Hedging Against Falling Sugar Prices using Sugar Futures

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Finance English practice: Unit 34 — Futures

  • Complete the sentences below. Use the key words if necessary.
    • Commodity futures

    are agreements to sell an asset at a fixed price on a fixed date in the future. are traded on a wide range of agricultural products (including wheat, maize, soybeans, pork, beef, sugar, tea, coffee, cocoa and orange juice), industrial metals (aluminium, copper, lead, nickel and zinc), precious metals (gold, silver, platinum and palladium) and oil. These products are known as .

    Futures were invented to enable regular buyers and sellers of commodities to protect themselves against losses or to against future changes in the price. If they both agree to hedge, the seller (e.g. an orange grower) is protected from a fall in price and the buyer (e.g. an orange juiced manufacturer) is protected from a rise in price.

    Futures are contracts — contracts which are for fixed quantities (such as one ton of copper or 100 ounces of gold) and fixed time periods (normally three, six or nine months) — that are traded on a special exchange.

    Forwards are individual, contracts between two parties, traded — directly, between, two companies of financial institutions, rather than through an exchange. The futures price for a commodity is normally higher than its — the price that would be paid for immediate delivery. Sometimes, however, short-term demand pushes the spot price above the future price. This is called .

    Futures and forwards are also used by speculators — people who hope to profit from price changes.

    More recently, have been developed. These are standardized contracts, traded on exchanges, to buy and sell financial assets. Financial assets such as currencies, interest rates, stocks and stock market indexes — continuously vary — so financial futures are used to fix a value for a specified future date (e.g. sell euros for dollars at a rate of €1 for $1.20 on June 30).

    and are contracts that specify the price at which a certain currency will be bought or sold on a specified date.

    are agreements between banks and investors and companies to issue fixed income securities (bonds, certificates of deposit, money market deposits, etc.) at a future date.

    fix a price for a stock and fix a value for an index (e.g. the Dow Jones or the FTSE) on a certain date. They are alternatives to buying the stocks or shares themselves.

    Like futures for physical commodities, financial futures can be used both to hedge and to speculate. Obviously the buyer and seller of a financial future have different opinions about what will happen to exchange rates, interest rates and stock prices. They are both taking an unlimited risk, because there could be huge changes in rates and prices during the period of the contract. Futures trading is a , because the amount of money gained by one party will be the same as the sum lost by the other.

  • British English or American English?
    • aliminium
      • British English
      • American English

    • aluminum
      • American English
      • British English

  • Match the definitions with the words below.
    • 1. the price for the immediate purchase and delivery of a commodity — . . .

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      International Sugar Prices: April-June 2020 Review and August Outlook

      2020: EU-27 sugar costs rise despite falling international prices

      Despite the decline in international prices, the latest data published by the European Commission on EU-27 refined sugar prices revealed an increase of 11% in 2020. Prices between December 2020 and March 2020 remained unchanged at €725 per tonne. This represented an 80% premium on their international equivalent (White Sugar – London No 5).

      EU-27 price rises have been driven by its quota system, which is currently set at 13 million tonnes. EU-27 refined sugar consumption was estimated by the industry at 16-16.5 million tonnes in 2020, which is significantly higher than the quota. This imbalance explains why EU-27 sugar prices continued to rise in 2020, despite falling international prices. Sugar imports into the EU are discouraged through heavy import duties, a situation frequently denounced by global confectionery manufacturers. Sales of sugar and sweeteners in EU-27 countries remained stagnant in 2020, totalling 5.6 million tonnes.

      Sales of Sugar and Sweeteners in EU-27 Countries

      Source: Euromonitor International

      ICE sugar futures for July delivery decline by 5% between 2 April and 14 June

      ICE sugar futures are used as a benchmark for the short-term trends in international sugar prices. Part of the decline in ICE sugar futures was down to strong output in Brazil. According to the Brazilian Sugarcane Industry Association (UNICA), sugar production in the south and centre of Brazil, its main sugarcane growing regions, surged to 1.5 million metric tonnes in the second half of April, up from 393,200 tonnes a year earlier. UNICA projects sugar production for the whole season to reach a record 35.5 million tonnes.

      The US Department of Agriculture (USDA) added to the regional bullish production projections in its global sugar report, published in mid-May 2020. According to USDA, global output is forecast to rise to a record 175 million tonnes for the 2020/2020 season. Lower prices will result in higher consumption, especially in China, where sales are projected to rise by 1.2 million tonnes. However, carry-over stocks from previous years will prevent ending stocks from building up this coming year. Global ending stocks are expected to total 38 million tonnes, five million tonnes higher than the
      2009/2020 level. Global sales of sugar and sweeteners totalled 105 million tonnes in 2020, 1% down on the previous year.

      Sugar and Sweeteners – Global Total Volume Growth

      Source: Euromonitor International

      High volatility

      One distinctive feature of international sugar prices in the last weeks has been their relatively high volatility. July futures rose by 3% between 10-14 June on the back of data suggesting that Brazilian farmers had increased their allocation of sugarcane deliveries to relatively more profitable ethanol. The rise reverted weeks of declining prices, which were in turn prompted by bullish global output projections and weakness in the Brazilian real. Brazil is a major sugar exporter and weakness in its currency typically results in lower international sugar prices.

      Hedging against volatility

      Sugar manufacturers planning to sell in October could hedge against risk by going long (buying) on put options (right to sell) at strike prices of US$0.15-0.16 per pound. Given the latest volatility in prices, hedging strategies through put options minimise risk exposure as the maximum loss is reduced to the payment of the premium of the option.

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