Docstoc

By Books

Document Sample
By Books Powered By Docstoc
					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 experi-
enced in the chartering of ships to carry all dry cargo commodities spe-
cializing 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 Univer-
sity 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 eco-
nomics at the same institution. After a year’s service in Vietnam, he
joined Cargill in 1969. The early years at Cargill were spent on funda-
mental analysis for the grain, livestock and soybean processing divi-
sions. 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, produc-
ers and users in sugar derivative markets.


R.G. Danvers
R.G. Danvers started his career in 1963 by joining Cargo SuperInten-
dents (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 trav-
elled 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 Com-
monwealth 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 Bul-
letin 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 sys-
tems 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 agricul-
tural commodities. Prior to joining LMC, he was a University Econom-

                                                     Contributors/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 profes-
sional 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 eco-
nomics 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 Organ-
ization. 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 Interna-
tional 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 commodi-
ties 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 com-
modity 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 ContiCom-
modity 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 com-
modity 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 Sec-
retary to both Associations in 1985. He is a member of the Commer-
cial 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:
joan@joannobleassociates.com.


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 interna-
tional conferences in the area of sugar and risk management and
finance. Some of her most recent publications on sugar are: ‘Collater-
alized commodity financing with special reference to the use of ware-
house 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 oper-
ation. 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 exper-
tise of its contributors and all the hard work they have put into its pre-
paration. 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 par-
ticular 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 contri-
butions 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 apol-
ogize 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 temp-
tation 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 super-
visor. 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 commu-
nication 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 relation-
ships 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 priva-
tization that spread across the globe, people everywhere slowly
found that they no longer worked for the government but for them-
selves. 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 under-
standing 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 specula-
tors 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 dis-
appeared, 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 con-
sumption. On the producing side, better education increases produc-
tivity; 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 impos-
ing 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 dis-
charged. 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 con-
tinue 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 informa-
tion. 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 know-
ledge have to be gathered from many sources, structured into a read-
able 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     European standard terms, Appendix
accounting, 17/1–33                               3/14
   accrual principle, 17/3                   No. 5 rules, Appendix 2/21–2
   balance sheets, 17/3–4                    No. 11 rules, Appendix 1/16–19,
   contract pricing, 17/7–9                       Appendix 1/20
   controls, 17/3                            Thai standard terms, Appendix
   currencies, 17/13–14                           3/18–19, Appendix 3/25
   demurrage and despatch, 17/11–13        Argentina, 5/15
   forward trading of physicals, 17/1–2    Armenia, 22/4, 22/10, 22/18, 22/24
   futures accounting, 17/2, 17/4–5,       aspartame, 5/30–1, 5/32–3, 5/35, 5/39,
        17/10–11                                  5/46
   internal markets, 14/14–15              Australia
   licences, 17/15–16                        delivery policy, 3/25
   margin payments, 17/4–5, 17/11            ethanol production, 6/18
   matching principle, 17/2–3                futures and options trading, 13/13–14
   narrow margins, 17/1                      production costs, 4/8, 4/9, 4/13
   position sheets, 17/2, 17/5–7             reporting conversions, 9/5
   presentation, 17/3–4                      subsidies, 3/10
   profit and loss accounts, 17/3, 17/17    average pricing, 17/8–9
   prudence principle, 17/3                Azerbaijan, 22/4, 22/10, 22/18, 22/25
   quotas, 17/15, 17/16
   vessel accounting, 17/9–10              back-to-back letters of credit, 18/19–20
accrual principle, 17/3                    bagged cargoes, 3/28, 8/14, 11/2–3
acesulfame-K, 5/31, 5/33, 5/39, 5/45       bakery products, 5/7–8
ACP (African Caribbean and Pacific)         balance sheets, 17/3–4
        countries, 19/9, 19/30             banks, 13/10–11
activated carbon, 12/9                        see also finance; payments
affination, 12/2, 12/5–6                    Banque Indosuez, 18/19
against actuals (AA) trades, 7/3–4, 17/7   Barbados, 1/4
agents, 8/7, Appendix 4/4                  Barbosa, Duarte, 1/1
agricultural alcohol, 6/1                  Basel II, 18/22–4
alcohol production                         basis trading, 7/6–12
   agricultural alcohol, 6/1               beet sugar, 1/6–11, 2/1, 4/4–8
   anhydrous alcohol, 6/2, 6/7, 6/9–10        decline in production, 3/3, 3/4
   beverage alcohol market, 6/2               quality conversions, 9/4
   Brazil, 2/11, 3/11–12                      in the US, 20/1, 20/12–17, 20/23–4
   hydrous alcohol, 6/2                    Belarus, 22/3–4, 22/8–9, 22/17–18,
   synthetic alcohol, 6/1                          22/26–7
   see also ethanol production             beverages market, 5/5–7, 5/10, 5/12–14,
alitame, 5/31, 5/45–6                              5/23–4, 5/32–3, 5/41
Andean Community (CAN), 21/2–4,               alcohol, 6/2
        21/7–9, 21/11, 21/15–17            bid bonds, 16/42–9, 18/21
anhydrous alcohol, 6/2, 6/7, 6/9–10        bills of lading, 8/8, 8/9, 16/3–4, 18/19,
annexed refineries, 12/1                            Appendix 4/7–8
appointing supervisors, 11/1–2             blending high intensity sweeteners,
Arab Black List, Appendix 4/15                     5/39–42
arbitration, 8/11, 10/2–4, 11/4, 11/5–6,   BMF contract, 13/2–3
        14/7                               Bolivia, 21/4
   Brazilian standard terms, Appendix      bone char, 12/9
        3/6, Appendix 3/7–8                bounty system, 1/8, 1/10–11
   charter party terms, Appendix 4/14–15   box plots, 2/28–9


                                                                      Index/page i
Index

Brazil                                            deviations, 8/9
  alcohol programmes, 2/11, 3/11–12,              discharging, 8/7, 8/9, 10/5–6,
        6/2, 6/7                                       Appendix 4/3, Appendix 4/8–9,
  contract terms, 13/2–3, Appendix                     Appendix 4/12–13
        3/1–2, Appendix 3/4–8                     general average, 8/10–11
  CPR finance system, 18/5–6                       hold condition, 8/9
  currency flotation, 3/30                         insurance, 8/10
  ethanol production, 3/30, 6/2, 6/4, 6/7–11      International Safety Management (ISM)
  expansion plans, 3/11–14                             code, 8/13
  and FTAA, 20/29                                 laytime, 8/9, Appendix 4/11, Appendix
  futures and options trading, 13/11,                  4/12–13
        13/12–13                                  loading, 8/7, 8/9, Appendix 3/13,
  history, 1/4                                         Appendix 4/3, Appendix 4/8–9,
  land supply, 3/3                                     Appendix 4/11
  organic sugar market, Appendix 6/5              mate’s receipts, 8/9, Appendix 4/7–8
  Proalcool programme, 6/2, 6/7                   notices and cancelling date, 8/8,
  production, 2/11, 2/19–23, 3/11–14,                  Appendix 4/6–7
        13/11                                     payment terms, 8/8, Appendix 4/5–6
  production costs, 3/12, 4/6–7                   riders, 8/12
  share of world exports, 3/6, 3/10               satellite tracking, 8/11–12, Appendix
British Sugar Bureau, 10/6–7                           4/15–16
Brussels Convention, 1/10, 2/4                    stevedores, 8/8–9, Appendix 4/7
bulk in bagged out (bibo), 8/14                   sub letting, 8/11, Appendix 4/15
bulking agents, 5/36–8                            taxation, Appendix 4/4–5
                                                  taxes, 8/8
CAN (Andean Community), 21/2–4,                   time bars, 8/11, Appendix 4/14
        21/7–9, 21/11, 21/15–17                   vessel condition, 8/9, 8/12
Canada, 5/33, 6/13                                vessel description, 8/7, Appendix
candle charts, 15/15–16                                4/1–2
cane sugar, 1/1–6, 2/1–3, 4/4–8                   vessel position, 8/7, Appendix 4/2–3
  in the US, 20/17–25                             vessel readiness, Appendix 1/6
cane zoning, 18/4                                 waiting times, 8/10, Appendix 4/13
CAP (Common Agricultural Policy), 19/1,           see also payments; supervision
        19/13                                  charting see technical trading
capacity utilization, 4/11–12                  Chicago Board of Trade, 13/1–2
capital adequacy requirements, 18/22–4         Chile, 21/2, 21/3
carbon, 12/9                                   China
carbonatation, 12/6–7                             ethanol production, 6/17
carrying charges, 3/22, 3/23                      HFCS (high fructose corn syrup),
cash against documents (CAD), 16/1–8                   5/18–19
cash premium analysis, 9/7                        HIS (high intensity sweeteners), 5/34,
centrifuging, 1/12, 12/4, 12/10                        5/35–6, 5/45
certificates, 8/12                                 history, 1/1
certificates of quota exemption (CQEs),            production costs, 4/8, 4/11, 4/13
        17/16                                  claims settlements, 11/5
CFTC (Commodity Futures Trading                clarification, 12/2–4, 12/6–7
        Commission), 13/3–4, 15/11             Clean Air Act, 6/12
Chadbourne Agreement, 2/5                      Coffee, Sugar and Cocoa Exchange
channels, 15/6–7                                       (CSCE), 14/1–11, Appendix
char filters, 12/9                                      1/1–23
charter party agreements, 8/5–13,              Colombia
        Appendix 4/1–16                           ethanol production, 6/19–20
  agents, 8/7, Appendix 4/4                       external tariffs, 21/4
  arbitration, 8/11                               futures and options trading, 13/14–15
  bills of lading, 8/8, 8/9, 16/3–4, 18/19,    colonial era, 1/2–5
        Appendix 4/7–8                         colour of bags, 3/28
  certificates, 8/12                            colour measurement, 12/7–9
  commission payments, 8/12–13                 Columbus, Christopher, 1/3
  demurrage and despatch, 8/9, 14/4–5,         commercial traders, 13/7–11
        17/11–13, Appendix 4/13                commission payments, 8/12–13

Index/page ii
                                                                              Index

commitment of trades (COT) report,          crushing, 1/11–12
        13/3–4, 15/11–12                    crystallization, 12/4, 12/9–10
Commodity Futures Trading Commission        CSCE (Coffee, Sugar and Cocoa
        (CFTC), 13/3–4, 15/11                       Exchange), 14/1–11, Appendix
commodity trading advisors (CTAs),                  1/1–23
        13/4–5                              Cuba, 1/3–4, 2/2, 2/4, 2/21, 3/29
Common Agricultural Policy (CAP), 19/1,       contract terms, Appendix 3/2–3,
        19/13                                       Appendix 3/9–12
Commonwealth Sugar Agreement (1951),          revolution, 2/8–9
        2/7, 19/9                           currencies, 17/13–14
concentration of exports, 3/4–6, 3/10         EU conversion policy, 19/4–6
confectionery products, 5/7–8                 matching, 18/9
consumer choice, 3/9                        cyclamates, 5/31, 5/33, 5/34, 5/38, 5/46
consumption
  ending stocks/consumption                 daily sentiment indicator (DSI), 15/14–15
        relationship, 9/6–7                 damaged cargoes, 11/3–4
  in the Former Soviet Union, 22/7,         decolourization, 12/4, 12/7–9
        22/20–1                             default rules, Appendix 2/15–18
  growth, 2/1, 2/14–18, 3/1–3, 13/16        deficiencies and excesses, Appendix
  of high fructose corn syrup, 5/2–3,               1/20–1
        5/10–11                             deliverers’ obligations, Appendix 1/10–16
  of high intensity sweeteners, 5/28–9      delivery grades, 14/3–4, Appendix
  history of, 1/12–14                               1/1–2, Appendix 2/2–3
  in India, 3/20–1                          delivery mechanisms, 3/25–9, 7/7–10,
  production/consumption relationship,              14/4–6, 14/8–10
        9/5–6                                  No. 14 rules, Appendix 5/5–6
  in the US, 20/1                              No. 5 rules, Appendix 2/9–14
container shipments, 8/2, 8/14                 Thai standard contract, Appendix
contract pricing, 3/29–31, 7/1–12, 17/7–9           3/14, Appendix 3/15–17,
contract terms, 3/25–9, 10/2                        Appendix 3/20–2
  Brazil, 13/2–3, Appendix 3/1–2,           delivery months, Appendix 1/4
        Appendix 3/4–8                      demand, 2/14–18
  contract size, Appendix 1/4                  for organic sugar, Appendix 6/3–4
  Cuba, Appendix 3/2–3, Appendix               supply and demand database, 9/1–8
        3/9–12                              demurrage and despatch, 8/9, 14/4–5,
  domestic contract (No. 14), 13/2,                 17/11–13
        Appendix 5/1–16                        accounting for, 17/11–13
  Europe, Appendix 3/12–14                     Brazilian standard contract, Appendix
  France, 13/2                                      3/5
  Japan, 13/3, 14/21–3                         charter party agreement, Appendix
  London refined white (No. 5), 13/2,                4/13
        14/10–21, Appendix 2/1–24           deviations, 8/9
  non-registered contracts, Appendix        dextran, 12/10
        2/23                                dextrose, 5/4
  premiums/discounts, 7/6–12                directional movement index (ADX), 15/14
  Thailand, Appendix 3/3–4, Appendix        discharging, 8/7, 8/9, 10/5–6
        3/14–25                                charter party agreement, Appendix
  verbal contracts, Appendix 1/3                    4/3, Appendix 4/8–9, Appendix
  world contract (No. 11), 13/1–2,                  4/12–13
        14/1–11, Appendix 1/1–23               No. 14 rules, Appendix 5/9–10
controls, 17/3                              discounts/premiums, 7/6–12
conversion standards, 9/4–5                 dispute resolution see arbitration; claims
corn syrup see HFCS (high fructose corn             settlement
        syrup)                              documentary credits, 16/8–42
costs of production see production costs    documentation, 11/4–5, 17/2
counter-trade, 18/20–1                         fraudulent amendment, 18/17
CPR finance system, 18/5–6                      No. 5 rules, Appendix 2/14
credit insurance, 18/18–19                     No. 14 rules, Appendix 5/6–8
crop cycles, 9/1–2                             Thai standard contract, Appendix
crop financing, 18/1–2                               3/17–18, Appendix 3/23–4

                                                                      Index/page iii
Index

Doha Development Agenda, 19/20,              production quotas, 5/21–2, 19/6–8,
        19/21                                     19/24–30
doji star, 15/15                                carryover, 19/17
domestic contract (No. 14), 13/2,            set-aside land, 19/17
        Appendix 5/1–16                      sugar policy (2001–6), 19/1–18
draught surveys, 11/3                        sugar policy (2006–onwards),
drying, 12/5                                      19/19–22
duties see tariffs and duties                Sugar Protocol, 19/9, 19/10, 19/20
                                             support prices, 19/2–6, 19/23
economic liberalization see free trade     evening star, 15/16
Ecuador, 21/4                              excesses and deficiencies, Appendix
ending stocks/consumption relationship,           1/20–1
        9/6–7                              exchange delivery settlement prices
energy qualities, 1/12                            (EDSP), Appendix 2/4–6
engulfing patterns, 15/15                   exchange for physicals, 7/3–4, 17/7
environmental protection, 19/18            executable orders (SEOs), 7/2–3, 17/7–8
ethanol production, 6/1–24                 exit positions, 15/4
  in Australia, 6/18                       exponential moving averages, 15/7
  in Brazil, 3/30, 6/2, 6/4, 6/7–11        export credit agencies, 18/18–19
  in Canada, 6/13                          exports, 2/19–23, 3/23
  in China, 6/17                             concentration, 3/4–6, 3/10
  in Colombia, 6/19–20                       European Union policy, 19/15–16
  definition of ethanol, 6/1                  Former Soviet Union (FSU), 22/20–39
  in the European Union, 6/13–14, 6/21       and production costs, 4/2
  feedstocks, 4/4–6, 6/1
  futures market, 6/23–4                   factories see refineries
  in India, 6/15–16                        FAIR Act, 20/7–10
  in Latin America, 6/19–20                fair basis, 7/10, 7/11
  in Peru, 6/19                            farms
  political support, 6/6–7                    crop cycles, 9/1–2
  and solvents, 6/2                           field performance, 4/9–11
  subsidies, 6/7, 6/24                        financing, 18/1–6
  in Thailand, 6/16–17                     feedstocks, 4/4–6, 6/1
  trade flows, 6/20–2, 6/23                 field performance, 4/9–11
  in the United States, 6/11–13            filtration, 12/4, 12/7
European Union, 19/1–30                    finance, 18/1–27
  Common Agricultural Policy (CAP),           bid bonds, 16/42–9, 18/21
        19/1, 19/13                           capital adequacy requirements,
  contract terms, Appendix 3/12–14                  18/22–4
  currency conversion policy, 19/4–6          counter-trade, 18/20–1
  domestic supply, 19/12–13                   currency matching, 18/9
  enlargement, 5/21–2                         in the European Union, 19/17–18
  environmental protection, 19/18             factories and mills, 18/7–13
  ethanol production, 6/13–14, 6/21           farms, 18/1–6
  export policy, 19/15–16                     long-term finance, 18/12–13
  finance, 19/17–18                            performance bonds, 16/42–9, 18/21
  futures and options trading, 13/15–16       plantations, 18/6–7
  HFCS (high fructose corn syrup),            risk management, 15/16–17, 18/24–7
        5/19–22                               short-term finance, 18/9–11
  HIS (high intensity sweeteners), 5/36,      tolling, 18/20
        5/42                                  of trade houses, 18/14–15
  import policy, 19/8–12, 19/13–15            see also payments
  intervention prices, 19/16               Finland, 19/9
  isoglucose production, 5/21–2, 19/6–7,   First World War, 2/1
        19/24–9                            flat prices, 3/29–31, 9/5–7
  licences, 17/15–16                       Florida, 20/17–18
  MERCOSUR negotiations, 21/1, 21/3        food manufacturing, 12/10–11
  organic sugar production, Appendix       force majeure, 14/7–8
        6/5–6                                 Brazilian standard contract, Appendix
  production levies, 19/17–18                       3/6, Appendix 3/8

