production requires the complete conversion of a farm in accordance with an organic management plan. This includes a balanced, multi-annual crop rotation. Substances ‘foreign’ to the farm should be applied only where essential and strictly according to the restrictive ‘positive list’ as provided for by national regulations on organic agriculture. Currently, all material produced from genetically engineered/modified organism (GEO/GMO) are considered as not compatible with the principles of organic production and therefore are not accepted as organic. The time between the start of organic management and certification of crop as organic is known as the conversion period. At least a twoyear conversion period in the case of annual crops (e.g. sugar beet) or a three-year period in the case of perennial crops (e.g. sugar cane) is required before a product can be labelled as organic. Practices and standards for organic agriculture cover all agricultural crops and currently do not establish any specific requirements for sugar beet or sugar cane. The only exception here is the elimination of the practice of cane burning prior to harvest. Processing and handling of organic raw material should be separated by time or place from the processing of non-organic products. Therefore cane crushing or beet slicing can be carried out not only by industrial units specialised in organic sugar production but also by existing mills/factories before conventional crops start to be processed or after crushing/slicing of conventional crops has been completed. There are no special technological requirements for organic sugar manufacturing apart from restrictions imposed by the positive list of processing aids and other non-agricultural ingredients allowed in organic production. In sugar production processors are allowed to use sodium carbohydrate, sodium hydroxides and sulphuric acid. Lime can be used to clarify cane/beet juice. Other clarifying agents such as flocculants containing polymers are not allowed. Two international standards: the IFOAM* Basic Standards and Codex Alimentarius Commission (a common programme of the two UN organizations – FAO and WHO) Guidelines for Organic Products constitute instruction manuals for designing national regulations rather than binding standards applicable worldwide. As a result, an export* IFOAM – International Federation of Organic Agriculture Movement. IFOAM was established in 1972. It represents the worldwide movement of organic agriculture with over 740 member organisations in more than 100 countries and provides a platform for global exchange and co-operation. Appendix 6/page 2
Organic sugar – Demand potential and supply availability orientated producer has to make sure that its organic product designated for export has been grown, processed, packed and labelled in full conformity with the particular regulations in the country or countries of destination as well as the domestic requirements. Certification procedure should make it possible to track and control the flow of products from primary production at farm level through each stage of manufacturing right up to the final consumer product. The cost of certification can be rather high. The industry reports a range between US$5000 and US$50 000 depending on the number of growers seeking certification, production volumes and the markets to which the certified sugar would be exported.3
Demand potential The world use of organic products is dominated by Western Europe, the United States and Japan, although there are fast-growing markets in a number of developing countries as well (e.g. Brazil). In high-income countries the organic sector is moving from ‘alternative’ culture to the mainstream supermarket option. The organic market started as the direct deliveries of organic food by farmers to consumers. It covered vegetables and fruits, meat, poultry and dairy products. Obviously, sugar as an industrial produce could not be offered directly by growers. On the health food market sugar also faces a competition from honey, a natural sweetener with a rather developed organic production worldwide. Another factor explaining rather slow progress in demand for organic sugar is the ‘unhealthy’ image of sugar in general, which makes it less appealing to health-conscious consumers. Nevertheless, demand for organic sugar has shown a remarkable growth in recent years. Since the second half of the 1990s the mainstream supermarket sector has committed itself to supporting organic trade, which now includes a large variety of processed foods and beverages on top of the traditional choice of organic farm products. Sugar, as an important and, sometimes, irreplaceable ingredient in production of ice creams, jams, breads and confectionery, is starting to enjoy a fast growth in demand. It remains to be seen, however, whether demand for organic sugar will grow on a par with the organic market in general. One can assume that ‘traditional’ organic products, i.e. direct farm produce, will be mainly responsible for the projected growth of organic products to the level of 5–10% of the total food sales in the advanced economies by 2005. The level of market penetration by processed food might be much lower but still impressive. It has been suggested that by 2005–06 world demand for organic sugar can be projected at 190 000 tonnes, raw value (based on the assumption that the share of processed organic food reaches 1% of the total processed food sales in develAppendix 6/page 3
Sugar Trading Manual oped countries).4,5 Clearly, even a triple increase to a 190 000 tonne level will leave the organic sugar market responsible for only a minute section of the world sugar market, representing less than 0.2% of world consumption.
