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Natural
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Assignment

 

 

Fall
term 2017

 

 

 

Mustafa
Ulas Taban                                  

Gaetano Mbengi

 

 

 

 

 

 

 

 

Date 07/01/2018

 

Content

 
Introduction. 3
1. Description of commodity. 3
2. Production areas, climatic
requirements and genetic advances. 4
3. Trade flows from countries of
production to countries of consumption. 5
4. Marketing and Processing channel from
producer to consumer. 7
5. Identify major market participants. 8
6. Provide a balance sheet with latest
Supply and Demand numbers. Calculate prominent ratios such as ending stocks to
usage ratio and explain its meaning. 9
7. Factors affecting S&D.. 9
8. Futures Price chart for the last year
or so with a description from the exchange rules identifying location of
delivery, time of delivery and deliverable form/grade. 10
9. Cash Price chart at the deliver
location for the futures contract, or another location of your preference,
with approval from the instructor. 11
10. Example of a hedging scenario for
either a producer/merchandiser (short hedge) or consumer (long hedge) 11
11. Extra credit: Forecast commodity
price outlook. 12
References. 13
 

 

 

 

 

 

 

 

Introduction

In this assignment, we study sugar
market including production requirements, transportation flow, marketing and
processing channels by providing supply and demand data, future prices and
sugar forecast outlook. The assignment divided into 11 parts which address the
questions such as a description of commodity, production areas or major market
participants for the market.

1. Description of
commodity

Sugar is a universal name for
sweet tasting, colourless and water-soluble carbon hydrate. In chemical
perspective, there are three types of sugar which are glucose, fructose and,
galactose-based on composition type. All the composition includes the same
general formula which is . Generally,
the most common sugar is table sugar which is sucrose with formula of , a
composition produced by glucose and fructose molecules (Encyclopedia
Britannica, n.d.)

The sugar can be extracted from
sugar canes (Saccharum officinarum) accounts for about 80%of sugar market and
sugar beets (Beta vulgaris) accounts for about 20% of the sugar market.

Picture 1

According to International
Sugar Organization, more than 130 countries in the world produce either sugar
cane or sugar beet, but top 10 producers are increasing their market share year
by year. For example, top 10 sugar-producing countries accounted for 56% of
global sugar production 1980, but this share increased to about 75% in 2014 (International
Sugar Organization, n.d.).

The sugar is not only serve as
sweetener on tables also offers an alternative to the energy industry as
biofuels or co-generation of electricity with sugar cane bagasse. The largest
10 sugar cane and beet producers can be seen from below.

Table 1

2. Production areas,
climatic requirements and genetic advances

2.1 Sugar Cane

Most of commercial grown sugar
cane`s production area stays areas between the 35°N and 35°S. The
crop of sugar cane grows under long and warm season with adequate moisture
comes after dry, sunny and frost-free period.

The ideal temperature for
sprouting is between 32°C to 38°C.  The ideal growth can be achieved by average
daily temperature between 22°C and 30°C.  Because of this tropical climate is suitable
for the sugar cane. For active growth, the minimum temperature can be 20.
However, the ripening period requires relatively low temperature such as
between 10° and 20°. The
low temperature has prominent effects on the growth rate and sucrose portion in
the crop.

The water requirement for the
sugar cane is between 1500mm to 2500 mm if received amount of water equally
distributed in growing period which takes about nine months in normal
conditions. Furthermore, the sugar cane does not require special type of soil.
Best soil condition for sugar cane is minimum 1 m and maximum 5 m deep, the
air-filled part accounts more than 10 to 12%, and with 5-8.5 PH values. However,
the sugar cane is slightly sensible for salinity. The high amount of salinity
can decrease the yield of the crop (Food and Agriculture Organization of the
United Nations, n.d.). The table below shows the summary of crop coefficients
for sugar cane.

Table 2

 

 

 

 

2.2 Sugar beet

The sugar beet accounts for
about 20% of the sugar market and it is known for high tolerance for saline and
alkali soils as a biennial crop.