Index/page iv
                                                                                Index

   charter party agreement, Appendix         fructose see HFCS (high fructose corn
        4/14                                          syrup)
   European standard contract, Appendix      FSU see Former Soviet Union (FSU)
        3/14                                 FTAA (Free Trade Agreement of the
   No. 11 rules, Appendix 1/19–20                     Americas), 20/29, 21/1
   No. 5 rules, Appendix 2/18–21             fuel ethanols see ethanol production
   Thai standard contract, Appendix 3/25     fundamental analysis, 15/1–2, 15/17
forecasting, 9/2–3                              supply and demand database, 9/1–8
Former Soviet Union (FSU), 2/14–18,          funds, 13/4–6, 15/1, 15/4–6
        22/1–39                              futures trading, 3/22–31, 7/1–12, 13/1–19
   Armenia, 22/4, 22/10, 22/18, 22/24           accounting, 17/2, 17/10–11
   Azerbaijan, 22/4, 22/10, 22/18, 22/25        against actuals (AA) trades, 7/3–4, 17/7
   Belarus, 22/3–4, 22/8–9, 22/17–18,           banks, 13/10–11
        22/26–7                                 basis, 7/6–12
   consumption, 22/7, 22/20–1                   by Brazilian companies, 13/11
   Georgia, 22/4, 22/10, 22/18–19,              carrying-charges, 3/22, 3/23
        22/27–8                                 commercial traders, 13/7–11
   HFCS (high fructose corn syrup), 5/22        contract pricing, 3/29–31, 7/1–12,
   Kazakhstan, 22/4, 22/10–11, 22/19,                 17/7–9
        22/28–9                                 delivery grades, 14/3–4, Appendix
   Kyrgyz Republic, 22/4–5, 22/10–11,                 1/1–2, Appendix 2/2–3
        22/19, 22/29–30                         in ethanol, 6/23–4
   market structures, 22/12–19                  executable orders (SEOs), 7/2–3,
   Moldova, 22/3, 22/10, 22/30–1                      17/7–8
   production trends, 22/1–6                    fair basis, 7/10, 7/11
   Russia, 2/18, 22/1–2, 22/8, 22/12–16,        flat prices, 3/29–31, 9/5–7
        22/32–4                                 freight spreads, 7/10
   sugar policies, 22/12–19                     funds, 13/4–6, 15/1, 15/4–6
   Tajikistan, 22/5, 22/11, 22/34–5             history, 13/1–3
   trade flows, 22/8–12                          by Indian companies, 13/11
   Turkmenistan, 22/5, 22/11, 22/35–6           inverted market structure, 3/22–4, 3/29
   Ukraine, 4/8, 4/11, 4/13, 22/2–3, 22/9,      liquidity, 13/7
        22/16–17, 22/36–8                       locals, 13/6–7
   Uzbekistan, 22/5, 22/11, 22/38–9             margin payments, 17/4–5, 17/11
forward trading of physicals, 17/1–2            non-commercial traders, 13/4–7
France, 1/7, 13/2                               options on futures, 7/4–6
fraud, 18/17, 18/21–2                           position information, 13/3–4, 15/11–12
free trade, 3/3–10                              by producing countries, 13/11–17
   Andean Community, 21/2–4, 21/7–9,            spreads, 3/22
        21/11, 21/15–17                         strategies, 3/27–8, 7/11–12
   FTAA, 20/29, 21/1                            trade houses, 13/8–10, 13/11, 13/17,
   Latin American, 21/1, 21/10                       18/14–15
   MERCOSUR, 21/1–7, 21/11–14, 21/18            volumes, 13/7, 13/19
   NAFTA, 20/26–9                               see also contract terms; delivery
freight market, 8/1–14                               mechanisms; technical trading
   bulk in bagged out (bibo), 8/14
   container shipments, 8/2, 8/14            Gama, Vasco da, 1/1
   differentials, Appendix 2/7–8             general average, 8/10–11
   liberty tweendecker ships, 8/13           Georgia, 22/4, 22/10, 22/18–19, 22/27–8
   liner services, 8/1–2                     glucose, 5/1, 5/4
   quantities shipped, 8/14                  glycyrrhizin, 5/32, 5/46
   rates, 3/16                               grading, 12/5
   spreads, 7/10                             Great Lakes, 20/14–15
   timecharters, 8/4–5                       Great Plains, 20/15–16
   tramping, 8/3–4                           Greeks, 1/1
   trends in, 8/13–14                        guarantees, 16/42–9, 18/16
   vessel accounting, 17/9–10                Guatemala, 13/14–15
   voyage charters, 8/4
   voyage estimates, 8/5, 8/6                hammer patterns, 15/15
   see also charter party agreements         hanging man patterns, 15/15

                                                                        Index/page v
Index

Hawaii, 20/20–1                                cane sugar, 1/1–6, 2/1–3
Hawley–Smoot Tariff Act, 2/5                   colonial era, 1/2–5
HFCS (high fructose corn syrup), 5/1–28,       First World War, 2/1
        5/42–4                                 slavery, 1/5–6
  in Argentina, 5/15                           social history, 1/12
  in Asia, 5/15–19                             technical innovations, 1/11–12
  in China, 5/18–19                          hold condition, 8/9
  consumption, 5/2–3, 5/10–11                Holland, 1/4
  in the European Union, 5/19–22             Howard, Edward, 1/12
  in the Former Soviet Union (FSU), 5/22     Hungary, 5/21
  in Japan, 5/16–18                          hydrous alcohol, 6/2
  in Mexico, 5/12–14
  outlook for, 5/22–8                        imports, 2/14–18
  prices, 5/9–10, 5/11, 5/24–8                  diversification, 3/4–6
  production costs, 5/25                        European Union policy, 19/8–15
  in South Korea, 5/16, 5/18                    Former Soviet Union (FSU), 22/20–39
  in Taiwan, 5/16, 5/18                         and production costs, 4/2
  in Thailand, 5/19                             US policy, 20/1
  in the United States, 5/3–11, 5/22–5,         see also tariffs and duties
        5/43–4                               income growth, 3/2
HIS (high intensity sweeteners), 5/1,        India, 2/2, 2/20–1, 3/19–22
        5/28–42, 5/44–5                         consumption/production mismatch,
  acesulfame-K, 5/31, 5/33, 5/39, 5/45               3/20–1
  alitame, 5/31, 5/45–6                         ethanol production, 6/15–16
  in Asia, 5/30, 5/33–5                         EU preferential quotas, 19/30
  aspartame, 5/30–1, 5/32–3, 5/35, 5/39,        futures trading, 13/11
        5/46                                    history, 1/1, 1/2
  blending, 5/39–42                             pricing system, 3/21–2
  in China, 5/34, 5/35–6, 5/45               Indonesia, 3/10
  consumption, 5/28–9                        information sources, 9/3
  cost savings, 5/40–1                       insurance, 8/10, 18/18–19
  cyclamates, 5/31, 5/33, 5/34, 5/38, 5/46      Brazilian standard terms, Appendix
  in the European Union, 5/36, 5/42                  3/6
  glycyrrhizin, 5/32, 5/46                      charter party agreement, Appendix
  isomalt, 5/46                                      4/14
  lactitol, 5/46                                No. 14 rules, Appendix 5/8–9
  malitol, 5/47                                 Thai standard terms, Appendix 3/17,
  mannitol, 5/47                                     Appendix 3/23
  neohesperidine dihydrochalcon              intensive sweeteners see HIS (high
        (NHDC), 5/47                                 intensity sweeteners)
  neotame, 5/32, 5/45, 5/47                  internal markets, 14/14–15
  poly-ols, 5/1, 5/36–8                      International Safety Management (ISM)
  prices, 5/38–9                                     code, 8/13
  prospects for, 5/38–42                     International Sugar Agreements
  saccharin, 5/29–30, 5/34, 5/35–6, 5/38,       1937, 2/6
        5/47                                    1953, 2/7–8
  sorbitol, 5/37, 5/47–8                        1958, 2/9
  stevioside, 5/32, 5/39, 5/48                  1968, 2/10–11
  sucralose, 5/31–2, 5/39, 5/48                 1977, 2/12–13
  thaumatine, 5/48                              1992, 2/31–3
  in the United Kingdom, 5/41                International Transport Workers
  in the United States, 5/32–3                       Federation (ITF), 8/4
  xylitol, 5/48                              intervention prices, 19/16
history of futures trading, 13/1–3           inulin, 19/6–7, 19/24–9
history of sugar, 1/1–14                     inverted market structure, 3/22–4, 3/29
  1900–39, 2/1–6                             investment funds, 13/4–6, 15/1, 15/4–6
  1939–85, 2/7–13                            ion exchange resins, 12/9
  1985–present day, 2/13–33                  isoglucose production, 5/21–2, 19/6–7,
  beet sugar, 1/6–11, 2/1                            19/24–9
  bounty system, 1/8, 1/10–11                isomalt, 5/46

Index/page vi
                                                                              Index

Jamaica, 1/4, 4/8, 4/10                    MERCOSUR, 21/1–7, 21/11–14, 21/18
Japan                                      metric tonnes, 9/4
   contract terms, 13/3, 14/17, 23–4       Mexico
   HFCS (high fructose corn syrup),          futures and options trading, 13/14–15
       5/16–18                               HFCS (high fructose corn syrup),
Java, 2/2                                         5/12–14
J. H. Rayner, 18/19                          and NAFTA, 20/26–9
Jones-Costigan Act, 2/6, 20/3                production costs, 4/8
                                             subsidies, 3/10
Kazakhstan, 22/4, 22/10–11, 22/19,           US–Mexico trade dispute, 5/11–15
      22/28–9                              Middle Eastern refineries, 13/16–17
Kyrgyz Republic, 22/4–5, 22/10–11,         mills see refineries
      22/19, 22/29–30                      Moldova, 22/3, 22/10, 22/30–1
                                           money flow index (MFI), 15/12–13
lactitol, 5/46                             moral hazard, 15/16–17
land supply, 3/3                           morning star, 15/16
last trading days, Appendix 1/6–7,         moving averages, 15/7–8
         Appendix 2/23, Appendix 5/4–5       convergence divergence (MACD), 15/8
Latin America                              multinational producers, 3/8–9
    ethanol production, 6/19–20
    free trade agreements, 21/1, 21/10     NAFTA, 20/26–9
laytime, 8/9, Appendix 4/11, Appendix      Napoleon Bonaparte, 1/7
         4/12–13                           narrow margins, 17/1
letters of credit, 16/3–4, 16/8–42,        neohesperidine dihydrochalcon (NHDC),
         18/15–16                                 5/47
    back-to-back, 18/19–20                 neotame, 5/32, 5/45, 5/47
    sight, 18/17                           net trades, 9/7
    usance, 18/19                          New York Board of Trade, 13/1–2, 14/1
liberty tweendecker ships, 8/13            New York Coffee, Sugar and Cocoa
licences, 17/15–16                                Exchange (CSCE), 14/1–10,
liner services, 8/1–2                             Appendix 1/1–23
liquidity, 13/7                            non-commercial traders, 13/4–7
litigation, 11/5–6                         non-registered contracts, Appendix 2/23
loading, 8/7, 8/9, Appendix 3/13,          notices and cancelling date, 8/8,
         Appendix 4/3, Appendix 4/8–9,            Appendix 4/6–7
         Appendix 4/11
loan programs, 20/1, 20/7–8                obligations of receivers and deliverers,
local traders, 13/6–7                              Appendix 1/10–16
Lomé Convention, 19/9                      open interest, 15/10–11
London International Financial Futures     open position reporting, Appendix
         Exchange (LIFFE), 13/2,                   1/21–2, Appendix 5/15–16
         13/15–16, 14/11–17                operating currencies, 17/13–14
London refined white (No. 5) contract,      option trading, 13/7, 13/17–19
         13/2, 14/10–21, Appendix 2/1–24   options on futures, 7/4–6
long-term finance, 18/12–13                 organic sugar, Appendix 6/1–8
Louisiana, 20/19–20                           demand, Appendix 6/3–4
low calorie bulking agents, 5/36–8            supply, Appendix 6/4–7
                                           original margins, 17/4–5
Madeira, 1/3                               oscillators, 15/8, 15/13
malitol, 5/47                              overtime payments, Appendix 4/14
managed money, 13/4–6, 15/1
mannitol, 5/47                             parabolic SAR system, 15/13–14
margin payments, 17/4–5, 17/11             payments, 8/8, 16/1–49, 18/15–20,
market participants, 13/3–17                      Appendix 4/5–6
marking of bags, 3/28                        bid bonds, 16/42–9, 18/21
matching principle, 17/2–3                   Brazilian standard contract, Appendix
mate’s receipts, 8/9, Appendix 4/7–8              3/5, Appendix 3/7
MATIF contract, 13/2                         cash against documents (CAD),
melting, 12/2                                     16/1–8
Memo of Delivery, Appendix 1/21              credit insurance, 18/18–19

                                                                     Index/page vii
Index

   documentary credits, 16/8–42             and field performance, 4/9–11
   freight differential, Appendix 2/7–8     of HFCS (high fructose corn syrup),
   guarantees, 16/42–9, 18/16                    5/25
   letters of credit, 16/3–4, 16/8–42,      and imports, 4/2
        18/15–16, 18/17, 18/19–20           and prices, 4/2–4
   No. 5 rules, Appendix 2/6–7              processing costs, 4/5
   performance bonds, 16/42–9, 18/21      production finance, 18/1–7
   promissory notes, 18/16                production levies, 19/17–18
   Thai standard contract, Appendix       production quotas see quotas
        3/17                              production statistics, 1/9–10
performance bonds, 16/42–9, 18/21           1900–39, 2/1–6
Persia, 1/2                                 1939–85, 2/7–13
Peru, 6/19                                  1985–present day, 2/13–33
Philippines, 2/2–3                          First World War, 2/1
phosphatation, 12/7                       productivity, 3/3
plantations, 18/6–7                       profit and loss accounts, 17/3
Poland, 5/21                              promissory notes, 18/16
polarization, 4/5, 9/4, 10/6, 12/6,       prudence principle, 17/3
        Appendix 5/11                     Puerto Rico, 1/3, 20/21–2
political environment, 2/23–5
Polo, Marco, 1/1                          quality, 3/9, 10/6, 12/1–11
poly-ols, 5/1, 5/36–8                       Brazilian standard contract, Appendix
population growth, 3/1                            3/4
Portugal, 1/3, 1/4, 19/9                    conversions, 9/4
position information, 13/3–4, 15/11–12      delivery grades, 14/3–4, Appendix
position limits, 14/3                             1/1–2, Appendix 2/2–3
position sheets, 17/2, 17/5–7               No. 14 rules, Appendix 5/11–12
premiums/discounts, 7/6–12                quantities shipped, 8/14
presentation of accounts, 17/3–4          quintals, 9/4
prices                                    quotas, 5/21–2, 17/15, 17/16
   1900–39, 2/3–6                           carryover, 19/17
   1939–89, 2/7–13, 2/30                    European Union, 19/6–8, 19/24–30
   1990–present day, 2/18–19, 2/30–1,       United States, 20/1–2, 20/3–6
        3/10–11
   contract pricing, 3/29–31, 7/1–12,     raw sugar, 9/4, 12/11
        17/7–9                            re-export programmes, 20/10–12
   exchange delivery settlement prices,   receivers’ obligations, Appendix 1/10–16
        Appendix 2/4–6                    Red River Valley, 20/16–17
   forecasting see supply and demand      Refined Sugar Association, 10/1–7, 11/1
        database                          refineries
   and free trade, 3/9                      annexed, 12/1
   of HFCS, 5/9–10, 5/11, 5/24–8            capacity utilization, 4/11–12
   of HIS, 5/38–9                           financing, 18/7–13
   long-run trend, 2/26–7                   Middle Eastern, 13/16–17
   price dynamics, 2/18–19                  performance, 4/11–13
  and production costs, 4/2–4               size, 4/11
  support prices, 19/2–6, 19/23, 20/2,      stand-alone, 12/1
        20/7                                and trade liberalization, 3/4
  volatility, 2/19–20, 2/25–31, 3/7–8,      United States, 20/22–5
        3/31, 17/2                        refining process, 12/1–11
Proalcool programme, 6/2, 6/7               affination, 12/2, 12/5–6
processing see refining process              carbonatation, 12/6–7
production costs, 4/1–14                    centrifuging, 1/12, 12/4, 12/10
  beet sugar, 4/4–8                         clarification, 12/2–4, 12/6–7
  benchmarks, 4/2                           costs, 4/5
  cane sugar, 4/4–8                         crystallization, 12/4, 12/9–10
  comparisons between producers, 4/4        decolourization, 12/4, 12/7–9
  country comparisons, 4/8                  drying, 12/5
  and exports, 4/2                          filtration, 12/4, 12/7
  and factory performance, 4/11–13          grading, 12/5