Supply availability Currently there are neither national nor international statistics on production, consumption and trade in organic products. The number of countries with reported production of organic sugar is rather limited. Some producers offer organic sugar cane, sugar cane molasses and syrup but not sugar. Below is some information on organic sugar production presented on a country-by-country basis. In Africa production of organic sugar cane, sugar cane molasses and syrup has been recorded in Madagascar and Malawi, while Mauritius started commercial organic sugar production from cane harvested over 175 hectares in 1995. That year 650 tonnes were exported. Since then the area has been reduced and production halved due to the prohibitively high cost of production. Sugar has been certified by a British certifier and has been exported mainly to the EU. In Asia only the Philippines has reported production of organic sugar. Sugar produced on the island of Negros is sold under fair trade schemes. Annual production and exports reach 400 tonnes. Sugar is exported to Japan and Western Europe. Organic sugar cane is also grown in India. In May 2000 there was a report on plans to start organic sugar production in the state of Karnataka on 50% of the state’s area under cane. Also some major cane growing states like Maharashtra and Tamil Nadu have already switched to the production of organic sugar cane, but production remains unreported. In South America sugar from organically grown cane is produced in Argentina, Bolivia, Brazil, Colombia and Paraguay. In Argentina production of certified organic sugar started in the province of Misiones in 1998 with 70% of produced sugar exported to the US. Organic sugar producers are supported by PRONAO, the National Programme of Organic Agriculture developed by the Ministry of Agriculture. Production of organic sugar is also monitored in Colombia by Agroindustrial Hunzahua Ltda in Cundinamarca and Ingenio Providencia S.A. The latter started organic production in 1999 when the first 383 tonnes of sugar were made. In 2000 the output increased to 434 tonnes. The company plans to convert 30% of the area owned by the mill (approximatly 1500 hectares) to organic production in order to increase the organic sugar output to 15 000 tonnes a year. In Paraguay since 1994 Otisa mill in Asuncion has been dedicated totally to organic production, exporting organic sugar predominantly to the USA. Currently the mill’s annual capacity reaches 8000 tonnes of organic sugar and Appendix 6/page 4
Organic sugar – Demand potential and supply availability 900 000 litres of organic alcohol. At the end of the 1990s organic sugar production in Paraguay was also started in Azucarera Iturbe S.A. Brazil, the largest world sugar producer and exporter, recently has captured the leading position in the organic sugar market as well. Organic sugar is produced under the brand name Native by Organizacao Balbo’s Sao Francisco and Santo Antonio mills based in Sao Paolo state. Native sugar was launched on the international market in 1997, when the first 1600 tonnes of organic sugar came off the conveyor belts. The next year, production rose to 4000 tonnes and than rocketed to 23 000 tonnes in 1999 (12 000 tonnes were designated for export while the remaining 11 000 tonnes entered the internal market). The company targeted to raise production to 40 000 tonnes in 2000/01 and export 20 000 to 24 000 tonnes to 21 countries including the EU, the US, Canada, Mexico, Japan, New Zealand and Tunisia. The company’s goal is to increase production to 60 000 tonnes by 2007, by that time all the sugar processed by the company’s two mills will be from organic cane. There are other smaller organic cane sugar processors including Produtos Naturias Planeta Verde Ltda in Lucelia (Sao Paulo), one of the oldest organic sugar producers and exporters in the world. In Central America organic sugar is manufactured in Costa Rica and the Dominican Republic. In Costa Rica annual production of organic sugar reaches about 1200 tonnes (Assukkar S.A. sugar mill) with sugar exported mainly to the US and the Netherlands. In the Dominican Republic there is one processor of organic sugar cane – Procesadora de Cana Organica Cruz Verde with an estimated production of 400 tonnes a year. There are reports indicating that Cuba also has welldeveloped plans to convert one mill and estate to exclusively organic sugar production. In the United States the leading producer and distributor of organic sugar is Florida Crystals, Florida. Organic cane is cultivated on about 2000 hectares in rotation with rice and pisciculture. According to the company’s officials, the organic cane sugar output varies from 1000 to 1500 short tons a year. There is no organic beet sugar production in the US but Wholesale Foods, a subsidiary of Imperial Sugar Company, reported that they were working closely with their agricultural and processing teams and organic certifiers to start a sugar beet programme aimed at production of organic sugar and beet pulp (an important by-product for organic livestock feed). In Europe sugar production from organically grown beet is still embryonic with small production started by Danisco in Denmark and Suiker Unie in the Netherlands in 1999/2000 (the total output being 400 and 1000 tonnes, respectively). In December 2000 British Sugar Plc, the only beet sugar processor in the UK, announced a launch of a liquid organic sugar. While the company is currently importing all supplies for Appendix 6/page 5
Sugar Trading Manual the new product, it plans to supplement supply with organic sugar produced from domestically grown beet from 2001. In the forthcoming harvest British Sugar targets to receive 10 000 tonnes of organically grown beet from around 300 hectares. According to the company, British growers are showing interest in growing organic sugar beet. However, no major increases in beet supply can be expected before 2003 due to the two-year conversion period. British Sugar also envisages added value opportunities for organic beet growing from its sister companies dealing with animal feeds within Associated British Foods Plc. Other companies within the group are involved in cereal and pork production, thereby forming the basis of an entire organic rotation. From the producers’ perspective obstacles to conversion to organic production include large managerial costs, risks of shifting to a new way of farming, limited awareness of the organic farming system and lack of marketing and technical infrastructure. In the case of sugar, there is an added difficulty – the introduction of crop rotation system into agroindustrial sugar crop production, which in many cases still follows a monoculture system. Producers cannot command certified organic price premium during the two to three year conversion period. The decision for any producer to undertake organic sugar production involves a serious cost-benefit calculation. On the benefit side, there are reduced input costs due to avoidance of synthetic yield enhancing inputs* and a considerable organic premium. In Europe growers may expect prices up to 50–55% higher than those for conventional beet. According to the industry, sugar produced from organically grown cane is estimated to command about 1.5–2.5 times the ex-factory price of its non-organic counterpart. It has to be noted that the organic premiums will apply to all farm and factory outputs rather than beet, cane or sugar only. In the Netherlands, for example, Suiker Unie supplies organic molasses to Nedalco, where it is used in production of organic drinks and vinegar. The pressed pulp is sold to organic cattle farms. At the first stage of conversion to organic agriculture non-application of agrochemicals severely decreases sugar and overall agricultural yields. According to a recent UK study, output of sugar beet grown in an organic system could be about 60% lower than that from conventional fields.6 Suiker Unie, the first Dutch organic sugar producer, reports that since the company introduced the pre-production scheme (i.e. processing organic beet in an existing factory before the conventional crops arrive) overall lower beet yields have been observed, plus
* According to Landell Mills, in the case of high yield beet and cane sugar producers, agrochemicals are responsible for 6 to 16% of sugar crops’ production cost. Appendix 6/page 6
Organic sugar – Demand potential and supply availability organic beet now has to be harvested earlier before maximum sugar content is attained. In the case of cane sugar production, Mauritius Sugar Syndicate notes that organic cane yields are markedly below those of conventionally grown cane with an average 20% drop in yields. Similar to beet sugar processing there are further reductions in sugar extraction during processing because of sugar loss at the first strike. Their experience shows that organic sugar yields are about half that obtained from conventional cane. The organic farming movement argues that in the long run the adoption of proper organic methods (good crop rotation, use of better plant varieties, developments in agricultural techniques and technology, etc.) might greatly compensate for the initial losses in yields. Higher production volumes permitting a longer use of a processing unit for organic beet or cane processing should eliminate sugar losses due to lower extraction rates at the first strike and permit harvesting at the optimum time. According to Brazilian producers of organic sugar, the productivity of Sao Francisco’s plantation already exceeds that in the traditional growing regions of the Sao Paulo state.7 Despite high costs and risks involved into conversion to organic production, world output of organic sugar shows a remarkable expansion from couple of thousand tonnes in the mid-1990s to a projected 50 000 tonnes in 2000.8 In the short to medium terms the main problem for the organic sugar market will be insufficient supply rather than lack of demand. Hence, considerable premiums for organic sugar can be anticipated. Organic sugar premiums at about two times the ex-factory price of its nonorganic counterpart open up opportunities for producers and exporters. Although the overall picture looks highly positive, in evaluating business opportunities one should take into consideration a number of potential risk factors, including a danger of premium erosion as supplies develop.