Index/page viii
                                                                              Index

   melting, 12/2                            sucrose yields, 4/9–11
   phosphatation, 12/7                      Sugar Association of London, 10/1–7,
   recovery boilings, 12/5                         11/1
relative strength index (RSI), 15/12        Sugar Bureau, 10/7
Renewable Fuels Standard (RFS), 6/12        Sugar Industry (Reorganization) Act, 2/6
reported sales, Appendix 1/22               Sugar Protocol, 19/9, 19/10, 19/20
resistance levels, 15/8                     supervision, 10/4–6, 11/1–6
riders, 8/12                                  appointing supervisors, 11/1–2
risk management, 15/16–17, 18/24–7            claims settlements, 11/5
role of supervisors, 11/2–4                   damaged cargoes, 11/3–4
Romans, 1/1                                   dispute procedures, 11/4, 11/5–6
rural credit schemes, 18/2–3                  documentation, 11/4–5
Russia, 2/18, 22/1–2, 22/8, 22/12–16,         draught surveys, 11/3
        22/32–4                               role of supervisors, 11/2–4
                                              sampling procedures, 11/3–4
saccharin, 5/29–30, 5/34, 5/35–6, 5/38,       third party supervisors, 11/4
        5/47                                  warehouse supervision, 11/4–5
sampling procedures, 11/3–4                 supply, 2/19–23, 3/23
satellite tracking, 8/11–12, Appendix         European Union domestic supply,
        4/15–16                                    19/12–13
sellers’ executable orders (SEOs), 7/2–3,     of organic sugar, Appendix 6/4–7
        17/7–8                              supply and demand database, 9/1–8
set-aside land, 19/17                         cash premium analysis, 9/7
shipping see freight market                   crop cycles, 9/1–2
shooting star, 15/16                          ending stocks/consumption
short tons, 9/4                                    relationship, 9/6–7
short-term finance, 18/9–11                    forecasting, 9/2–3
sight letters of credit, 18/17                historical data, 9/1–2
size of refineries, 4/11                       information sources, 9/3
slavery, 1/5–6                                net trades, 9/7
Slovakia, 5/21                                production/consumption relationship,
smuggling, 3/7                                     9/5–6
social history, 1/12                          quality conversions, 9/4
soft drinks market, 5/5–7, 5/10, 5/12–14,     weight conversions, 9/4–5
        5/23–4, 5/32–3, 5/41                  whites premium, 9/7
solvents, 6/2                               support levels, 15/8
sorbitol, 5/37, 5/47–8                      support prices, 19/2–6, 19/23, 20/2, 20/7
South Africa, 3/25, 3/29                    sweetener market, 3/2
   production costs, 4/8, 4/13                see also HFCS (high fructose corn
South Korea, 3/17                                  syrup); HIS (high intensity
   HFCS (high fructose corn syrup), 5/16,          sweeteners)
        5/18                                sweetness qualities, 1/12
Spain, 1/3–4, 1/5                           synthetic alcohol, 6/1
speculation, 13/4–6
spreads, 3/22                               Taiwan, 5/16, 5/18
squeeze plays, 3/27–8                       Tajikistan, 22/5, 22/11, 22/34–5
stand-alone refineries, 12/1                 tallymen, 8/8–9, Appendix 4/7
standard physical contracts see contract    Tarafa Action, 2/4
        terms                               tariffs and duties, 2/24–5, 3/9–10,
starch sweeteners see HFCS (high                    19/13–15
        fructose corn syrup)                   Andean Community, 21/15
stevedores, 8/8–9, Appendix 4/7                Former Soviet Union countries,
stevioside, 5/32, 5/39, 5/48                        22/12–19
stochastic indicators, 15/13                   MERCOSUR members, 21/14
strategies for futures trading, 3/27–8,        US tariff rate quota (TRQ), 20/3–6
        7/11–12                             Tate & Lyle, 10/4, 10/5, 20/23
strikes, Appendix 4/14, Appendix 5/13       taxation, 8/8, Appendix 3/18, Appendix
sub letting, 8/11, Appendix 4/15                    3/24–5, Appendix 4/4–5,
subsidies, 3/10, 6/7, 6/24                          Appendix 5/13
sucralose, 5/31–2, 5/39, 5/48               technical innovations, 1/11–12

                                                                      Index/page ix
Index

technical trading, 15/1–17                 Ukraine, 22/2–3, 22/9, 22/16–17, 22/36–8
   candle charts, 15/15–16                   production costs, 4/8, 4/11, 4/13
   channels, 15/6–7                        United Kingdom, 5/41
   commitment of trades report, 13/3–4,    United States, 20/1–29
        15/11–12                             beet sugar industry, 20/1, 20/12–17,
   daily sentiment indicator, 15/14–15            20/23–4
   directional movement index, 15/14         cane sugar industry, 20/17–25
   money flow index, 15/12–13                 Clean Air Act, 6/12
   moving averages, 15/7–8                   consumption, 20/1
      convergence divergence, 15/8           ethanol production, 6/11–13
   open interest, 15/10–11                   FAIR Act, 20/7–10
   oscillators, 15/8, 15/13                  Far West region, 20/13–14
   parabolic SAR system, 15/13–14            Florida, 20/17–18
   relative strength index, 15/12            and FTAA, 20/29
   resistance levels, 15/8                   futures exchanges, 13/1–2, 14/1–10
   and risk management, 15/16–17             Great Lakes, 20/14–15
   stochastic indicators, 15/13              Great Plains, 20/15–16
   support levels, 15/8                      Hawaii, 20/20–1
   trend lines, 15/6–7                       Hawley–Smoot Tariff Act, 2/5
   volume, 15/9–10                           HFCS (high fructose corn syrup),
tender days, Appendix 2/8–9, Appendix             5/3–11, 5/22–5, 5/43–4
        2/23–4                               HIS (high intensity sweeteners),
testing see weighing and testing                  5/32–3
Texas, 20/21                                 import policy, 20/1
Thailand, 3/14–19                            industry structure, 20/22–5
   contract terms, Appendix 3/3–4,           Jones–Costigan Act, 2/6, 20/3
        Appendix 3/14–25                     loan program, 20/1, 20/7–8
   delivery mechanisms, 3/26                 Louisiana, 20/19–20
   ethanol production, 6/16–17               and NAFTA, 20/26–9
   farm finance risks, 18/4                   organic sugar production, Appendix
   freight rates, 3/16                            6/5
   futures and options trading, 13/14        production, 20/1
   HFCS (high fructose corn syrup), 5/19     production costs, 4/8, 4/11, 4/13
   industry outlook, 3/18–19                 Puerto Rico, 20/21–2
   pricing system, 3/15–16                   quotas, 20/1–2, 20/3–6
   quality issues, 3/17                      re-export programmes, 20/10–12
   volatility in raw premiums, 3/17–18       Red River Valley, 20/16–17
thaumatine, 5/48                             refineries, 20/22–5
third party supervisors, 11/4                Renewable Fuels Standard (RFS),
time bars, 8/11, Appendix 4/14                    6/12
timecharters, 8/4–5                          support programmes, 20/2, 20/7
Tokyo Grain Exchange, 14/21–3                Texas, 20/21
tolling, 18/20                               US–Mexico trade dispute, 5/11–15
trade associations, 10/1–7, 11/1           unloading see discharging
   council members, 10/1                   unmatched trades, Appendix 1/5
   sugar-testing programme, 10/7           Uruguay Round, 2/23–5, 19/9–10
trade flows, 3/6–7                          usance letters of credit, 18/19
   ethanol production, 6/20–2, 6/23        USSR, 2/7, 2/9–13
   forecasting, 9/3                          see also Former Soviet Union (FSU)
   in the Former Soviet Union (FSU),       Uzbekistan, 22/5, 22/11, 22/38–9
        22/8–12
   see also exports; imports               vacuum pan, 1/12
trade houses, 13/8–10, 13/11, 13/17,       variation margin, 17/5
        18/14–15                           Varthema, Ludivico di, 1/1
trade liberalization see free trade        verbal contracts, Appendix 1/3
tramping, 8/3–4                            vessel accounting, 17/9–10
transportation see freight market          vessel condition, 8/9, 8/12
trend lines, 15/6–7                        vessel description, 8/7, Appendix 4/1–2
Turkey, 5/21–2                             vessel position, 8/7, Appendix 4/2–3
Turkmenistan, 22/5, 22/11, 22/35–6         vessel readiness, Appendix 1/6

Index/page x
                                                                            Index

volatility of prices, 2/19–20, 2/25–31,      No. 14 rules, Appendix 5/10,
         3/7–8, 3/31, 17/2                        Appendix 5/10–11
volume of trades, 13/7, 13/19, 15/9–10     weighted moving averages, 15/7
voyage charters, 8/4                       West Indies, 1/4
voyage estimates, 8/5, 8/6                 whites market, 9/4, 9/7
                                             No. 5 contract terms, 13/2, 14/10–21,
waiting times, 8/10, Appendix 4/13                Appendix 2/1–24
warehouse supervision, 11/4–5              world contract (No. 11), 13/1–2, 14/1–10,
weighing and testing, 10/5–6, 10/7, 11/2          Appendix 1/1–23
  conversions, 9/4–5
  deficiencies and excesses, Appendix       xylitol, 5/48
       1/20–1
  No. 11 rules, Appendix 1/8–10            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 quanti-
ties, 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 Euro-
pean 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 abun-
dance 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 occupa-
tion 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 emerg-
ing 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 intro-
duced 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 unload-
ing 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 concen-
trated 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 produc-
tion 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 conquis-
tadors. 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 pro-
ducing 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 pro-
duction 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 produc-

Chapter 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 produc-
tion 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 pro-
gressed 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 impor-
tant 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 manu-
facture – 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 eigh-
teenth 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 move-
ment gathered force in the nineteenth century. In 1807 the US abol-
ished 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 deriv-
ing 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 con-
vinced 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 fac-
tories 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 beet-
roots, far from diminishing that of wheat, contributed to procure for him
more abundant crops than he obtained before, first, because in employ-
ing 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 depart-
ments 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 indus-
tries 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)

                                  1850                1900

        Germany                   53 349              1 984 287
        Austria/Hungary           16 805              1 083 328
        Russia                    13 100                893 500
        France                    76 151              1 040 294
        Belgium                   11 604                325 000

        Source: Deerr.



nineteenth century saw an exponential growth in beet sugar produc-
tion in Europe, as Table 1.1 shows.
   Such was the growth of the beet industry that, by 1880, it had over-
taken 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 nine-
teenth century was not simply confined to production. Much of the pro-
duction 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’ex-
portation whereby refined sugar exported from France received a draw-
back 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 dif-
ference 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 pro-
ducer 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 posses-
sions 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          788 000          48 198         830 198      93.0
1841          829 000          50 919         879 919      94.2
1842          840 000          41 240         881 240      96.3
1843          909 000          46 911         955 911      95.0
1844          961 000          53 458       1 014 458      94.7
1845        1 003 000          60 857       1 063 857      94.2
1846        1 017 000          80 004       1 097 004      92.5
1847        1 067 000          96 346       1 163 346      91.7
1848        1 008 000          79 885       1 087 885      92.3
1849        1 070 000         110 737       1 180 737      90.7
1850        1 043 000         159 435       1 202 435      86.5
1851        1 186 000         163 757       1 349 757      87.6
1852        1 167 000         202 810       1 369 810      85.2
1853        1 284 000         194 893       1 478 893      86.9
1854        1 301 000         176 210       1 477 210      88.2
1855        1 243 000         246 856       1 489 856      83.5
1856        1 195 000         276 702       1 471 702      81.3
1857        1 220 000         370 004       1 590 004      76.7
1858        1 358 000         409 614       1 767 614      76.8
1859        1 438 000         387 539       1 825 539      78.8
1860        1 376 000         351 602       1 727 602      79.7
1861        1 466 000         413 671       1 879 671      78.1
1862        1 363 000         474 719       1 857 719      74.3
1863        1 334 000         457 146       1 791 146      74.5
1864        1 333 000         474 719       1 837 719      74.3
1865        1 506 000         680 685       2 195 685      69.5
1866        1 544 000         671 810       2 215 810      69.8
1867        1 499 000         687 281       2 186 281      68.4
1868        1 759 000         760 025       2 519 025      69.8
1869        1 728 000         821 141       2 549 141      68.0
1870        1 662 000         939 096       2 601 096      64.0
1871        1 697 000         976 915       2 673 915      63.5
1872        1 805 000       1 128 918       2 933 918      61.5
1873        1 848 000       1 198 463       3 046 463      60.7
1874        1 883 000       1 284 586       3 167 586      59.1
1875        1 816 000       1 377 336       3 193 336      55.1
1876        1 792 000       1 085 204       2 877 204      62.4
1877        1 770 000       1 385 828       3 128 828      56.2
1878        1 873 000       1 615 934       3 488 934      53.7
1879        1 908 000       1 459 385       3 367 385      56.7
1880        1 883 000       1 857 210       3 740 210      50.2
1881        1 806 000       1 831 847       3 637 847      48.3
1882        2 079 000       2 173 409       4 252 409      48.9
1883        2 210 000       2 322 736       4 532 736      48.7
1884        2 225 000       2 549 672       4 774 672      46.6
1885        2 300 000       2 172 200       4 472 200      51.4
1886        2 400 000       2 686 700       5 086 700      47.2
1887        2 541 000       2 367 200       4 908 200      51.7
1888        2 359 000       3 555 900       5 914 900      40.0


                                                        Chapter 1/page 9
Sugar Trading Manual

Table 1.2 (cont.)

Year        Cane           Beet            Total           Share of cane

1889        2 138 000      3 536 700       5 674 700       37.7
1890        2 597 000      3 679 800       6 276 800       41.2
1891        3 502 000      3 480 800       6 982 800       51.6
1892        3 040 500      3 380 700       6 421 200       47.3
1893        3 561 000      3 833 000       7 394 000       48.2
1894        3 531 000      4 725 800       8 256 800       42.7
1895        2 840 000      4 220 500       7 060 500       40.2
1896        2 842 000      4 801 500       7 643 500       37.2
1897        2 869 000      4 695 300       7 564 300       38.0
1898        2 995 000      4 689 600       7 684 600       38.5
1899        2 881 000      5 410 900       8 291 900       34.7

Source: Deerr.



followed by further conferences in 1864, 1871, 1873 and 1875. The
results of all these conferences were inconclusive, as they concen-
trated on devising acceptable means for valuing sugar, rather than
directly attacking the problem of bounties. Further international confer-
ences 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 con-
stitute 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 opposi-
tion from the jam and confectionery industries, which benefited from
cheap bounty-fed imports, and the agreement was never fully imple-
mented. Finally, the bounty system was ended by the Brussels Con-
vention, signed in 1901 (and this time ratified by Great Britain), which
entered into force in 1903. The convention stated that: ‘The High Con-
tracting 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 hun-
  dredweight 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 tex-
tiles. The invention of the first centrifuge specifically for sugar produc-
tion 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 improve-
ment 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. Sweet-
ness 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

                                Production              Energy content
                                (million tonnes)        (million calories)

Wheat                           601.7                   2413
Rice                            521.7                   1847
Cassava                         150.8                    530
Sugar                           123.4                    460
Meat                            176.6                    387
Milk                            537.8                    349
Oilseeds                         75.5                    313
Fruits and vegetables           795.9                    235
Pulses                           58.8                    200
Potatoes                        268.1                    165
Other                           345.4                    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 eigh-
teenth 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 sum-
marized 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 sweet-
    ener. 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 condi-
tions 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 produc-
tion 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 pro-
duction and consumption achieved an eleven-fold increase from 1900
to 1997.
   During the century two periods of rapid growth stand out. The inter-
war 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 under-
mined 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                                     7.59
        1920                                     9.49
        1921                                     3.14
        1922                                     2.82
        1923                                     5.11
        1924                                     4.06
        1925                                     2.44
        1926                                     2.46
        1927                                     2.78
        1928                                     2.36
        1929                                     1.77
        1930                                     1.27
        1931                                     1.13
        1932                                     0.78
        1933                                     0.86
        1934                                     0.92
        1935                                     0.88
        1936                                     0.88
        1937                                     1.13
        1938                                     1.01
        1939                                     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 quasi-
official 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, par-
ticularly 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 co-
operation and national legislative backup. Formally respectful of the
aversion to state intervention shown by the League’s Economic Com-
mittee, it was an odd hybrid: neither a commercial treaty between gov-
ernments 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 Inter-
national 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 consider-
ably 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 barri-
ers 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 mar-
keting 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 arrange-
ment. 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 gov-
ernments, 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 con-
cerning 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 ‘remu-
nerative 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 fur-
ther 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 illus-
trated another lasting behavioural trait: the seemingly overriding pre-
occupation 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 short-
ages 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                        3.10
        1946                        4.18
        1947                        4.96
        1948                        4.24
        1949                        4.16
        1950                        4.98
        1951                        5.70
        1952                        4.17
        1953                        3.41
        1954                        3.26
        1955                        3.24
        1956                        3.47
        1957                        5.16
        1958                        3.50
        1959                        2.97
        1960                        3.14

        Source: ISC.



instrument used for stabilization was the export quota, adjusted accord-
ing 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 require-
ment 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 sta-
bilize 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. Pro-
duction 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 dis-
rupted 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                                  3.29
        1956                                  3.51
        1957                                  5.20
        1958                                  3.55
        1959                                  3.02
        1960                                  3.12
        1961                                  2.75
        1962                                  2.83
        1963                                  8.34
        1964                                  5.77
        1965                                  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 consid-
erable 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                                   2.08
        1966                                   1.81
        1967                                   1.92
        1968                                   1.90
        1969                                   3.20
        1970                                   3.68
        1971                                   4.50
        1972                                   9.27
        1973                                   9.45
        1974                                  29.66
        1975                                  20.37

        1
         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 pro-
visions. 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 there-
fore 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 previ-
ous 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 com-
modity 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                                   20.37
        1976                                   11.51
        1977                                    8.10
        1978                                    7.81
        1979                                    9.65
        1980                                   28.69
        1981                                   16.83
        1982                                    8.35
        1983                                    8.49
        1984                                    5.20
        1985                                    4.06
        1986                                    6.04
        1987                                    6.75
        1988                                   10.20
        1989                                   12.82

        1
         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 gener-
ated 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 commod-
ity 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 continu-
  ing 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 forth-
  coming 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 demon-
  strated 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 through-
  out the 1990s. This growth in imports was by no means relentless. At
  the beginning of the decade imports of the Former Soviet Union (FSU)


           135,000.00                                                        6.00

           130,000.00

           125,000.00                                                        4.00

           120,000.00
                                                                                      % per year
000 mtrv




           115,000.00                                                        2.00

           110,000.00

           105,000.00                                                        0.00

           100,000.00

            95,000.00                                                        –2.00
                       19 5
                       19 6
                       19 7
                       19 8
                       19 9
                       19 0
                       19 1
                       19 2
                       19 3
                       19 4
                       19 5
                       19 6
                       19 7
                       19 8
                       20 9
                       20 0
                          01
                          8
                          8
                          8
                          8
                          8
                          9
                          9
                          9
                          9
                          9
                          9
                          9
                          9
                          9
                          9
                          0
                       19




                        World consumption                Growth rate in %
                        Linear (growth rate in %)        Linear (world consumption)

                 2.1    Changes in world sugar consumption, 1985–2001.



  Chapter 2/page 14
                                                    Sugar from the 1900s to the present day

               100
                90
                80
                70
Million mtrv


                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
                                    25
                     Million mtrv




                                    20
                                    15
                                    10
                                     5
                                     0
                                         90

                                               91

                                                     92

                                                           93

                                                                 94

                                                                       95

                                                                             96

                                                                                   97

                                                                                         98

                                                                                               99

                                                                                                     00

                                                                                                           01
                                     19

                                              19

                                                    19

                                                          19

                                                                19

                                                                      19

                                                                            19

                                                                                  19

                                                                                        19

                                                                                              19

                                                                                                    20

                                                                                                          20
                                              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. Nev-
ertheless, 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 geo-
graphical and product structure of world sugar imports. The transfor-
mation 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)

                               1992      1993      1994      1995      1996

FSU                            7.42      7.32      3.59      5.08      5.17
South East Asia                6.19      5.38      7.24      9.07      8.25
North Africa & Middle East     5.81      5.31      5.84      6.73      6.94
Sub-Saharan Africa             1.84      1.65      1.57      1.66      1.71
USA                            2.05      1.83      1.60      1.64      2.87
Western Europe                 2.23      2.28      2.40      2.81      2.73