References 1 Organic Food and Beverages: World Supply and Major European Markets. International Trade Centre, UNCTAD/WTO, Geneva, 1999. 2 Guidelines for the Production, Processing, Labelling and Marketing of Organically Produced Food. Codex Alimentarius Commission of the Joint FAO/WHO Food Standards Programme, CAC/GL 32-1999. 3 The CFC/ISO symposium Challenges and Opportunities for Organic Sugar, Guatemala, August 2000. 4 Organic Sugar: Practices and Standards for Producing Organic Sugar, Demand Potential. MECAS(00)10. ISO, London, April 2000. 5 Sergei Gudoshnikov. Organic Sugar – a Growth Opportunity for Producers? International Sugar Journal, October 2000. Appendix 6/page 7
Sugar Trading Manual 6 Lawrence Woodward. ‘Can Organic Farming Feed the World?’ IFOAM Ecology and Farming, September 1998. 7 Reuters, 13 September 2000. 8 Peter Buzzanell. Organic Sugar: Short Fad or Long Term Growth Opportunity? The IX ISO Seminar, Hot Issues for Sugar, London, November 2000.
Appendix 6/page 8
7 Glossary of terms
AAs Against Actuals. An operation where the physical sugar is exchanged for futures plus or minus the premium or discount in order to set the final contract price. (Known as EFPs or Exchange For Physicals in other markets.) Actuals The physical sugar itself, also known as physicals. Arbitrage The simultaneous buying of one futures contract and selling of another in order to profit from a disparity in price relationships. In sugar, the two most favoured arbitrages are New York No. 11 Raw Sugar against London No. 5 White sugar, and New York No. 11 vs the Tokyo Grain Exchange Raw Sugar delivered contract. Arbitration In general terms, this is a method of settling a dispute using an impartial third party. In sugar, there are different procedures for futures and physical contracts. At-the-Money An option in which the underlying commodity is trading at the strike price of the option contract. Backwardation Where the futures market is characterised by prices which are progressively lower in the distant months. Also known as an inverse. Bear One who believes that the market will decline. Bear market A market in which prices are declining. BEOs Buyer’s Executable Orders. Where the buyer gives instructions to his seller to buy futures on his behalf to fix the final contract price plus or minus the premium or discount. Berth The specific place within a port where the vessel is to load or discharge. Bid A contractually binding offer to buy sugar at a certain price within a certain time limit that can be given either in writing or orally. (Sometimes referred to as a ‘firm bid’.) Bill of Lading Document signed by the master of the vessel showing proof of delivery of the goods on board the vessel. It is used as evidence of the contract of carriage and as a means of transferring rights to the goods in transit by the transfer of the document to another party. Bull One who believes the market will rise. Bull market A market in which prices are rising. Appendix 7/page 1
Sugar Trading Manual Buying hedge (or long hedge) The purchase of futures to protect against possible price increases of the commodity needed in the future. CAD Cash Against Documents. Buyer pays for the goods against presentation of shipping documents. CAF Cost And Freight (sometimes CFR). The seller must pay costs and freight necessary to bring the sugar to the named port of destination. The risk of loss or damage to the sugar is transferred to the buyer when the sugar passes the ship’s rail at port of loading. Call option An option contract under which the holder has the right, but not the obligation, to purchase a fixed amount of the underlying commodity at a stated price, within a specified period of time. Carry Negative price differential whereby the price of the nearby shipment position is less than the price of the deferred shipment position. Carryover The surplus stocks of a commodity from a previous season that are used in the current season. CC Current crop. Sugar to have been produced since the start of the current crop year for that particular origin. CFTC Commodity Futures Trading Commission. The independent federal agency established by Congress with overall responsibility to regulate the futures industry in the United States. Charter party The contract between the owner of the vessel and the charterer. CIF Cost Insurance Freight. The seller has the same obligations as under CAF but also has to insure the risk of loss or damage during transport. (From warehouse to warehouse under the rules of the SAL (117A).) CIFDP Cost Insurance Freight with any import duties in country of destination for seller’s account. Seller has obligation to arrange custom clearance in importing country. Clearing House The part of a futures exchange which is a counter party to all traders, it takes the responsibility of acting as a buyer for all the sellers and a seller for all the buyers. Clearing member A member of the Clearing House who must also be a member of the Exchange. An Exchange member does not have to be a Clearing member, but all his trades have to be registered and settled through a Clearer. Commission house A company that executes futures orders for clients in return for a commission. Commodity trading advisor An individual or firm who, for a commission or share of profit, directly or indirectly advises others on buying or selling futures contracts or commodity options. Contango A situation in the market where prices increase with each successive delivery month down the board. Also known as a carry. Appendix 7/page 2
Glossary of terms COP Discharge rate as per Custom Of Port. No demurrage nor despatch to be paid. Co-shipment allowed Seller has the right to fulfil his obligations to the buyer against a CAF sale by shipping the sugar on the same vessels with other sugars destined for different buyer. COT Commitment of Traders Report published every two weeks by the CFTC showing the futures positions in the NY futures market held by different trading categories. Crystals A non-technical term that usually refers to unrefined white sugar produced in Brazil via the crystallisation process directly from the cane juice. This sugar is usually around 100 or 150 ICUMSA sugar and although normally exported in bags it has been exported in bulk in the past. (See VHPs and VVHPs.) Day A period of 24 consecutive hours running from 0001 hours to 2400 hours. Any part of the day shall be counted as pro rata (for laytime calculations). Day order An order in the futures market which expires, if not executed, at the end of the trading day on which it was entered. DC raws Raw sugar in bags destined for Direct human Consumption without further processing. Delivery The settlement of a futures contract to fulfil an obligation to supply or receive the actual commodity on the date agreed upon in the contract. Hence delivery notice, delivery price. Delivered at border Seller has fulfilled his obligations when the sugar has been delivered to the border (frontier) and customs cleared for export. Delivered ex quay The seller fulfils his obligation to the buyer when he delivers the sugar to the buyer on the quay. If duty paid the seller has to pay all import duties and carry out all customs formalities. Delivered ex ship The seller fulfils his obligations to the buyer when he has made available the sugar to the buyer on board the ship. (Sometimes referred to as ex-hold or in vessel’s hold.) Demurrage An agreed amount payable to the owner in respect of delay to the vessel beyond the laytime, for which the owner is not responsible. Despatch An agreed amount payable by the owner if the vessel completes loading or discharging before the laytime has expired. Despatch on all time saved (ATS) Despatch money shall be payable by the owner from the completion of loading or discharging to the expiry of the laytime including periods exempted from the laytime. Discounts Negative price differential between physical sugar and its corresponding futures month. Discretionary account An account in which the customer gives the broker or another party trading authority to buy and sell commodities on his behalf. Equity The total cash value of an account, including the amount of Appendix 7/page 3
Sugar Trading Manual profit or loss that would be incurred if the existing futures positions were liquidated at the current settlement price. Exercise Taking advantage of the right to buy or sell the underlying futures contract at the agreed upon strike price. Ex-pit transaction A legal trade executed outside the exchange trading ring. Used normally to transfer positions from one clearer to another. Ex works Seller has fulfilled his obligation to the buyer once he has made the sugar available at his premises or (ex warehouse) his warehouse. The seller is not obliged to load the sugar onto whatever vehicle is provided by buyer. Fast market When trading is so volatile and takes place so fast that a floor broker cannot be held responsible for failure to fill limit orders. FAQ Fair Average Quality. The quality of the sugar must be similar to other sugars produced in that country during the same crop year. FAS Free Alongside Ship. The seller fulfils his obligation to the buyer when the sugar has been placed alongside the vessel on the quay or in lighters at the port of shipment. Fill or kill order An order to execute an order immediately or cancel the order. Floor broker A member of the Exchange who executes customer orders on the floor. Floor trader A member of the Exchange who trades for his personal account. Also called a Local. FOB Free On Board. The seller fulfils his obligation to the buyer when the sugar has passed over the ship’s rail at the port of shipment. FOBS Free On Board Stowed. The seller fulfils his obligation to the buyer when the sugar has passed the ship’s rail and been correctly stowed in the vessel. Title, however, passes at the ship’s rail. Force majeure Events and happenings that occur which prevent or delay loading or shipping. These events, as stated in the rules of SAL and RSA, are as follows: war, strikes, rebellion, insurrection, political or labour disturbances, civil commotion, fire, stress of weather, act of God or any cause of force majeure (whether or not of like kind to those before mentioned) beyond the seller’s control. Form A Otherwise known as GSTP Form A, showing that the sugar is from a country of origin which is a member of the General System of Trade Preferences. Funds The Funds, often referred to in media reports about the activity of the futures’ market, are in fact institutions which combine individual subscribers’ investments to trade a wide range of markets with a collective power and influence not available to any single one of its subscribers. Funds usually, but not always, work on a technical basis, with the aim of pinpointing price trends, which they will support and follow until the ‘signals’ say otherwise. Appendix 7/page 4