                               1997      1998      1999      2000      2001

FSU                            4.82      5.51      8.68      7.30      8.42
South East Asia                8.23      8.19      7.92      7.73      8.33
North Africa & Middle East     7.90      7.74      7.94      7.82      7.99
Sub-Saharan Africa             2.07      2.73      2.20      2.14      3.18
USA                            2.95      2.06      1.59      1.37      1.26
Western Europe                 2.49      2.23      2.28      2.31      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 Sub-
Saharan 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 mar-
ginal 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   1998    1999   2000     2001
                                White sugar imports           Raw sugar imports

                    2.4    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                    2001

Russia                2872       Russia       5708    Russia        2 272     Persian G          924
USA                   1994       EU           1647    Iran            736     Algeria            900
Japan                 1821       Japan        1568    Nigeria         697     Nigeria            893
EU                    1705       S. Korea     1516    Saudi           521     Syria              874
                                                      Arabia
S. Korea              1229       Malaysia     1230    Jordan         472      Indonesia        840
WORLD                 1544       WORLD        2217    WORLD       14 055      WORLD         15 339
TOTAL                       4    TOTAL           8    TOTAL                   TOTAL
Share of                   62    Share of       45    Share of           33   Share of           29
  world                            world                world                   world
  total %                          total %              total %                 total %




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 mid-
1990s 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 inter-
nal 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

                    18


         Cents/lb
                    14

                    10

                    6

                    2
                         1991




                                 1993




                                               1995




                                                        1997




                                                                   1999




                                                                               2001
                                        LDP (white)   ISA daily price (raw sugar)

        2.5          World market sugar prices, 1991–2001.



towards the end of the decade. By late 1998 world market prices col-
lapsed below 7 cents/lb, reflecting increasingly bearish global funda-
mentals (considerable production gains in a number of key producing
countries not supported by parallel growth in import demand and the con-
sequent 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 condi-
tions 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 pro-
ductive 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 expecta-
tions of higher price stability and declining volatility (having said that,
in absolute terms the current variations in world market prices are sig-
nificantly 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

                    135,000

                    125,000

         000 mtrv   115,000

                    105,000

                     95,000
                                91

                                92

                                93

                                94

                                95

                                96

                                97

                                98

                                99

                                00

                                01
                              19

                              19

                              19

                              19

                              19

                              19

                              19

                              19

                              19

                              20

                              20
        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 begin-
ning 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      Increase
                                                 1000 t           in %

Brazil           9 825.3         19 148.6         +9 323.3        +95
India           12 911.8         19 186.4         +6 274.5        +49
EU15            16 826.6         17 361.6          +535.0          +3
USA              6 775.6          8 032.6         +1 257.0        +19
China            7 966.7          7 767.9          -198.8          -2
Thailand         4 383.5          5 661.0         +1 277.6        +29
Mexico           4 040.1          5 153.1         +1 113.0        +28
Australia        4 015.5          4 899.6          +884.2         +22
Cuba             6 232.6          3 893.4         -2 339.3        -38
Pakistan         2 506.7          2 827.4          +320.7         +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 begin-
ning 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       Share of                          Exports        Share of
                      (1000 t)      world                             (1000 t)       world
                                    total (%)                                        total (%)

        Cuba           6 674.7     23               Brazil        10 045.8           26
        EU             5 065.6     17               EU             5 783.1           15
        Thailand       3 025.9     10               Australia      3 865.9           10
        Australia      2 810.8     10               Thailand       3 711.8           10
        Brazil         1 842.1      6               Cuba           3 200.1            8
        Subtotal      19 419.2     67               Subtotal      26 606.8           68
        World         29 194.3                      World         39 058.4
         total                                       total




Table 2.10 Changing structure of export supply, world’s largest exporters, 1992 and
2001 (in 000 mtrv)

Raw sugar                                    White sugar

1992                2001                     1992                        2001

Cuba        5860    Brazil         7 085     EU               4 784      EU             6 060
Australia   2878    Australia      3 453     China            1 808      Brazil         4 083
Thailand    2422    Cuba           2 926     Brazil           1 592      India          1 209
Brazil       681    Thailand       2 239     Thailand         1 297      Thailand       1 125
Mauritius    633    Guatemala      1 276     Ukraine            970      Turkey         1 000
World       1544    World         22 600     World           15 661      World         18 297
Total          4    Total                    Total                       Total
Share of      77    Share of            75   Share of           67       Share of          74
  world               world                    world                       world
  total %             total %                  total %                     total %




        increased considerably the share of the latter in their export pro-
        grammes. 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 posi-
        tion 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 liberal-
ization 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 transi-
tion 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 dereg-
ulation. It is important to note, however, that liberalization and deregu-
lation 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 gov-
ernment 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 begin-
ning 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, conces-
sions 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        2001

US TRQ imports                                            1.732        1.154
EU sugar imports under ACP, SPS and MFN                   1.626        1.647
    arrangements
Cuban exports to USSR                                     3.835        0
  China                                                   0.797        0.359
  North Korea                                             0.025        0
  Central Europe                                          0.058        0
USSR sugar intra-trade                                    2.273        0
Total                                                   10.346       3.160
  Share in world trade in %                                 35       8
World total exports                                     29.5351     40.897

1
    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 indi-
vidual 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 reduc-
tion 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 imple-
mentation 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 estab-
lished for tariffication (a small but important step towards reducing pro-
tection) 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 pro-
duction even in the most efficient agricultural industries. The depen-
dence 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 resid-
ual market, which tended to be oversupplied except when a coinci-
dence 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            White
              30

              25
US cents/lb




              20

              15

              10

              5

              0


                                                                                           1981

                                                                                                  1984

                                                                                                         1987

                                                                                                                1990

                                                                                                                       1993

                                                                                                                              1996

                                                                                                                                     1999

                                                                                                                                            2002
                   1951

                          1954

                                  1957

                                          1960

                                                 1963

                                                        1966

                                                               1969

                                                                      1972

                                                                             1975

                                                                                    1978

                                                                               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 sig-
nificant 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


              80
US cents/lb




              60


              40


              20


               0
                    1951

                           1954

                                    1957

                                           1960

                                                  1963

                                                          1966

                                                                 1969

                                                                        1972

                                                                               1975

                                                                                      1978

                                                                                             1981

                                                                                                    1984

                                                                                                           1987

                                                                                                                  1990

                                                                                                                         1993

                                                                                                                                1996

                                                                                                                                       1999

                                                                                                                                              2002
                                                                              Year
                                                         Raw            Deflated              Expon. (deflated)

                     2.8          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 con-
sequence 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 volatil-
3
  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
Sugar Trading Manual

                                  35

                                  30

                    US cents/lb   25

                                  20

                                  15

                                  10

                                  5

                                  0
                                       1951–60   1961–70    1971–80      1981–90      1991–00

                    2.9            Nominal raw sugar price, 1951–2000.



              120

              100
US cents/lb




              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 pre-
cipitous 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 vari-
ability 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 skew-
ness and kurtosis. Skewness is a measure of symmetry. In a normal
distribution, skewness is zero. Negative values indicate that observa-
tions 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 move-
ments 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                                 White sugar

            Average     Std     Skewness   Kurtosis   Average     Std     Skewness   Kurtosis
                        dev.                                      dev.

1951–60     25.22        6.73    1.38       1.30      na          na      na         na
1961–70     19.07       12.59    1.89       3.22      na          na      na         na
1971–80     42.54       29.05    1.46       1.89      52.97       33.90   1.58        2.35
1981–90     15.19        7.46    1.64       3.77      20.16       8.57    1.58        3.16
1991–2000   11.79        2.75   -0.51      -0.24      15.8        3.76    -0.4       -0.79



                                                                Chapter 2/page 29
Sugar Trading Manual

        Table 2.13 Coefficient of variation, 1951–2000

                                  Raw                   White

        1951–60                   0.26                  Na
        1961–70                   0.66                  na
        1971–80                   0.68                  0.64
        1981–90                   0.49                  0.43
        1991–2000                 0.23                  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 com-
fortably high level (12–13 US cents/lb) and showing a degree of sta-
bility 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 particu-
lar. Especially in the Americas and the Pacific Rim, production capac-
ities 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 drought-
affected crop in Brazil) rather than any underlying market response to
the price fall. Indeed, driven by expectations for a long-awaited draw-
down 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

              12.00
US cents/lb




              10.00

               8.00

               6.00

               4.00
                                          ISA       1989–97   1998–2003
               2.00

               0.00
                  89

                  90

                  91

                  92

                  93

                  94

                  95

                  96

                  97

                  98

                  99

                  00

                  01

                  02

                  03
                19

                19

                19

                19

                19

                19

                19

                19

                19

                19

                19

                20

                20

                20

                20
                      2.11 Monthly ISA price, 1989–2003.



the event, however, despite the weather-driven fall in global sugar pro-
duction, 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 eco-
nomic clauses designed to defend a price range. Instead, the objec-
tives 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 non-
    traditional 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 Feder-
  ation, 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 pro-
visions are generally considered to be outdated instruments unable to
contribute to a sustainable and positive development of commodity-
dependent 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 continu-
ing 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 pat-
terns in world trade have been the growth in consumption and eco-
nomic liberalization.


Consumption growth
There are three principal factors behind the continuing growth in con-
sumption, as shown in Fig. 3.1.
• Population growth: The way it affects consumption depends on indi-
  vidual country growth rates. India, for example, has higher popula-
  tion 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

               120
Million mtrv




               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




                     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 con-
  sumption has been artificially restrained by substitution of sac-
  charin. 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 con-
sumption 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 pre-
sented: 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

               180           Low growth rate
                             Moderate growth rate
               170           Mod. growth + trade reform
Million mtrv




                             Mod. growth + reform + ethanol
               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 pos-
sibly supply 60/70% of the anticipated increase in production, other effi-
cient cane producers will also have to expand. There is also scope for
rebuilding the beet industries in Eastern Europe at least to meet domes-
tic 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 produc-
tivity 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 liberaliza-
tion: the lowering of tariff barriers, reduction in producer subsidies, pri-
vatization 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
               72
% cane sugar




               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 destina-
tion, rather than ship it as a refined product in bags. Trade liberaliza-
tion 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 pro-
duced 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 concentra-
tion among exporting countries and dispersal among importing coun-

Chapter 3/page 4
                                                     The current world picture

         65
                                          % White exports
         60                               % Raw exports

         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
         120
US$/mt




         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        Quantity

        Brazil        12 750       Russia               4 815
        EU             5 050       EU                   2000
        Thailand       4 690       Indonesia            1 845
        Australia      3 947       Japan                1 515
        India          1 950       Korea, Rep           1 400
        Total         28 387       Total            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 concentra-
tion. 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 pro-
duction, 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     1996    1997     1998    1999     2000   2001

         3.6    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 dis-
guise the sugar in ‘blends’ exaggerates the difficulty. Similarly, the
‘democratization of corruption’ has meant more sugar is being smug-
gled than ten years ago. All this makes it difficult to keep track of
trade flows and has led some observers to argue that global con-
sumption 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

              50
US cents/lb




              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 con-
sumption 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 coun-
tries 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 productiv-
ity 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 diffi-
cult 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 re-
ductions 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 encourag-
ing 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 trade-
advocating 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 main-
taining 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 all-
time 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 oppor-
  tunities for alcohol (e.g. Japan and India)
• encourage the Brazilian government to further promote fuel alcohol
  usage domestically, as a substitute for imported oil



                      400

                      350         Centre-South
                                  North North-East
                      300

                      250
         Million mt




                      200

                      150

                      100

                       50

                        0
                         90/91   92/93   94/95   96/97   98/99   00/01   02/03

         3.8           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 impor-
tant, 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 vari-
able 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   93/94     95/96      97/98   99/00   01/02   93/04

        3.9    Annual change in Brazil cane growth by region.

Chapter 3/page 12
                                                      The current world picture

                      500
                                    Total Brazil
                      450           Aggressive expansion
                                    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 per-
spective 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 pro-
duction following the sharp fall in production in 2000/01. The ‘Aggres-
sive expansion’ line shown in the chart projects growth at a significantly
faster expansion path than the historical linear trendline. The ‘Aggres-
sive 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 produc-
ers 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 fol-
lowing year, a 25% increase in cane yielded a 19% increase in sugar
produced. In neither year did Thai industry forecasts indicate that a sig-
nificant increase was expected. Most of the production increase has




                              80                                                     8
                                         Cane production
                              70                                                     7
                                         Sugar production
                              60                                                     6
                                                                                         Million tonnes sugar
        Million tonnes cane




                              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
                                             The current world picture

                 3500
                        00/01   01/02        02/03
                 3000

                 2500

                 2000
        000 mt



                 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 facto-
ries 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 corre-
sponding 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, includ-
ing the system of auctioning B quota tonnage in October or Novem-
ber 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 nor-
mally 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 incen-
tive exists for the industry to lift raw sugar quality. Some milling groups
are moving in this direction and will now guarantee a minimum polar-
ization 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 differen-
tial) 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 miscalcu-
lated, sold more than existed and were instead squeezed themselves.

                                                          Chapter 3/page 17
Sugar Trading Manual

                   250

                   200

                   150
          Points


                   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 domes-
tic 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 – includ-
ing 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 capac-
ity 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 pos-
sible export potential. Its cane production is second only to that of
Brazil, and it is the world’s largest consuming nation. Its ‘partial’ involve-
ment 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

                     1000
         000 mtrv




                      500
                                                                                                                            Net importer




                       0

                     –500

                    –1000

                    –1500
                            91/92

                                    92/93

                                            93/94

                                                    94/95

                                                            95/96

                                                                    96/97

                                                                            97/98

                                                                                    98/99

                                                                                            99/00

                                                                                                    00/01

                                                                                                            01/02

                                                                                                                    02/03




        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, through-
out the 1990s, India fluctuated between net exporter and net importer,
and the cycles had an element of predictability about them. Low domes-
tic 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 afford-
ability of sugar.




                        24
                                     Production
                        22
                                     Consumption
                        20
         Million mtrv




                        18

                        16

                        14

                        12

                        10
                             91/92   93/94    95/96   97/98   99/00   01/02

        3.15 Indian sugar production/consumption.

Chapter 3/page 20
                                              The current world picture

                 360                                     W'sale USD/t
                                                         Traded 100 ICUMSA
                 320                                     Traded Thai raws

         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 govern-
ment 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 rev-
enues 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 inter-
nationally, and politicians then set about propping up mills in a finan-
cial 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 under-
standing 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 ware-
house rent, insurance and interest charges – as well as some element
to take account of the cost of keeping the commodity in good condi-
tion 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 com-
modity 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 expen-
sive 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 in-
sight into that, we have to look beyond the simple textbook theory.
   The move from carrying charges to inverses in the sugar market coin-
cided 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 his-
toric 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 Indone-
sia (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 pre-
ferred 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 popula-
tion 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 pro-
ducers 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 arbi-
tragers 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 posi-
tions in sugar, peaking at over five million tonnes in mid-February 2003.
Their ensuing liquidation was obviously one factor behind the flatten-
ing 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 eco-
nomic conditions. However, this hasn’t happened and spot months
have continually expired at premiums. As such, one has to look else-
where 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 par-
ticularly 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

                 150
        Points

                 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 con-
tract. 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 30-
day shipment window, even if it means that their sugar is worth a dis-
count 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 hap-
pened 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 dif-
ferent 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
                 50
                 40
        US$/t




                 30
                 20
                 10
                  0
                –10
                –20
                      93   94   95   96   97   98   99   00   01   02   03

        3.18 Thai whites premiums.

Chapter 3/page 26
                                          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 produc-
tion, there has often been a deficit of sugar that can technically be deliv-
ered 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 opera-
tors 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 mar-
ginal, 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 non-
deliverable 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 non-
deliverable 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 re-
ceivers. 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 pre-
sentation. 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 deliv-
ery. However, so far all arbitrations have ruled in favour of the deliv-
erer. 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 non-
deliverable 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 pro-
duction 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 pro-
duction, which has not only increased the supply of deliverable sugar
but also buried the Far East premium by swinging the region into struc-
tural 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 sit-
uation is now over. Increased production in Thailand coupled with infra-
structure 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 con-
siderations 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


                      12
        US cents/lb




                      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 produc-
ers 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 competi-
tors cannot come close to these numbers – most have costs of pro-
duction 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 pro-
duction 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 prod-
  ucts 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 tech-
  nologies 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 valu-
able 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 pro-
  duction 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 competi-
tiveness 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 coun-
tries 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 method-
ological 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 sim-
plest, 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 pro-
duction 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 coun-
tries, 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

                  350
2001 US$/tonne




                  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     Long-run trend world raw sugar price


                           4.1    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 bench-
mark 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 dis-
cernible 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 govern-
ment 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 sig-
nificant. 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 com-
paring costs of production, is the distinction between cane and beet
sugar producers. Sugar is an unusual commodity in that it can be pro-
duced 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 com-
pares 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                  Factory                  Total

         4.2   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 pro-
  duction 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 dis-
tinction 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%
        150
Index




        130

        110
                                                                 Rate of decline = 3.8%
         90

         70

         50
              1980    1982    1984   1986      1988      1990   1992      1994     1996    1998     2000
                        Beet sugar          Cane sugar          Beet sugar trend          Cane sugar trend


                4.3   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 pro-
nounced. Taken together, the weighted average world cane sugar pro-
duction 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 pro-
duction 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


                          110
Real costs (1979 = 100)



                          100


                          90


                          80


                          70


                          60
                                0


                                          2


                                                    4


                                                              6


                                                                        8


                                                                                  0


                                                                                            2


                                                                                                      4


                                                                                                                6


                                                                                                                          8


                                                                                                                                    0


                                                                                                                                              2
                            /8


                                         /8


                                                   /8


                                                             /8


                                                                       /8


                                                                                 /9


                                                                                           /9


                                                                                                     /9


                                                                                                               /9


                                                                                                                         /9


                                                                                                                                   /0


                                                                                                                                             /0
                          79


                                     81


                                               83


                                                         85


                                                                   87


                                                                             89


                                                                                       91


                                                                                                 93


                                                                                                           95


                                                                                                                     97


                                                                                                                               99


                                                                                                                                         01
                     19


                                    19


                                              19


                                                        19


                                                                  19


                                                                            19


                                                                                      19


                                                                                                19


                                                                                                          19


                                                                                                                    19


                                                                                                                              19


                                                                                                                                        20
                                               Averages using fixed weights                      Averages using actual weights

                                    4.4       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 pro-
ducer’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 diver-
gence 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           Jamaica          Mexico   South Africa
                                         Field     Factory   Total

            4.5       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 pro-
    duction 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 pro-
    ducing 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             Poland        Ukraine      US beet
                                   Field    Factory   Total

          4.6   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 tech-
nical 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 coun-
tries, respectively.
   Australia stands out as having the highest sucrose yields among this
group of countries. This high level of performance in the field con-
tributes to Australia’s low field costs.