Glossary of terms Futures commission house (FCM) An individual or firm which solicits or accepts orders to buy or sell futures contracts or commodity options. For a commission, FCMs will handle the execution of trades for their customers, from whom they take cash or other assets to finance futures business. FCMs also provide research and information on the market. GSTP General System of Trade Preferences. A certificate (sometimes referred to as a Form A) showing that the country of origin of the sugar is a member of the GSTP group of countries. This is one of the documents that is necessary in order to enter sugar into other GSTP countries at often preferential rates of import duty. Helms Burton Act American legislation that prevents US companies and their overseas subsidiaries from trading Cuban sugar. ICUMSA International Commission for Uniform Methods of Sugar Analysis. A scale of measurement for the colour of sugar. The lower the ICUMSA, the whiter the sugar. Initial margin The amount of money that must be deposited in an account when a futures position is established. Also called Original Margin. In the money The intrinsic value of an option contract, e.g. when the underlying future is higher than the strike price of a call option, or when the underlying future is trading below the strike price of a put option. International scale (of polarisation premiums) For every full degree above 96° to and including 97° add 1.5%, for every degree above 97° to and including 98° add 1.25%, and for every degree above 98° to and including 99° add 1.0%. Fractions of degree are calculated pro rata. Inverse Positive price differential where the price of the nearby shipment position is at a premium to the more deferred position. ISO International Sugar Organization. Laytime The period of time agreed between the parties during which the vessel owner will make and keep the vessel available for loading or discharging without payment additional to the freight. Letter of Credit (LC) A written undertaking by a bank given to the seller, on instructions from the buyer to pay at sight or at determinable future date up to the stated sum of money within a proscribed time limit and against stipulated documents. Limit orders Orders to brokers to buy or sell at a specified price or better. Sometimes called resting orders. Liner out The seller/shipowner delivers the sugar to the port of discharge and discharges onto the quay at no cost to the buyer. No demurrage or despatch to be paid. Maintenance margin The level to which the initial may decrease without the customer being called for additional margin. Margin call A demand for additional funds made by a futures broker to a customer when the cash in the account falls below the Appendix 7/page 5
Sugar Trading Manual maintenance margin level. The Clearing House also issues margin calls to member firms when required. Market if touched (MIT) order An order which becomes a market order when the commodity touches a specified price. Market on close order An order to buy or sell at market during the close. Market on opening order An order to buy or sell at market during the opening. Market orders Orders to a futures broker which must be executed without delay at the best price obtainable. Mill whites Low quality white sugar produced directly at the mill with a colour usually around 300 ICUMSA. (Otherwise known as plantation whites.) Minimum price fluctuation Also called minimum tick. The minimum price increment in a futures market. In New York No. 11 Sugar it is 1 point, which equals $11.20 per contract of 50 tons. Notice of readiness (NOR) The notice to charterer, shipper, receiver, or other person as required by the charter party that the vessel has arrived at the port or berth and is ready to load or discharge. Offer A contractually binding offer to sell sugar at a certain price within a certain time limit that can be given either in writing or orally. (Sometimes referred to as a ‘firm offer’.) Open interest All contracts which have not been liquidated or settled by an offsetting trade. Open order The same as good till cancelled. Option The right to buy (call) or sell (put) the underlying futures contract at a specified price (the strike or exercise price) within a specified period of time. Out of the money An option that has no intrinsic value, e.g. when the underlying future is below the strike price of a call, or above the strike price of a put. Per hatch per day Means that the laytime is to be calculated by dividing the quantity of cargo by the result of multiplying the agreed daily per hatch by the number of the vessel’s hatches. Each pair of parallel twin hatches shall count as one hatch. Nevertheless, a hatch that can be worked simultaneously by two gangs shall be counted as two hatches. Physicals The actual sugar (as opposed to the futures). Plantation whites Low quality or unrefined white sugar produced directly at the mill. Points One point is 1/100 of one cent per pound. To convert the price of sugar from points per pound into dollars per metric tonne multiply them by 0.220462. To convert them into dollars per long ton multiply by 0.224. Polarisation Measurement of sucrose content in sugar. 100° is Appendix 7/page 6
Glossary of terms maximum and means 100% sucrose. Raw sugar is usually traded basis 96° polarisation. Polarisation premiums Scale of payments for rewarding the producer for delivering sugar above 96° polarisation or penalising the producer for delivering sugar between 96° and 93°. Port An area within which vessels load or discharge cargo whether at berths, anchorages, buoys or the like including the usual places where vessels wait for their turn. Port rotation The order in which a vessel will call at different ports to load or unload its cargo. Premiums Positive price differential between physical sugar and its corresponding futures month. Remelting Refers to taking domestically produced raw sugar and refining it into whites either for local consumption or for export. (Usually refers to Thailand.) RSA Refined Sugar Association. SAL Sugar Association of London. SEOs Seller’s Executable Orders where the seller gives instructions to the buyer to sell futures to set the final contract price plus or minus the premium or discount. Spreads Price differentials between different forward shipment positions for either physicals or futures. Stop limit orders Orders to buy or sell at a specified price or better if the contract trades at or through a specified stop price. Stop orders Orders to buy or sell at the market if the contract trades at or through a specified price (the stop price). Strike A concerted industrial action by workmen causing a complete stoppage of their work which directly interferes with the working of the vessel. Refusal to work overtime, go-slow, or working to rule and comparable actions not causing a complete stoppage shall not be considered a strike. Strike price The fixed price in a range of fixed prices in the option market at which the calls or puts are traded, for a premium to the seller/granter. Switch Liquidating a futures position in one delivery month while simultaneously establishing that position in another delivery month. TCSC Thai Cane Sugar Corporation. Tel quel Literally ‘Quality as is’. A method of buying or selling sugar when the seller includes the cost of the polarisation premiums in the price. Therefore, no polarisation premiums are to be paid. Time value The amount of the option premium that exceeds its intrinsic value. Tolling The refining of imported raws sugar for re-export as whites. Trade house A company or corporation that buys, sells and transports physical sugar for their own account and risk. Appendix 7/page 7
Sugar Trading Manual TSTC Thai Sugar Trading Corporation. UK scale Scale of polarisation premiums. Buyer has to pay an extra 1.4% per degree for sugar with a polarisation from 96° to 99°. Part of a degree to be charged pro rata. No extra premium to be paid above 99°. Variation margin The amount of money that must be deposited in a futures account to restore the equity back to the initial margin requirement. VHPs Very High Polarisation Sugar. A non-exact term that usually refers to bulk Brazilian sugar that has a polarisation between 99.0° and 99.5°. In Thailand VHPs can refer to bulk raws with a polarisation above 99.5°. VVHPs Very Very High Polarisation sugar. A non-exact term that usually refers to bulk Brazilian sugar with a polarisation above 99.5°. (They can also be called BKs, which refers to VVHPs with a maximum ICUMSA of 750.) Weather working day (WWD) A working day of 24 consecutive hours except for any time when weather prevents the loading or unloading of the vessel or would have prevented it had work been in progress. Whites premiums Usually refers to the price differential between raw and white sugar as shown by the New York and London futures markets (expressed in dollars). WIBON Whether In Berth Or Not. If no loading or discharging berth is available on her arrival, the vessel, on reaching any usual waiting place at or off the port, shall be entitled to tender notice of readiness from it and laytime shall continue in accordance with the charter party. WIFPON Whether In Free Pratique Or Not. The completion of customs formalities shall not be a condition precedent to tendering notice of readiness, but any time lost by reason of delay in the vessel’s completion of these formalities shall not count as laytime or time on demurrage.
Appendix 7/page 8