                                                             Chapter 4/page 9
    Sugar Trading Manual

                              11

                              10
Tonnes per hectare per year




                              9

                              8

                              7

                              6

                              5

                              4

                              3
                                   Australia    C/S Brazil     Jamaica       Mexico      South Africa

                                   4.7   Sucrose yields per hectare per annum for selected cane
                                         countries, 1998/99–2002/03.


                              12


                              10
Tonnes per hectare per year




                               8


                               6


                               4


                               2


                               0
                                    China          EU           Poland       Ukraine        US beet

                                   4.8   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


                      10000
Tonnes cane per day



                      8000


                      6000


                      4000


                      2000


                         0
                                    Australia   C/S Brazil     Jamaica       Mexico      South Atrica

                              4.9     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 particu-
larly 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 impor-
  tant 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
        Sugar Trading Manual

Tonnes sugar per tonne of daily milling capacity   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

                                                   8000

                                                   7000
      Tonnes beet per day




                                                   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
                                                                                                  Costs of production


Tonnes sugar per tonne of daily slicing capacity
                                                   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 capac-
ity, 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 sur-
prise 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 pro-
ducing 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 bever-
age 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,     0.7
                        tapioca
HFCS-55               as above                         0.95
Fructose              Invert sugar                     1.1–1.4
Glucose/dextrose      Cereals                          0.1–0.5
Inulin                Chicory                          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 con-
fectionery, 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 character-
istics, 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 sweet-
ener 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      Sugar       Sugar &     %HFCS        Annual growth
                                    HFCS
                                                            HFCS     Sugar

1986/87        6 843     94 077     100 921     7.3         na       na
1987/88        7 186     98 018     105 204     7.3         5.0       4.2
1988/89        7 220     98 049     105 269     7.4         0.5       0.0
1989/90        7 548    100 196     107 743     7.5         4.5       2.2
1990/91        7 795    100 833     108 628     7.7         3.3       0.6
1991/92        8 128    101 831     109 959     8.0         4.3       1.0
1992/93        8 422    104 894     113 316     8.0         3.6       3.0
1993/94        8 928    104 045     112 973     8.6         6.0      -0.8
1994/95        9 427    105 387     114 815     8.9         5.6       1.3
1995/96        9 771    108 800     118 570     9.0         3.6       3.2
1996/97       10 409    112 035     122 445     9.3         6.5       3.0
1997/98       10 920    114 935     125 855     9.5         4.9       2.6
1998/99       11 043    114 581     125 624     9.6         1.1      -0.3
1999/2000     11 361    117 997     129 358     9.6         2.9       3.0
2000/01       11 437    118 544     129 981     9.6         0.7       0.5
2001/02       11 665    121 879     133 544     9.6         2.0       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 sig-
nificant 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     1987/88     1988/89     1989/90     1990/91     1991/92     1992/93


Belgium               72 250      72 248      72 250      72 250       72 252      71 668      72 250
Finland                7 000       7 000       8 000       8 000        9 000      15 000      20 000
France                19 855      20 022      19 986      20 022       20 022      19 926      20 022
Germany               35 684      35 509      35 679      35 662       35 684      34 496      35 684
Greece                   750       2 692       6 357       7 440        9 795      12 334      11 711
Italy                 20 438      19 359      20 115      20 463       20 463      20 439      20 476
Netherlands            5 686       8 414       9 175       9 175        9 159       9 176       9 174
Portugal                 322         370         389       1 276        5 214       6 609       7 899
Spain                 82 993      82 990      82 976      82 973       83 000      82 999      82 992
United Kingdom        27 305      26 974      27 483      27 356       27 469      27 432      27 397
European Union       272 283     275 578     282 410     284 617      292 058     300 079     307 605
Bulgaria                   0      15 303      14 673      12 359        6 845       5 348       5 000
Hungary               46 000      40 000      40 000      40 000       40 000      40 000      40 000
CIS                        0           0       5 000       5 000        8 000       8 000      10 000
ex-Yugoslavia         60 000      40 000      27 300      25 300       10 000       8 000       5 000
Poland                     0           0           0           0            0           0           0
Slovakia                   0           0           0           0            0           0           0
Turkey                     0           0           0           0            0           0           0
Europe               378 283     370 881     369 383     367 276      356 903     361 427     367 605
Egypt/ Africa              0      30 000      38 000      48 340       40 310      39 600      51 240
Argentina            169 000     164 000     146 000     157 000      175 000     180 000     188 000
Canada               237 000     240 000     240 000     240 000      250 000     250 000     255 000
Mexico                                                                      0           0           0
USA                 5 158 000   5 396 000   5 392 000   5 597 000   5 745 300   6 053 750   6 331 350
Uruguay                     0       6 000      10 000      18 000      18 000      18 000      18 000
Americas            5 564 000   5 806 000   5 788 000   6 012 000   6 188 300   6 501 750   6 792 350
China                  10 000      10 000      10 000      30 000      30 000      30 000      35 000
India                   3 000       3 000       3 000       3 000       3 000       5 000       5 000
Indonesia              15 000      18 000      16 000      15 000      14 000      12 000      10 000
Japan                 688 006     728 977     712 244     742 410     782 788     794 405     746 889
Malaysia               16 000      16 000      16 000      16 000      16 000      18 000      18 000
South Korea           148 000     178 000     198 000     220 000     225 000     213 000     199 000
Taiwan                 15 000      19 000      51 000      67 000     110 000     125 000     165 000
Thailand                3 000       3 000      15 000      18 000      20 000      24 000      28 000
Asia                  898 006     975 977   1 021 244   1 116 410   1 025 788   1 221 405   1 206 889
Australia/Oceania       3 000       3 000       3 500       3 500       3 500       3 500       3 500
World               6 843 289   7 185 858   7 220 127   7 547 526   7 794 801   8 127 682   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, con-
           sumption of these two sweeteners has shown little growth (see Fig.
           5.2). Around 80% of glucose syrup and dextrose is used in commer-
           cially 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/        2000/01      2001/02
                                                                           2000

   72 250      72 250      66 725       72 091       72 232       72 250       72 250       69 394       71 592
   20 000      11 930      12 425       11 930       11 930       11 930       11 930       11 400       11 872
   20 022      20 022      20 000       20 022       20 022       20 022       20 022       19 258       19 846
   35 684      35 684      35 684       35 328       35 684       35 684       35 684       34 405       35 389
   12 736      12 985      12 985       13 000       13 000       12 997       13 000       12 534       12 911
   20 475      20 490      21 213       20 465       20 468       20 470       20 470       19 737       20 274
    9 175       9 175       8 956        9 174        9 140        9 175        9 175        8 846        9 099
    9 261      10 000      10 000       10 000       10 000       10 000       10 000        9 642        9 700
   83 000      83 000      83 000       83 000       83 000       83 000       83 000       81 174       82 400
   27 303      27 318      26 778       27 016       27 245       27 483       27 478       26 387       27 237
  309 906     302 854     297 766      302 026      302 721      303 011      303 009      292 777      300 320
    5 000      15 000      20 000       10 000       10 000       35 000       30 000       30 000       30 000
   40 000     104 000     117 000      130 000      130 000      135 000      130 000      130 000      135 000
   10 000      10 000      10 000       15 000       30 000       20 000       20 000       30 000       35 000
   10 000      25 000      30 000       30 000       25 000       10 000        8 000       10 000       12 000
        0           0           0            0            0       10 000       20 000       40 000       50 000
        0           0           0            0       15 000       28 253       41 664       43 429       52 000
        0           0           0            0       35 000       85 000      120 000      220 000      300 000
  374 906     456 854     474 766      487 026      547 721      626 264      672 673      796 206      914 320
   69 387      73 196      93 000       94 000       94 000       93 000       86 000       91 000      100 000
  210 000     205 000     190 000      210 000      220 000      230 000      235 000      280 000      260 000
  260 000     255 000     255 000      265 000      260 000      255 000      260 000      265 000      280 000
        0           0      25 000      125 000      240 000      255 000      350 000      360 000      220 000
6 769 526   7 071 624   7 333 805    7 750 000    8 218 000    8 273 755    8 414 123    8 262 840    8 431 278
   20 000      25 000      20 000            0            0            0            0            0            0
7 259 526   7 556 624   7 823 805    8 350 000    8 938 000    9 013 755    9 259 123    9 167 840    9 191 278
   35 000      50 000      70 000       85 000       85 000       90 000       95 000       95 000      110 000
    5 000       5 000       5 000        5 000        5 000        5 000        5 000        5 000        5 000
   14 000      14 000      25 000       30 000       25 000       20 000       22 000       18 000       20 000
  727 416     805 819     783 621      878 461      789 000      760 000      755 000      741 000      761 000
   20 000      25 000      28 000       28 000       22 000       22 000       25 000       25 000       25 000
  215 000     213 000     221 000      231 000      213 000      218 000      240 000      265 000      295 000
  173 000     180 000     195 000      165 000      155 000      153 000      155 000      170 000      175 000
   30 000      42 000      50 000       54 000       44 585       34 000       38 000       55 000       60 000
1 219 416   1 334 819   1 377 621    1 476 461    1 338 585    1 302 000    1 335 000    1 374 000    1 451 000
    5 000       6 000       1 500        2 000        2 000        8 000        8 000        8 000        8 000
8 928 235   9 427 493   9 770 692   10 409 487   10 920 306   11 043 019   11 360 796   11 437 046   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)

                                                          1986/87    1987/88    1988/89    1989/90    1990/91     1991/92    1992/93

United States                            HFCS              5 197.3    5 413.2    5 395.9    5 601.0    5 720.7     6 080.9    6 383.9
                                         Sugar             6 890.4    7 024.3    7 082.8    7 302.4    7 489.8     7 551.7    7 567.9
                                         Sugar &   HFCS   12 087.7   12 437.5   12 478.8   12 903.4   13 210.5    13 632.6   13 951.8
                                         %HFCS                43.0       43.5       43.2       43.4       43.3        44.6       45.8
Canada                                   HFCS                125.0      125.0      125.0      126.1      165.3       140.7      122.6
                                         Sugar             1 065.8    1 047.0    1 028.0      981.3      981.3     1 028.0    1 046.7
                                         Sugar &   HFCS    1 190.8    1 172.0    1 153.0    1 107.5    1 146.6     1 168.8    1 169.4
                                         %HFCS                10.5       10.7       10.8       11.4       14.4        12.0       10.5
Argentina                                HFCS                169.0      164.0      146.0      157.0      175.0       180.0      188.0
                                         Sugar             1 066.4      885.1      837.8      972.2    1 018.0     1 138.1    1 097.1
                                         Sugar &   HFCS    1 235.4    1 049.1      983.8    1 129.2    1 193.0     1 318.1    1 285.1
                                         %HFCS                13.7       15.6       14.8       13.9       14.7        13.7       14.6
Mexico                                   HFCS                  0.0        0.4        0.4        3.9        8.6        17.9       30.0
                                         Sugar             3 286.7    3 473.2    3 711.8    3 729.2    4 267.4     4 045.7    4 020.0
                                         Sugar &   HFCS    3 286.7    3 473.6    3 712.2    3 733.1    4 276.0     4 063.6    4 050.0
                                         %HFCS                 0.0        0.0        0.0        0.1        0.2         0.4        0.7
Other                                    HFCS                  0.0        6.0       10.0       18.0       18.0        18.0       18.0
                                         Sugar            11 394.4   12 139.2   11 560.4   12 550.8   11 466.2    12 926.5   13 073.8
                                         Sugar &   HFCS   11 394.4   12 145.2   11 570.4   12 568.8   11 484.2    12 944.5   13 091.8
                                         %HFCS                 0.0        0.0        0.1        0.1        0.2         0.1        0.1
Total                                    HFCS              5 491.3    5 708.6    5 677.4    5 906.0    6 087.6     6 437.5    6 742.5
Americas                                 Sugar            23 703.7   24 568.8   24 220.8   25 536.0   25 222.7    26 690.1   26 805.6
                                         Sugar &   HFCS   29 195.0   30 277.4   29 898.2   31 442.0   31 310.4    33 127.6   33 548.0
                                         %HFCS                23.2       23.2       23.4       23.1       24.1        24.1       25.2


Source: F.O. Licht and International Sugar Organization.




                                     9

                                     8

                                     7
         Million tonnes, dry basis




                                     6

                                     5
                                     4

                                     3
                                     2
                                     1

                                     0
                                             Europe              USA            Other                 Asia              Other
                                                                               Americas
                                                          1998/99      1999/00   2000/01         2001/02         2002/03

                                              5.1     World HFCS production.

                                     Chapter 5/page 6
                                                                                      Alternative sweeteners



1993/94                              1994/95      1995/96      1996/97    1997/98      1998/99     1999/2000    2000/01     2001/02

 6 769.5                              7 071.6      7 333.8      7 750.0    8 218.0      8 273.8     8 414.1      8 262.8    8 431.278
 7 656.2                              7 901.1      8 019.0      8 131.9    8 224.3      8 457.3     8 473.4      8 458.9       8 541.1
14 425.7                             14 972.7     15 352.8     15 881.9   16 442.3     16 731.0    16 887.5     16 721.8     16 972.4
    46.9                                 47.2         47.8         48.8       50.0         49.5        49.8         49.4          49.7
   142.7                                201.5        178.8        202.9      272.9        238.9       223.6        207.3         225.7
 1 074.8                              1 098.1      1 121.5      1 144.9    1 144.9      1 121.5     1 121.5      1 154.2       1 158.9
 1 217.5                              1 299.6      1 300.3      1 347.7    1 417.8      1 360.4     1 345.1      1 361.5       1 384.6
    11.7                                 15.5         13.7         15.1       19.2         17.6        16.6         15.2          16.3
   210.0                                205.0        190.0        210.0      220.0        230.0       235.0        280.0         260.0
 1 121.5                              1 211.2      1 261.7      1 259.3    1 224.2      1 261.7     1 355.1      1 387.9       1 420.6
 1 331.5                              1 416.2      1 451.7      1 469.3    1 444.2      1 491.7     1 590.1      1 667.9       1 680.6
    15.8                                 14.5         13.1         14.3       15.2         15.4        14.8         16.8          15.5
    67.2                                 49.8        102.7        313.5      398.6        434.3       497.8        477.1         255.7
 4 157.7                              4 084.3      4 133.9      3 952.2    3 954.2      4 012.3     4 112.1      4 317.0       4 539.0
 4 224.9                              4 134.2      4 236.6      4 265.7    4 352.8      4 446.6     4 609.9      4 794.1       4 794.7
     1.6                                  1.2          2.4          7.3        9.2          9.8        10.8         10.0           5.3
    20.0                                 25.0         20.0          0.0        0.0          0.0         0.0          0.0           0.0
13 169.3                             13 539.5     13 897.8     14 494.8   15 094.8     15 523.8    15 997.1     16 296.5     16 508.9
13 189.3                             13 564.5     13 917.8     14 494.8   15 094.8     15 523.8    15 997.1     16 296.5     16 508.9
     0.2                                  0.2          0.1          0.0        0.0          0.0         0.0          0.0           0.0
 7 209.5                              7 552.9      7 825.3      8 476.4    9 109.5      9 177.0     9 370.5      9 227.2       9 172.7
27 179.4                             27 834.3     28 433.9     28 983.1   29 642.4     30 376.6    31 059.2     31 614.5     32 168.4
34 388.9                             35 387.2     36 259.1     37 459.5   38 751.9     39 553.6    40 429.7     40 841.7     41 341.1
    26.5                                 27.1         27.5         29.2       30.7         30.2        30.2         29.2          28.5




                            10 000
000 short tons, dry basis




                             8 000

                             6 000

                             4 000

                             2 000

                                0
                                      1975      1978   1981      1984     1987      1990    1993    1996      1999   2002
                                                             Dextrose     Glucose          HFCS

                                     5.2   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      1978   1981   1984   1987    1990   1993   1996   1999   2002
                                                                 Sugar   HFCS

                                     5.3   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 prod-
    ucts. 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 condi-
    tions, 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 thou-
    sand 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 invest-
    ment 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   Imports

                                     5.4   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 continu-
ing 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 con-
trast 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 declin-
ing 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. Con-
sumption 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 analy-
sis conducted by the USDA (Haley, S., 2003, ‘Measuring the effects
of imports of sugar containing products on US sugar deliveries’, SSS-
237-01, 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 Feb-
ruary 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 compa-
nies – 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

                         160 000
Metric tons, dry basis




                         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 Manufactur-
ing Co, CPC International Inc and Archer Daniels Midland Co. Perma-
nent 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 com-
plaint to the WTO dispute settlement panel in October 1998. In a ruling
released 28 January 2000, the panel determined that Mexico’s anti-
dumping 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 vio-
lation 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 sus-
pended 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

                         600
000 tonnes, dry weight




                         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 con-
sumption 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 con-
sumption 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 sweet-
eners 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 negoti-
ated 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 effec-
tively increased supplies to the domestic market (by increasing allot-
ments 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. Accord-
ing 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 pro-
duction 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 con-
sumption 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)

                                  1986/87    1987/88       1988/89    1989/90    1990/91    1991/92    1992/93

Japan           HFCS                 688.0      729.0         712.2      742.4      782.8      794.4      746.9
                Sugar              2 529.6    2 529.6       2 529.6    2 529.6    2 529.6    2 529.6    2 529.6
                Sugar &   HFCS     3 217.6    3 258.6       3 241.9    3 272.0    3 312.4    3 324.0    3 276.5
                %HFCS                 21.4       22.4          22.0       22.7       23.6       23.9       22.8
South Korea     HFCS                 148.0      178.0         198.0      220.0      225.0      213.0      199.0
                Sugar                668.4      727.0         769.2      770.1      788.6      802.6      803.6
                Sugar &   HFCS       816.4      905.0         967.2      990.1    1 013.6    1 015.6    1 002.6
                %HFCS                 18.1       19.7          20.5       22.2       22.2       21.0       19.8
Taiwan          HFCS                  15.0       19.0          51.0       67.0      110.0      125.0      165.0
                Sugar                495.0      505.1         490.6      509.6      526.9      498.3      494.1
                Sugar &   HFCS       510.0      524.1         541.6      576.6      636.9      623.3      659.1
                %HFCS                  2.9        3.6           9.4       11.6       17.3       20.1       25.0
Other Asia      HFCS                  52.0       55.0          65.0       87.0       88.0       94.0       96.0
                Sugar             27 949.4   28 978.1      28 868.2   30 065.3   31 251.6   32 683.6   33 564.7
                Sugar &   HFCS    28 001.4   29 033.1      28 933.2   30 152.3   31 339.6   32 777.6   33 660.7
                %HFCS                  0.2        0.2           0.2        0.3        0.3        0.3        0.3
Total Asia      HFCS                 903.0      981.0       1 026.2    1 116.4    1 205.8    1 226.4    1 206.9
                Sugar             31 642.5   32 739.9      32 657.6   33 874.7   35 096.7   36 514.1   37 392.1
                Sugar &   HFCS    32 545.5   33 720.9      33 683.8   34 991.1   36 302.5   37 740.5   38 599.0
                %HFCS                  2.8        2.9           3.0        3.2        3.3        3.2        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    2001/02

   727.4      805.8      783.6        878.5      789.0      760.0      755.0         741.0       761.0
 2 529.6    2 529.6    2 529.6      2 529.6    2 529.6    2 529.6    2 529.6       2 529.6     2 529.6
 3 257.0    3 335.4    3 313.2      3 408.1    3 318.6    3 289.6    3 284.6       3 270.6     3 290.6
    22.3       24.2       23.7         25.8       23.8       23.1       23.0          22.7        23.1
   215.0      213.0      221.0        231.0      213.0      218.0      240.0         265.0       295.0
   796.4      883.1      973.2      1 034.1    1 040.2      921.4      903.0         945.6     1 015.0
 1 011.4    1 096.1    1 194.2      1 265.1    1 253.2    1 139.4    1 143.0       1 210.6     1 310.0
    21.3       19.4       18.5         18.3       17.0       19.1       21.0          21.9        22.5
   173.0      180.0      195.0        165.0      155.0      153.0      155.0         170.0       175.0
   494.1      494.1      494.1        494.1      494.1      494.1      494.1         494.1       494.1
   667.1      674.1      689.1        659.1      649.1      647.1      649.1         664.1       669.1
    25.9       26.7       28.3         25.0       23.9       23.6       23.9          25.6        26.2
   104.0      136.0      178.0        202.0      181.6      171.0      185.0         198.0       220.0
34 960.2   36 492.5   37 525.6     39 147.5   39 399.8   39 137.0   40 742.5      42 110.4    43 502.1
35 064.2   36 628.5   37 703.6     39 349.5   39 581.4   39 308.0   40 927.5      42 308.4    43 722.1
     0.3        0.4        0.5          0.5        0.5        0.4        0.5           0.5         0.5
 1 219.4    1 334.8    1 377.6      1 476.5    1 338.6    1 302.0    1 335.0       1 374.0     1 451.0
38 780.4   40 399.4   41 522.6     43 205.4   43 463.8   43 082.2   44 669.3      46 079.8    47 540.8
39 999.8   41 734.2   42 900.3     44 681.9   44 802.4   44 384.2   46 004.3      47 453.8    48 991.8
     3.0        3.2        3.2          3.3        3.0        2.9        2.9           2.9         3.0




    30

    25

    20
%




    15

    10

     5

     0
             Japan               South         Taiwan        Other Asia         Total Asia
                                 Korea
                                  1999/2000      2000/01      2001/02

           5.7   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
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 duty-
free 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 gov-
ernment 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, develop-
ment of an HFCS industry relies on an advantageous tax and import
regime for grains as against sugar. There is no domestic sugar indus-
try 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 coun-
tries have not been sufficiently favourable over the past decade. Ana-
lysts 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 by-
products 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 govern-
ment 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)

                  HFCS         Sugar          Sugar & HFCS          %HFCS

1986/87           272          12 691         12 963                2.1
1987/88           276          12 677         12 953                2.1
1988/89           282          12 730         13 012                2.2
1989/90           285          12 897         13 181                2.2
1990/91           292          12 905         13 197                2.2
1991/92           300          12 925         13 225                2.3
1992/93           308          12 904         13 212                2.3
1993/94           310          12 747         13 057                2.4
1994/95           303          12 798         13 101                2.3
1995/96           298          13 283         13 581                2.2
1996/97           302          13 439         13 741                2.2
1997/98           303          13 247         13 550                2.2
1998/99           303          13 247         13 550                2.2
1999/00           303          13 615         13 918                2.2
2000/01           293          13 110         13 403                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 main-
tenance 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 pro-
duction 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 produc-
ing 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. Pro-
duction 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 equiva-
lent (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 con-
tinue 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 cal-
culation 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        127 627       10 000        137 627
        Poland          24 911        1 870         26 781
        Slovakia        37 524        5 023         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 previ-
ously. The industry is suffering from a general malaise evident through-
out 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 capac-
ity to fuel ethanol production. In Europe, production quotas will con-
tinue 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 invest-
ments 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 rela-
tionship 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 fre-
quently 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 A domestic deficit of sugar and a high internal sugar price.
2 Sufficient supplies of starch.
3 A well-developed food production and consumption infrastructure.
4 The availability of capital for investment in research and develop-
  ment and plant and equipment.
5 A favourable government policy.
Vuilleumier (1997) extends this list to include a large soft drinks indus-
try; a skilled labour force that can be trained to use sophisticated pro-
duction 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 well-
developed 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 whole-
                   sale refined beet sugar prices (typically around 30%), ensuring a com-
                   petitive 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 pro-
                   ducers 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
              30
              25
US cents/lb




              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 sweet-
eners 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 pro-
ducing 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 abun-
dant 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 indi-
vidual 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 envi-
ronment 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 poli-
cies – 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 coun-
tries 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         7.43      8.1       8.18      7.78       7.58
  Major exporters3           10.37     10.6      10.72     10.52       9.73
Cane sugar
White value equivalent
  Low-cost producers2        11.02     11.75     11.84     11.41     11.19
  Major exporters3           14.23     14.48     14.61     14.38     13.53
Beet sugar, refined value
  Low-cost producers4        21.31     23.16     23.09     21.21     22.67
  Major exporters5           25.47     26.87     25.9      23.56     24.75
High fructose corn syrup6
  Major producers7           13.45     16.78     13.57     12.86     11.76

1
  Measured in current US cents per pound, ex mill, factory basis.
2
  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).




   In the short term, US HFCS production would not decline without the
US sugar programme. The variable costs of HFCS production are esti-
mated to be below the world price of refined sugar seen during the
1990s and, as shown in Fig. 5.9, HFCS spot prices, although histori-
cally 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 invest-
ment 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

              25

              20
US cents/lb




              15

              10

              5

              0
               1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
                                LDP fob      HFCS-42       HFCS-55       Spot

                   5.9   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 mag-
nitude 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 signifi-
cant sugar price rises, opening the door to substantial HFCS produc-
tion 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 main-
tained 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 sweet-
ness 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 cycla-
mate, but there are also others (see Appendix for a description of each
HIS and its main properties and uses). The use of alternative sweet-
eners 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 Com-
mittee 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-to-
date published statistics reflecting commercial sensitivities. Despite this
frustration, analysts generally agree that HIS have gained an increas-
ing 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 seg-
ments: 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)             Mt      91.5    101.5     108.9     118.5
High Fructose Syrup             Mt       6.2      7.6       9.7      11.4
High Intensity Sweeteners       Mt       7.2      8.5      11.5      13.8
Total                           Mt     104.9    117.6     130.1     143.7
HIS share                       %        6.9      7.2       8.8       9.6
HFS share                       %        5.9      6.5       7.5       7.9
Sugar share                     %       87.2     86.3      83.7      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 inten-
sive 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 con-
sumption (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 after-
taste, 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       40.0       50.0          60.0
                                       Percent

            5.10 Global HIS consumption by region, 1995 and 2000.

                                                          Chapter 5/page 29
Sugar Trading Manual

                                  10
                                   9
                                                                                       1985
Million tonnes sugar equivalent


                                   8                                                   1995
                                   7                                                   2000
                                   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 attrac-
tive to price-sensitive food and drink manufacturers in developing coun-
tries (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 tra-
ditional 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 con-
sumption 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 syner-
gies 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 limita-
tions, have also shared in the general growth in HIS over the past
decade. However, use is focused in Asia, where cyclamates are typi-
cally used in blends with saccharin. Cyclamate use reached 0.9 million
tonnes se in 2000, of which 0.5 million tonnes was in Asia. Consump-
tion 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/acesul-
fame-K blend. The US FDA approved acesulfame-K for use in soft
drinks on 6 July 1998, which has boosted its demand but with nega-
tive impacts for aspartame use. The popularity of acesulfame-K/aspar-
tame 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 cap-
turing 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 sig-
nificant 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 sweet-
eners (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, sug-
gesting the aspartame market had reached maturity. By 2000, aspar-
tame 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          1.5          2
                                     Million tonnes wse

        5.12 North America’s use of intense sweeteners.

Chapter 5/page 32
                                            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 aspar-
tame (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 dress-
ings and certain snack foods where prior approval had not been
granted. Most of the aspartame used in the US is produced domesti-
cally (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 sac-
charin market in the US is well established. Even so, increased blend-
ing 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      8
                                Million tonnes wse

        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, reach-
ing around 5.9 million tonnes (accounting for over half of world sac-
charin 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 sub-
stituting 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 gov-
ernment to introduce a set of measures to help support prices, includ-
ing 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 new-
generation 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 proper-
ties of aspartame often mean that it is not suitable for use in these food-
stuffs 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 orig-
inally 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 dis-
placed between 2.6 and 3.9 million tonnes of domestic sugar con-
sumption, 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 mag-
nitude 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 saccha-
rin 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 intro-
duced 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. Further-
more, 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 pro-
duction 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 sac-
charin 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 implemen-
tation of the EU Sweeteners Directive at the start of 1996 – which har-
monized 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 prod-
ucts. 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 appli-
cations. 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 ben-
efiting 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 inten-
sive sweeteners. In contrast, growth in the use of the other poly-ols as
bulking agents has arisen from the rising popularity of ‘lite’ confec-
tionery. 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           cents/lb se

                            1995                 1999

        Saccharin           <1.00                <1.00
        Aspartame           13.00–14.00          10.00–11.00
        Cyclamates          4.00–5.00            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 aspar-
tame, 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 sweet-
eners 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 aspar-
tame 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   Blend      White sugar
                          power        Actual     equivalent

                                       kg         kg
        Sugar               1          20          20
        Saccharin         300           0.037      11
        Aspartame         200           0.075      15
        Acesulfame-K      200           0.035        7
                                                   53
        Synergy                                    47
        Total sweetness                           100


                                                         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 sweeten-
ing power of [20 + 15 + 7 + 11] 53 kilos of sugar. Yet, this blend actu-
ally 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 sweet-
ener), which is equivalent to the price of 5.1 kilos of sugar plus the ace-
sulfame-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

                           Blend      Unit cost   Total cost    Sugar equivalent
                           (kg)       €/kgø       €             kg

Sugar                      20          0.665      13.3           20
Saccharin                   0.037      3.72        0.1            0.21
Aspartame                   0.075     46.58        3.5            5.25
Acesulfame-K                0.035     74.97        2.6            3.95
Sugar/HIS blend                                   19.6           29.41
White sugar equivalent                            66.5          100.00
Savings                                           46.9           70.59

ø
 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 govern-
ment 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.) Coca-
Cola 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 impact-
ing 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 bev-
erage products.


Sugar/HIS blending in other markets
Other EU member states are following the UK’s lead. Sufficient infor-
mation 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 sweeten-
ers 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 com-
pete 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 sweet-
eners 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 con-
fectionery, 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 econom-
ics 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 devel-
opments 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 sweet-
ener sector (particularly beverages). This is because HFCS and sugar
will remain imperfect substitutes in some applications. In the confec-
tionery 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 dis-
placed sugar in many markets. The substitution process is therefore
coming to an end and demand will grow more sluggishly than previ-
ously. In Europe, production quotas will continue to constrain isoglu-
cose 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, pro-
duction and consumption of HFCS will continue to grow and be a sub-
stitute 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 negotia-
tions), 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 pro-
tective 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 sweet-
eners 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 con-
traction of the US sector and sugar regaining some liquid sugar
markets. On balance, demand for HFCS in the United States will con-
tinue 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 dis-
incentive 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 sub-
stitution. 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 pos-
sibly 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 per-
ceptible 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, con-
fectionery 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 desir-
able 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 intro-
duced 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, aspar-
tame 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 re-
instated or approved its use. It is approved for use in around 50 coun-
tries 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 tempera-
tures 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 aspar-
tame 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-phenylala-
nine combined with two organic functional groups: one known as an
ethyl ester group and the other as a neohexyl group. These compo-
nents 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 Cor-
poration 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 crys-
talline powder. It is 600 times sweeter than sucrose and is stable at high
temperatures. Tate & Lyle PLC of the UK and McNeil Specialties Prod-
ucts 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 veg-
etables, 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 Interna-
cional, 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 Com-
pendium, 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 Inter-
national 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 pre-
sented 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 feed-
stocks 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 pro-
duction of ethyl alcohol is controlled by one or two companies. As pub-
licly 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 mis-
leading, 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 feed-
stocks, 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 indus-
trialized 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
                 70 000
                 60 000
Million litres




                 50 000
                 40 000
                 30 000
                 20 000
                 10 000
                     0
                      1975      1980    1985     1990      1995   2000    2005   2010
                                             Fuel   Industrial    Beverage

                      6.1    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 anti-
knock 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 impur-
ities into the fuel. These substances are insoluble in gasoline. Ethanol’s
affinity for water can lead to phase separation of blended alcohol gaso-
line fuels, resulting in engine damage or poor vehicle performance.
Phase separation is a function of water content, ethanol content, tem-
perature 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 ter-
minal 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 produc-
  tion, 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. Feed-
stocks crucially determine the profitability of fuel ethanol production.
  There are various ways to look at the issue. In Fig. 6.2, the theoreti-
cal 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, par-
ticularly 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 ingredi-
ents (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 pro-
duced, 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 large-
scale 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 condi-
tions 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 achiev-
able if these feedstocks were used to produce sugar. So, if policy-

Chapter 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 distin-
guish between the various stages in the production and marketing
process where subsidization may occur. For this end one can distin-
guish 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 suc-
cessful. By 1980, ethanol had a larger market share in the transporta-
tion 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 occa-
sional 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     Gasoline

            6.5      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 pro-
duction 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
                 2000
                 1500
Million litres


                 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       Exports

                         6.7   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 pre-
ferred to produce sugar for export rather than ethanol for the domes-
tic 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 illus-
trate 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
                        Sugar Trading Manual
BRL/kg of total recoverable sugars
                                                      0.45
                                                                0.4
                                                      0.35
                                                                0.3
                                                      0.25
                                                                0.2
                                                      0.15
                                                                0.1
                                                      0.05
                                                                      1999      2000                2001         2002               2003
                                                                                         Sugar domestic         Anhydrous alcohol

                                                                        6.8   Brazil: ethanol vs domestic sugar economics.



                                                                0.35
                           BRL/kg of total recoverable sugars




                                                                 0.3

                                                                0.25

                                                                 0.2

                                                                0.15

                                                                 0.1

                                                                0.05
                                                                       1999       2000              2001         2002               2003
                                                                                         Sugar exports (VHP)     Anhydrous alcohol (AAC)

                                                                        6.9   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 pro-
                        fitable 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 return-
                        ing 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 con-
sistent 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



                 20 000                                                                    60

                                                                   RFS                     50
                 15 000
                                                                                           40
                                                                                                Cents/gallon
Million litres




                                              California
                 10 000                                                                    30

                                  Clean Air Act                                            20
                  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
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 incen-
tives have certainly helped the ethanol industry in the US get off the
ground. However, the real boost came with the introduction of man-
dated or captive markets in the early 1990s. The Clean Air Act man-
dated the use of cleaner-burning fuels in the dirtiest US cities. In order
to achieve this the legislation enforces the addition of oxygen to gaso-
line. 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 prob-
  lems 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 pro-
gramme 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 expec-
tation 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 con-
trary, it could require significant amounts to supplement domestic sup-

Chapter 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 substan-
tially 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 mega-
tonnes 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 provin-
cial 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, dis-
tributors 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
         3000
000 hl




         2500
         2000
         1500
         1000
          500
            0
                1991      1993     1995       1997     1999     2001   2003
                                     France    Spain   Sweden
                6.11 EU ethanol production.


Member states will now have to try to achieve a 2% share of renew-
ables 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 bio-
fuels, such as ethanol, from the tax on mineral oil products.
   As shown in Fig. 6.11, presently there are three fuel ethanol pro-
ducers 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

          80 000
000 hl




          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 over-
capacity, 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 consump-
tion 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 exemp-
tion. 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 signifi-
cantly, perhaps, there are still substantial differences in the profitability
of potable alcohol as against fuel alcohol and in several states. Con-
sequently, 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 oppor-
tunity with an oil import bill as the decisive reason for pursuing the
bio-ethanol programme. More recently, the role of ethanol in replac-
ing 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, promo-
tion privileges are to be given by the Board of Investment. Tax privi-
leges 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 Thai-
land’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 experiment-
ing 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 cane-
based fuel ethanol sector in the year 2000 at a time of significant finan-
cial hardship. The production of fuel ethanol was identified within some
sections of the industry as one potential course to broaden the finan-
cial base and improve the sector’s financial returns. The proponents
argued that a fuel ethanol industry could be established without build-
ing 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 inter-
national 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 objec-
tive 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 refin-
ery, 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 support-
ing the nation’s ethanol industry. The fuel excise exemption (amount-
ing 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 con-
junction 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 consid-
erably 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 Mega-
project 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 gov-
ernment 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

              –200 000

              –400 000
000 litres




              –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 diver-
sifying 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 Brazil-
ian 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


                  8 000
Million litres




                  6 000


                  4 000


                  2 000


                     0
                            2005      2006   2007     2008    2009     2010    2011     2012

                              Other           Japan           USA             Europe

                          6.14 Projected ethanol imports by country (optimistic scenario).



                                                                          Chapter 6/page 21
Sugar Trading Manual

                 10 000

                  8 000
Million litres




                  6 000


                  4 000

                  2 000


                     0
                              2005   2006    2007    2008       2009    2010   2011   2012
                                                 Fuel ethanol          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 indus-
trial 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      2000     2005     2010
                          EU                  Australia                India
                          Thailand            China                    Colombia
                          Peru                Central America          Canada
                          USA (fuel)          Brazil (fuel)

                      6.16 Projected ethanol production by country.



Conclusions
Fuel ethanol will not go away in the foreseeable future. On the con-
trary, 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 rela-
tionship 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 possibil-
ity of hedging against price fluctuations. There can be little doubt that

                                                                                  Chapter 6/page 23
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 liq-
uidity 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 sub-
sidized 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 policy-
making 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 ship-
ment), 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, pre-
miums 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 ex-
ecution 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 contin-
ues 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 physi-
cal 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 ship-
ment 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 pro-
ducer 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 pro-
ducer 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 exer-
cised, meaning the importer will have priced (bought futures) or aban-
doned, 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 pro-
ducer/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 pro-
tection 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, con-
versely, 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 inter-
est 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 rela-
tion 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 avail-
able 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 regu-
lates 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 com-
modity 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 commod-
ity 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 deliver-
ies 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 pro-
ducers, 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 valu-
able tool for producers, refiners, warehouse operators, traders, lift op-
erators 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 dis-
count 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 deliv-
erer 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 dif-
ferent 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            1200 tonnes            Indonesia           300 tonnes
Thailand           200 tonnes            Morocco             200 tonnes
                                         Russia              700 tonnes
Total             1400 tonnes            Total              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 dif-
ferent 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 advan-
tages versus Brazil: to Indonesia, $10.0 per tonne. Brazil has the fol-
lowing 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 competi-
tive 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                      Import requirements
Thailand              200 tonnes         Indonesia            300 tonnes
Total                 200 tonnes         Total                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             Morocco              200 tonnes
                                         Russia               700 tonnes
Total            1200 tonnes             Total                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 deliver-
able 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 possi-
ble 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 trad-
ing 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 quan-
tities 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 special-
ized high-value sugars. The container companies have been able to
command much higher per ton freight rates, making them uncom-
petitive 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 advan-
tages 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, gener-
ally 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 direc-
tion, 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 approx-
imately 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 dis-
charge 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 Mediter-
ranean, 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 satisfacto-
rily, 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 pos-
sibility 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 trans-
action and another. There are many formats for a voyage calcula-
tion, 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 conven-
tional 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 dis-
charging 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 dis-
charge 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 gen-
erally 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 com-
missions 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 provi-
sional 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 dis-
charging 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 condi-
tion 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 stop-
ping 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 pre-
scribed 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 char-
terer 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 approxi-
mately 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 insur-
ance 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 mari-
time 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 situa-
tions. 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 dis-
charged 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 incor-
porated 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 tween-
decker (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 car-
riers. 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 discharg-
ing 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 hemi-
sphere; 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 prob-
ably 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   Beginning stocks.
2   Production.
3   Consumption.
4   Exports.
5   Imports.
6   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 statisti-
cally 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                 101         3         0        0        104
Consumption                315       315       325      325       1280
White exports                9         6         1        4         20
Raw exports                  0         0         0        0          0
Total exports raw value     10         7         1        4         22
White imports                4         6         7        7         24
Raw imports                429       122       220      270       1041
Total imports raw value    433       129       228      278       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 esti-
mating 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 produc-
ers. 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 esti-
mates. 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 depend-
ing 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 quar-
terly breakdown of their production, consumption and trade statistics.
An estimate of the quarterly production can be made with a little know-
ledge of the harvest periods. Consumption is fairly stable across quar-
ters, with consumption usually a little higher during the warmer summer
months. Forecasting the timing of trade statistics is difficult. If the infor-
mation is not available, you can check the trading partners to see when
they are shipping or receiving sugars. A historical database can be con-
structed 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, pro-
duced or consumed? If prices change a month from now, you will prob-
ably 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 relation-
ship with the internal country players is extremely helpful. Frequent
updating and changing of the forecast is required as data becomes avail-
able. 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 indus-
tries 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 report-
ing, 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 con-
sistently show more exports than imports, obviously impossible. Most
analysts just subtract one to 1.5 million tonnes as a ‘statistical adjust-
ment’ 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 polari-
zation and the whites converted to 99.9 polarization. This means that
low quality whites shipped from Brazil in bulk are considered for sta-
tistical purposes as raws. Importing countries have their own rules
when they classify sugar as whites or raws. Many countries have dif-
ferent 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 depend-
ing 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 fun-
damental 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
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 trad-
able 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
Monthly avg px cents/lb




                               94
                          14
                                  81
                          13                                   97
                          12
                                   95            96
                          11                             88
                                            90      93                                     83
                          10
                                                  91      92
                           9                                    87 98
                           8                                            82
                           7                                                          86
                           6                                                               85
                           5                                                               84
                           4
                           0.4       0.42        0.44       0.46     0.48      0.5          0.52   0.54
                                                 End stocks as % annual consumption

                              9.1   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 coun-
tries 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 pre-
dicting 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 compar-
ing 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 data-
base. 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 calen-
dar 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 ques-
tion, ‘how high is too high and how low is too low?’ To fine-tune the pro-
jections 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 funda-
mental 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 individ-
ual 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 compa-
nies 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 con-
cluded 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 proce-
dure 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 con-
ditions 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 arbi-
tration. 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, regard-
less 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 asso-
ciation 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 consid-
ers 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 pro-
cedure 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 arbi-
tration 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 deliv-
ered to the United Kingdom. Up to the early 1980s there were also
sugar associations of Lancashire and Greenock which were responsi-
ble 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 pro-
vided 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 asso-
ciation’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 com-
mence until the damaged quantity has been assessed by the insurer’s
surveyor and an agreement has been reached as to who is responsi-
ble 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 super-
visor 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 inter-
fere with the unloading procedure unless he is concerned that the inter-
ests 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 sat-
isfied 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 auto-
matically 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 com-
puter. 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 super-
visor’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 con-
tainers 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 dis-
solved 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. Determina-
tion of the polarization is by measurement of the optical rotation of the
clarified solution. The results of the seller’s and the buyer’s polariza-
tions 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 inde-
pendent 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 cal-
culation 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 orga-
nization 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 Com-
modity 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 sus-
pended. The Grain and Feed Trade Association now provides secretar-
ial 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 regu-
lations 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: moond@sugar-assoc.co.uk).




                                                        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 ap-
proved superintendence company means a firm or organisation of inter-
national 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 Inspec-
tion 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 gov-
ernment 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 rep-
resentatives from the country of origin, or other origins, of the govern-
ment 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 monitor-
ing 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 suit-
able 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 unload-
ing 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, ship-
pers and receivers. In the event that no acceptable weighing ap-
paratus 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, represent-
ing each sublot and established in several sets, as defined by the gov-
erning supervision rules.
   Thereafter, sealed samples should be submitted to a recognized ana-
lytical chemist with instructions to analyse the various quality elements
called for under the governing contract. The analysis must be per-
formed 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 super-
visor’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 estab-
lish either a report of loading or discharge or, in the event that a docu-
mentary 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 super-

Chapter 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 establish-
ing all documents that may be required.
   In a normal shipment of sugar (bulk raws or bagged whites) by what-
ever means of transportation, or in the event of warehouse stock moni-
toring or collateral management, or documents required under letter of
credit payments, the following is a typical list of documents the super-
visor 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 trans-
  ported 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 inter-
nationally 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 consign-
ment 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 appear-
ance 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 sig-
nificance. 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 refin-
ery 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   Affination.
 2   Melting.
 3   Clarification.
 4   Filtration.
 5   Decolourization.
 6   Crystallization.
 7   Centrifuging.
 8   Drying and grading.
 9   Other processes.
10   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 re-
move more of the remaining impurities from the syrup. The two pro-
cesses commonly used throughout the world are carbonatation and
phosphatation.

Chapter 12/page 2
                                                                    Decolourization   Crystallization   Dryer
                                                                                                                    Storage
                       Raw sugar shed                                     6
                                                         Mingling                              7
                                 1
                                                          2                                                              10
                                                                                                                9




                                                                                                                    11
                                                                                           8
                       3                                                                                            Outloading
                                                                              5
                    Affination
                                          4                                           Centrifuging
                                                                        Filtration
                                         Clarification

                     12.1    The refining process.




Chapter 12/page 3
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 pre-
cipitate 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, straw-
coloured liquid. There are a number of filtration options in both car-
bonatation 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 cen-
trifuges 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 refin-
ing 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 cri-
teria, and a combination of several deficiencies in raw sugar quality can
substantially affect both the processing rate and the economics of refin-
ing the sugar. It is important to understand why various raw sugar
quality criteria are treated with caution by refiners and why the pro-
cessing 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 affina-
tion 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      Total impurities, lumps,
                     and shape, polarization              foreign matter
Clarification
   Carbonatation     Starch                               Total impurities
   Phosphatation     Total impurities
Filtration           Filtrability, insoluble impurities   Total impurities
Decolourization      Colour                               Ash, other impurities
Crystallization      Colour, dextran, ash



    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 impu-
rities 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 impu-
rity load, the slower the clarification process. Clarification by the phos-
phatation 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 effi-
ciency of the phosphatation process. The filtration step is a critical rate-
determining 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 fil-
tration 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 indicat-
ing 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 com-
ponents can determine their ease of removal. Raw sugar colour nor-
mally 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 decolouri-
zation 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 typi-
cally a bank of such filters in a refinery using char. The char is recy-
cled 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 combina-
tion 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 regen-
erated 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. Exces-
sive 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 cen-
trifuging and drying the refined product. A number of raw sugar quality
factors will have an impact on the final refined sugar quality, depend-

                                                         Chapter 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 crys-
tallization 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 characteris-
tics 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 bacte-
  ria, 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        99.30     0.19        1250      40         18
Australian BR 1       98.90     0.26        1800      67         29
Australian JA         97.85     0.47        3529      79         30
Brazil Cristal        99.80     0.10         250     138        200
Brazil VHP            99.48     0.12         880     168        220
Brazil raw            98.49     0.26        2600     124        140
South Africa VHP      99.40     0.14        1936      55        120
Thailand high pol     98.99     0.17        2381     184         10
Thailand standard     98.51     0.20        3692     238         10
Guatemala             99.00     0.21        1991     105         25
Colombia              98.46     0.34        2324     175         65
El Salvador           98.71     0.21        2478      62        300
Cuba                  98.04     0.40        4238     280        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 fer-
  mentation 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 dif-
ferent 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 oper-
ation 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, emu-
lating 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, Balti-
more, 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 domes-
tic 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 inter-
nal 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 con-
tracts 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 com-
petition 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 deliv-
ery remains difficult, and there is also some concern by exchange
officials that they might have to cope logistically with the type of deliv-
ery 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 increas-
ing importance of Brazil on the world sugar market, the price discov-
ery 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 yen-
based 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 partici-
pate 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: non-
commercials 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 non-
reporting 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 specula-
tors 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 nor-
mally 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 com-
position 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 inter-
est. 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. There-
fore 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 com-
modity production and surprise reduction in demand as a result of the
Asian meltdown has caused commodity prices to drop to inflation-
adjusted 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 partici-
pating in the market, the daily volume is always much larger than
normal. The locals know when the funds are buying and selling aggres-
sively 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 particu-
larly agitated, you can even detect locals migrating over from other
markets such as cocoa or coffee. A good analogy would be like scav-
engers 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, depend-
ing 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 neces-
sity 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 volatil-
ity 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 liquid-
ity. (For further details of options trading strategies see page 17 of this
chapter.)
   Despite the success of electronic screen-based trading experi-
enced 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 inven-
tory 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 interna-
tional 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 coun-
tries 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 com-
modity 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 com-
petitive 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 in-
curring 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, espe-
cially 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 sur-
prises 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 every-
thing 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 multina-
tional super food-processing group. The concentration within the indus-
try 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 busi-
ness. 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 inter-
mediary between the buyer and the seller. In this way they are theo-
retically 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 com-
modity 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 infor-
mation. 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 govern-
ment 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 mon-
itoring. 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 regula-
tions 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 weak-
ness are extremely threatening to the other world producers. The
Australians have been most vocal in their concern but any and all mar-
ginal 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 gov-
ernment 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 hun-
dreds 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 atten-
tion 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 pro-
duction and exports have grown tremendously in the last ten years and
the Central-South region of Brazil is now the dominant source of deliv-
erable 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 them-
selves. 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 pro-
duction utilizes a tremendous amount of cane. If ever the alcohol pro-
duction 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 nega-
tively 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 con-
tract that was delivered as a worldwide contract but really targeted
Brazil. Unfortunately, the trade houses did not fully embrace the con-
tract 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 increas-
ingly, 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 pro-
ducing 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 evi-
dence 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 competi-
tor, 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 con-
tract, 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 pro-
ducers 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 produc-
tion 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) respon-
sible. 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 sec-
ondary 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 produc-
tion 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 li-
quidity 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 elec-
tronically 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 flexibil-
ity 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 emerg-
ing 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 con-
sumption 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 activ-
ity 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 petro-
leum 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 depen-
dent 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 regula-
tions. Client relationships are very important within the country, and
long-time established traders are treated more openly than the rota-
tional 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 con-
servative mills.


Option strategies
Having discussed the increase in option strategies, some attention
should be paid to those other strategies that are becoming more preva-
lent. 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 expo-
sure 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 automati-
cally 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 stipu-
lated 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 accord-
ingly. 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 ex-
amples above are the basic trading tools that are needed to commence
option trading. For further assistance you should contact a know-
ledgeable and experienced option broker.

Conclusion
Sugar futures and option trading continue to grow and expand through-
out 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 neces-
sary 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 indepen-
dence 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 inher-
ent 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 interna-
tional 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 con-
tracts they offer. Each contract has its own function and charac-
teristics, strengths and weaknesses, but the common factor is that
each exchange, backed by a clearing house to organize the financ-
ing 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         112 000 lbs (50 long tons).
Trading hours        9.00 am to 12 noon New York time.
Price quotation      Cents per pound.
Delivery months      March, May, July, October.
Ticker symbol        SB.
Minimum fluctuation   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 specu-
lative 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. Addi-
tionally, 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 produc-
tion facility delivered in bulk. There is no restriction on the polariza-
tion 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 polariza-
tion 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 ship-
ments 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 includ-
ing, 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 pre-
sumed to be commercially justifiable unless the deliverer can clearly
establish that they are not. This last point is a development from a pre-
vious 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 Deliv-
erer’, states that ‘once Notice of Readiness has been presented, the
vessel shall be berthed (or anchored) promptly and Deliverer shall com-
mence loading promptly’. Thus far, the arbitrators have been reluctant
to consider such instances as a default of the No. 11 contract, espe-
cially 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 deliv-
ered 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 clear-
ing 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, depend-
ing 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 straightfor-
ward, 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 impar-
tial) 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, rebel-
lion, 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 Centre-
South sugars dominating the deliveries in both July and October. It is
worth noting, however, that as mentioned earlier, the other main South-
ern Hemisphere producers, Australia and South Africa, do not tradi-
tionally 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 possi-
bility 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         1996      1997      1998      1999      2000         2001      2002      2003

Argentina           0         0         0         0         0            0         0         0
Brazil            250         0         0    94 150     2850        24 700         0   116 400
Honduras            0         0         0         0         0       19 700    14 000    20 100
Costa Rica          0     2000          0         0         0            0    25 000     3050
Dom Rep             0         0         0         0         0            0         0
El Salvador         0     2500          0    25 650         0       79 750    20 500     7500
Guatemala      40 400    47 950         0    33 400     3650       110 800    20 500   218 800
Mexico              0    27 750    13 850         0         0            0         0         0
Nicaragua      34 450         0         0    48 750    19 350      131 400     1400     49 700
Thailand       86 150     4000          0         0         0            0         0   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      2003

Argentina           0         0         0        0           0           0         0         0
Brazil         62 550   295 750    87 600     6250           0     303 500    43 300     2550
Honduras            0         0         0        0           0      22 750         0         0
Costa Rica          0     2000          0     4500           0           0         0         0
Dom Rep             0         0         0        0           0           0         0         0
El Salvador         0    16 750         0        0           0           0         0         0
Guatemala           0    23 550         0        0           0      15 900         0     1250
Mexico              0     2000          0        0           0           0         0         0
Nicaragua           0         0         0        0           0           0         0         0
Thailand            0         0         0     2000           0           0         0    18 100
Total          62 550   340 050    87 600    12 750          0     342 150    43 300    21 900


JULY          1996      1997      1998      1999      2000         2001      2002      2003

Argentina           0         0         0         0         0            0         0         0
Brazil        124 000    56 350   213 900    29 700    38 700       51 650    98 300   226 200
Honduras            0         0         0         0         0            0         0         0
Costa Rica          0         0         0         0         0            0         0    12 950
Peru                0         0         0         0         0            0         0    19 950
El Salvador         0         0         0         0         0            0         0     1200
Guatemala           0     1450          0         0         0            0         0     6500
Mexico              0         0         0         0         0            0         0         0
Nicaragua           0         0         0         0         0            0     3150     11 500
Thailand            0         0         0         0         0            0                   0
Total         124 000    57 800   213 900    29 700    38 700       51 650   101 450   278 300


OCTOBER       1996      1997      1998      1999      2000         2001      2002      2003

Argentina           0         0         0    47 850     9800             0     3050          0
Brazil        206 200   186 350    23 600   292 850   129 450      109 000   264 700   307 650
Honduras            0         0         0         0         0            0         0         0
Costa Rica          0         0         0         0         0            0         0         0
Dom Rep             0         0         0         0         0            0         0         0
El Salvador         0         0         0         0     1150             0         0         0
Guatemala           0     3800          0    14 150    22 300            0         0         0
Mexico              0         0         0         0         0            0         0         0
Nicaragua           0         0         0    10 400         0            0     3200          0
Thailand            0         0         0    13 750         0            0         0         0
Belize              0         0         0     2450     11 000            0         0         0
Total         206 200   190 150    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 advan-
tage 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, includ-
ing 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 else-
where, and there are many traders who feel that the terms of the No.
11 Contract should be tightened up to keep pace. For example, increas-
ing 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 inter-
est 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 demur-
  rage/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 pre-
  sented 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 deliv-
    erer 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 manufac-
  tured 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         50 tonnes.
Delivery months         March, May, August, October and December,
                        so that seven delivery months are available
                        for trading.
Tender period           Any business day during the specified delivery
                        month and the following month.
Last trading day        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).
Price basis             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.
Tick size (and value)   10 cents per tonne ($5).
Trading hours           09.45–17.30 on LIFFE Connect.
Tender date             Fifteen days preceding the first day of the
                        tender period (if not a business day then the
                        first business day following).

Chapter 14/page 12
                                                        The exchanges

Quality                  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.
Packing                  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 dif-
ference 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 like-
liest 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 oppo-
site 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 dis-
counts 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 deliv-
ery, 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 imperfec-
tion as a catalyst to inspire more volume and movement, and to discour-
age 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 pre-
ceding 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 misrepresenta-
tion 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 else-
where 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 moni-
tors 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 Con-
tract, 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 incep-
tion, 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 dimin-
ishing 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 inter-
est 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
                     Table 14.2 White sugar tenders, 1992–2003 (000 tonnes)

                     March 1992               May 1992                  August 1992              October 1992         December 1992

                     Thailand         640     Thailand         871      Santos            654
                                                                        Thailand          240
                                                                        Antwerp           248
                     Total            640     Total            871      Total             1142   Total            0   Total             0

                     March 1993               May 1993                  August 1993              October 1993         December 1993




Chapter 14/page 18
                     Flushing          12     Rouen            520      Hamburg             2    Santos         217   Santos          220
                     Hamburg            2     Flushing         230      Santos            264                         Bremen          262
                                                                                                                                            Sugar Trading Manual




                     Antwerp            6     Santos           260      Recife              9
                     Rostock           66     Bremen            15      Rostock            10
                     Recife           106     Immingham        680
                     Thailand          22     Recife            80
                                              Delfzijl         280
                                              Eemshaven        252
                                              Rostock           55
                                              Dunkirk          160
                                              Antwerp           80
                     Total            214     Total           2612      Total             285    Total          217   Total           482

                     March 1994               May 1994                  August 1994              October 1994         December 1994

                     Eemshaven        563     Eemshaven          2      Hamburg            50                         Maceio          256
                     Flushing         240     Antwerp           99      Dunkirk           296
                     Dunkirk           12     Dunkirk          133      Santos            287
                                              Immingham        952      Itajai/Imbituba    20
                                                                        Immingham         461
                     Total            815     Total           1186      Total             1114   Total            0   Total           256
                     March 1995          May 1995           August 1995          October 1995         December 1995

                     Antwerp       60    Hamburg      270   Santos         306   Hamburg         23   Hamburg         24
                     Maceio       280    Savannah     213   New Orleans      1   Antwerp        107   Eemshaven        6
                     Santos       166    Immingham   1218   Buenos Aires   220   Rostock         37
                     New          170    Dunkirk       17   Recife          17   Eemshaven       75
                     Orleans
                     Immingham     94    Antwerp     460    Hamburg         4    Dunkirk        88
                     Dunkirk       71    Flushing    240    Bremen          4
                     Eemshaven     17                       Flushing        4
                     Savannah     285                       Delfzijl        4
                     Total        1143   Total       2418   Total          560   Total          330   Total           30

                     March 1996          May 1996           August 1996          October 1996         December 1996

                     Immingham     85    New          227   Antwerp          4   Gdansk           1   Gdansk          118
                                         Orleans
                     Eemshaven     14                       Cadiz          180   Gdynia         280   Gdynia           80
                     New          133                       Dunkirk        187                        Eemshaven         2
                     Orleans
                     Recife        44                       Immingham       25                        Rostock         35
                     Santos        64                       Le Havre       120
                     Delfzijl       5
                     Maceio         5
                     Total        350    Total        227   Total          516   Total          281   Total           235




Chapter 14/page 19
                                                                                                                            The exchanges
                     Table 14.2 (cont.)

                     March 1997                 May 1997           August 1997         October 1997         December 1997

                     Eemshaven             55   Eemshaven     21   Antwerp        20   Cadiz           61   Gdansk            80
                     Immingham            128   Flushing      16   Cadiz         181   Calais          54   Stettin            6
                     Rostock              240   Gijon        536   Dunkirk        58   Gdansk         174
                                                Hamburg       20   Gijon          10   Santos          20




Chapter 14/page 20
                                                Immingham   1158   Hamburg        17
                                                Rostock       30   Immingham     311
                                                                   Recife         47
                                                                                                                                   Sugar Trading Manual




                                                                   Rostock         4
                                                                   Santander     109
                                                                   Santos         20
                                                                   Singapore       2
                     Total                423   Total       1781   Total         779   Total          309   Total             86

                     March 1998                 May 1998           August 1998         October 1998         December 1998

                     EU               2321      EU          1502   EU            361   EU             893   EU              1066
                                                                                       Other            9
                                                                                       Europe
                     Total            2321      Total       1502   Total         361   Total          902   Total           1066
                     March 1999         May 1999           August 1999          October 1999          December 1999

                     Immingham    270                      Santos        1405   Rouen           107   Gdansk           480
                     Eemshaven    114                      Paranagua      120   Zeebrugge        51   Rouen             30
                     Recife       255                      Zeebrugge       73   Cadiz           115   Antwerp          280
                     Rostock       80                      Itajai         136                         Rostock           60
                     Gdansk        10                      Port Rashid    100
                     Total        729   Total          0   Total         1834   Total           273   Total            850

                     March 2000         May 2000           August 2000          October 2000          December 2000

                     Eemshaven    31    Rostock       54   Rouen           37   Calais           19   Flushing         100
                     Zeebrugge    22    Santander     39   Immingham       96                         Eemshaven        145
                     Gijon        34    Gijon         17   Eemshaven      152                         Rostock          100
                                        Eemshaven     10
                                        Immingham   1393
                     Total         87   Total       1513   Total          285   Total            19   Total            345

                     March 2001         May 2001           August 2001          October 2001          December 2001

                     Immingham    137   Zeebrugge    81    Dunkirk         82   Santos           20   Santos           460
                     Flushing     100   Dunkirk     344    Calais         369   Natal           280   Natal            154
                     Eemshaven    137   Rouen       514    Antwerp         94   Dunkirk          20   Maceio           595
                                        Calais      828    Rouen           62   Recife          700   Recife          1285
                                        Antwerp     440    Le Havre        40
                                        Hamburg     100    Santos        2240
                                        Immingham   259    Jebel Ali      711
                                        Eemshaven   121    Hamburg        684




Chapter 14/page 21
                                                                                                                             The exchanges




                                                           Immingham      290
                                                           Itajai         123
                     Total        374   Total       2687   Total         4695   Total          1020   Total           2494
                     Table 14.2 (cont.)

                     March 2002                 May 2002           August 2002          October 2002          December 2002

                     Immingham            137   Zeebrugge    81    Dunkirk         82   Santos           20   Santos           460
                     Flushing             100   Dunkirk     344    Calais         369   Natal           280   Natal            154
                     Eemshaven            137   Rouen       514    Antwerp         94   Dunkirk          20   Maceio           595
                                                Calais      828    Rouen           62   Recife          700   Recife          1285




Chapter 14/page 22
                                                Antwerp     440    Le Havre        40
                                                Hamburg     100    Santos        2240
                                                Immingham   259    Jebel Ali      711
                                                                                                                                     Sugar Trading Manual




                                                Eemshaven   121    Hamburg        684
                                                                   Immingham      290
                                                                   Itajai         123
                     Total                374   Total       2687   Total         4695   Total          1020   Total           2494

                     March 2003                 May 2003           August 2003          October 2003          December 2003

                     Calais            723      Thailand    328    Natal            4
                     Eemshaven         416      Jebel Ali   288    Recife           4   Recife          960   Maceio           540
                     Rouen             100                         Maceio           2                         Santos           218
                     Le Havre          100                         Santander       15
                     Maceio             14                         Thailand       358
                     Santos             24                         Jebel Ali     2346
                     Jebel Ali         818                         Imbituba       280
                     Thailand         3842
                     Total            6037      Total       616    Total         4549   Total           960   Total            758
                                                        The exchanges

Contract size                  50 000 kg.
Delivery months                January, March, May, July, September
                               and November within a 14-month
                               period.
Price quotation                Yen per 1000 kg.
Minimum price fluctuation       10 yen per 1000 kg (500 yen per
                               contract).
Maximum price fluctuation       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.
Position limits                1500 contracts net in any given delivery
                               month. The gross limit in any delivery
                               month is 5000 lots.
Last trading day               The last business day two months prior
                               to the delivery month.
First delivery day             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.
Last delivery day              The last day of the delivery month.
Contract grade                 Raw centrifugal cane sugar of a
                               polarization of 96° from Australia, Brazil,
                               Cuba, Fiji, the Philippines, the Republic
                               of South Africa, Taiwan and Thailand.
Method of settlement           Physical delivery, cif Japan.
Delivery points                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 polari-
zation 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 respon-
sible (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       28 950    36 900   102 780    48 600    30 700    12 450    29 900     9 650
March     33 770    69 100   101 650    91 700    32 000    55 000    26 000    19 850
May       32 560    64 280   116 150    93 350    35 500    43 850    52 750    16 500
July      76 200    43 840    90 650    70 600    34 150    27 850    11 500    29 050
Sept      56 240    37 340    33 150    52 400    17 900    27 350    42 900    28 050
Nov       59 720    42 520     7 100    38 550    25 900     9 100    29 600    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 addi-
tional 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 pur-
chases 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 his-
tory. 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 explo-
sion 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 instanta-
neously. 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 impos-
sible 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 specu-
lator 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 tradi-
tional 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 con-
sumers 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 infor-
mation 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 infor-
mation 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 funda-
mentals? 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 tech-
nical analysis works because people believe it does. The power of posi-
tive 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 explana-
tion. 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 avoid-
ance of pain. In futures markets, this can be translated into the infa-
mous ‘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 man-
agement. Past chart patterns may help to predict future price move-
ments, 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 three-
year-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 fun-
damental 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 stimu-
late 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 dif-
ferent 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 weight-
ings and rocket scientist mathematics can be distilled down to a simple
formula from which their activity could be predicted. A whole sub-
industry 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 fine-
tuned. (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 con-
trarian, the competitive nature of the industry means that he has to allo-
cate 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 dis-
claimers 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 ear-
liest 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 identi-
fiers 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 inter-
preted 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 deci-
sions 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 some-
times play the funds by moving the market to their trigger points, touch-
ing 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 strate-
gic. 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 inter-
pretation. 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 physi-
cal/fundamental outlook. If you are bullish, you will find broken down-
trend 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 vari-
ations on a theme. Simple moving averages are calculated by adding
values, usually the closes, over a set number of periods and then divid-
ing 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 progres-
sively 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 up-
coming 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 aver-
ages 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 con-
ceptually 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, off-
setting 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, dif-

Chapter 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 weak-
ening 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 Com-
mission (CFTC) based on data received from the exchange. The report
shows, after a time lag, the size of the positions held by different cat-
egories of traders: large and small hedgers and large and small spec-
ulators. 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 reac-
tion 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 cor-
rected 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 consid-
ered 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 posi-
tions 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 trail-
ing stops curve on the chart like a parabola. When the price is trend-
ing 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 devel-
oped 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 down-
ward 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 impor-
tant 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 for-
mation 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 fun-
damental 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 share-
holders – 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 down-
side 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. Gen-
erally 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 fundamen-
tals. The problem is that it is so hard to know what those fundamen-
tals 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 fundamen-
tals. Trading basis technical indicators can provide the necessary dis-
cipline 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   G
     Example   H
     Example   I
     Example   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 com-
monly 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 doc-
uments as specified in Rule 17 of the RSA are: (some words and com-
ments 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 com-
plete 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), cer-
tificate 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, Insur-
ance 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 require-
ments/documentary instructions include a request for the shipping doc-
uments 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 ‘con-
genbill’), which is to be used with (read with) the charter party (the con-
tract 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 nec-
essary 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) publi-
cation 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 empha-
sis 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 follow-
ing 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 docu-
ments 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 refer-
ence 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 pre-
sentation of such notice and documents are to be presented to the
buyer not later than 11.00 hours local time on the next following busi-
ness 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 doc-
uments 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 docu-
ments 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 dis-
posing 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 impossi-
ble, 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 nomi-
nated 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 dif-
ferent 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 nom-
inated 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 orig-
inal bills of lading that pass through the letter of credit/banking chan-
nels 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 docu-
ments 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 financ-
ing 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 avail-
able 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 con-
sidered 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 financ-
ing 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 accom-
pany 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 con-
ditions 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 docu-
ments, 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. There-
fore, 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 docu-
ments. 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 dis-
crepancies 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 neces-
sarily 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 nego-

Chapter 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 employ-
ees, 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 pref-
erential 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 ben-
eficiary 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/bene-
ficiary’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 pre-
sents 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 deliv-
ery period and before the vessel(s) commence loading.
   Secondly, whether the contract price is fixed at the time that the con-
tract 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 provi-
sional 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 pro-
visional 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 def-
inite 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
                                                      -URGENT-
     Here 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)    Bank charges of opening bank in . . . . . . . . . . for opener’s
              account. All other bank charges for beneficiary’s
              account.
      (ii)    Documents to be sent from advising bank in . . . . . . . . . to
              opening bank in . . . . . . . . . . . . . by first available courier
              service at beneficiary’s cost.
      (iii)   Documents to be negotiated within 15 days of bill of
              lading date.
      (iv)    Partial shipment allowed, transshipment not allowed.
       (v)    This letter of credit is subject to Uniform Customs and
              Practice for Documentary Credits (1993 revision)
              International Chamber of Commerce publication 500.
      (vi)    The letter of credit expires on . . . . . . . . . [date].
     (vii)    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
                                                             -URGENT-
     Here 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 e-
mail 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 benefi-
ciary be someone other than himself, the seller should be asked to
confirm this in writing.
    Alternatively, a buyer could confirm any request, received by tele-
phone, in writing to the seller. However, the seller’s written confirma-
tion 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 unen-
viable position of having an irrevocable undertaking in favour of bene-
ficiary 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 obliga-
tion 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 estab-
lishment 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 bene-
ficiary’s country. However, in this case the beneficiary would not be
obliged to present the shipping documents for negotiation via the advis-
ing 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’, ‘approxi-
mately’, ‘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 other-
wise, 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 consid-
ered 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 condi-
tions, within seven banking days of receipt of the documents, the bank
is to make payment as per the beneficiary’s instructions or the instruc-
tions of the advising bank and in accordance with the terms and con-
ditions 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 instruc-
tions 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 let-
terhead 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 corre-
spond, 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 condi-
tions 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 amend-
ments contained in one and the same advice of amendment is not per-
mitted 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 dis-
charge 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 rep-
resenting 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 desti-
nation 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 docu-
ments. 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 en-
velope. 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 con-
tract 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 specifi-
cally 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 con-
sidered 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 con-
tractual 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 enti-
tled 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 appar-
ent 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 docu-
ments 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 dis-
charge 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 ben-
eficiary. The buyer should be aware that, if he does make an amend-
ment 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 appli-
cant/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 speci-
fied regarding the signature of the B/Ls. Furthermore, there is no ref-
erence 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 other-
wise 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 com-
mercial 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 orig-
inal 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 steve-
dores/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 war-
rants 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 com-
pliance 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 presen-
ter 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 con-
ditions to be stated/confirmed on the commercial invoice or on a
separate certificate.)


Article 20
Terms such as ‘first class’, ‘well known’, ‘qualified’, ‘independent’, ‘offi-
cial’, ‘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 orig-
inal – 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 sig-
nature, 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 docu-
ments and commercial invoices are called for, the credit should stipu-
late 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 arti-
cles into consideration when the documents are established.
   ‘4. Certificate of weight, quality and packing issued by an interna-
tionally 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 cer-
tified in the finally issued certificate, such omission would be consid-
ered 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 addi-
tional 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 any-
thing as along as what was stated was not inconsistent with L/C terms
and conditions and the other documents established for the same ship-
ment. A general rule that can be applied with success to the estab-
lishment 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 negotiat-
ing 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 estab-
lishment 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 estab-
lishment 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 advis-
ing 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 ben-
eficiary’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 presenta-
tion 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 await-
ing 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 docu-
ments 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 tra-
ditional 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 advis-
ing bank asks the beneficiary whether the beneficiary wants the docu-
ments 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 benefi-
ciary’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 docu-
ments 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 docu-
ments to be negotiated within 15 days of the B/L date. The buyer/appli-
cant 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 accept-
able’ 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 dif-
ferent 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 destina-
tion 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 ship-
ment 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 dis-
charge, 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 trans-
port, 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 docu-
ments 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, reim-
bursement to be made to advising bank in . . . . . . . . . within 2 banking
days. Thank you and regards . . . . . . . . . . . . . . . . . . . SA.’ The reim-
bursement/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 insur-
ance 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 dura-
tion 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 cir-
cumvented by the first paragraph of the payment clause shown in
Example F.
   ‘Buyer to open an irrevocable letter of credit bearing the confirma-
tion 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/benefi-
ciary’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 desti-
nations, 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) reim-
bursements. 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 condi-
tions 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 avail-
able 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 con-
firmation 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 bene-
ficiary 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 con-
firmation 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 confir-
mation 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 toler-
ance 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 con-
firming 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 docu-
ments 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 con-
sequences 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 possibil-
ity 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 fre-
quently 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 gov-
ernment 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 con-
tract, 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 con-
ditions. 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 lan-
guage 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 differ-
ence. 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 guar-
antee 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 require-
ments. 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 elimi-
nating 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 govern-
ing 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 depart-
ments 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 fea-
tures. These can be characterized as:
1   Narrow margins.
2   Forward trading of physical contracts.
3   Futures trading.
4   Volatility.
5   Positions.
6   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 accoun-
tant’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 account-
ing. 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 manage-
ment accounts might look like for a sugar trading company. The exam-
ples 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 ratio-
nalization of the profit, which explains in commercial terms where the
money is made or lost. This is the part that does not appear in con-
ventional 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

                Long Lots Short Lots     Comments            Rate $         Amount $
March                100                 Spot position         500            50 000

May                  100
August                            120
October                           250
Total                100          370
Smaller Total                     100    Outright position     250            25 000
Spread                            270    Spread position       100            27 000
Total original margin calculation                                            102 000
Previous days original margin calculation