The crop can be grown in
different climates. It also has about 140 to 200 days growing periods. The seed
can even be grown minimum 5°C, but the ideal temperature is between 7° and 10°C.
Higher temperatures are more desirable to increase sugar yields as long as not
more than 30°C
because the yield starts to decrease after this temperature.

The soil can be in a very wide
range for the sugar beet. Well drained and more than 5.5 PH values soils are
thought as ideal for growing. Unlike Sugar Cane, the Sugar beet is not so
sensible to salinity. The water requirement for sugar beet is depended on the
cycle of its lifespan. During crop emergence period and after, the sugar beet
is sensible for water deficits. The table below shows the summary of crop
coefficients for the sugar beet (Food and Agriculture Organization of the
United Nations, n.d.)

Table 3

 

 

 

 

 

3. Trade flows from
countries of production to countries of consumption

 

Largest Producers

Largest Consumers

 

Sugar Cane in MMT

Sugar Beet in MMT

Sugar Cane &Beet in MMT

1

Brazil

34.24

EU

15.04

India

26

2

India

28.87

Russia

5.1

EU

17.88

3

Thailand

11

USA

4.43

China

15.45

4

China

9.49

Turkey

2

Brazil

11.01

5

Pakistan

6.1

Ukraine

1.43

USA

10.83

6

Mexico

5.88

Egypt

1.37

Indonesia

6.05

7

Australia

4.82

China

0.77

Russia

5.5

8

USA

3.28

Iran

0.66

Pakistan

4.86

9

Guatemala

2.84

Japan

0.62

Mexico

4.37

10

Indonesia

2.51

Belarus

0.49

Egypt

3.27

Table
4

The sugar cane and the sugar
beet producing countries are different due to climate condition they require to
grow. The sugar cane basically requires warmer climates and vulnerable to water
shortages and salinity, unlike sugar beet which can resist colder climates and
less vulnerable to salinity. The sugar cane and the sugar beet top ten
producing countries can be seen from the Table 4.

Table 5

However, the consumer countries
concentrate on the places where the population is crowded and intense. But the
traditional food’s ingredients and dietary patterns. The largest consumer of
sugar is India according to 2015 ISO Figures. The European Union, China and, Brazil
is other large consumers just after India as can be seen from the table below.
The developing countries consume about 67% of total world supply of sugar.
Global sugar consuming quantities are increasing parallel with the population.

Table 6

Many countries produce sugar for
national usage. Because of that even though some countries are large producers
of sugar, they aren`t large importers for sugar. As can be seen from the Table
6 which shows the 10 largest net sugar exporters, India mostly consumes the
sugar produced if we check the its producing data for sugar. The largest 10
sugar exporters countries are responsible for  95% of sugar trade according to 2014 ISO data.
Furthermore, raw sugar is responsible about 60% of the international sugar
trade and white sugar accounts for the rest of the sugar trade. Brazil is
increasing its market share for sugar trade gradually from 20% in 2000 to 40%of
global sugar export to 2014. The largest 10 net importers of sugar can be seen
from the table below.

Figure 1

 

The sugar is a commodity which
effects from seasonality (Figure 1). During the summer period in the northern
hemisphere, the volumes of traded sugar increases.  The sugar is generally being carried by
handsize and handymax type dry bulk vessels from point of origin to point of
need due to port restrictions and cargo specifications.

Figure
2

4. Marketing and
Processing channel from producer to consumer

Figure 3

In the picture above,
there is the channel of sugar cane from producer to consumer. The process is the
same either for sugar beet or sugar cane except that the juice obtained from
the sugar cane is extracted by crushing. Meanwhile, the juice obtained from
sugar beet is obtained by a process called diffusion. First, farmers harvest
the sugar cane crop cutting the stalks into small lengths called billets. These
billets are loaded into bins and towed by a tractor to an area known as a cane
pad and made ready for collection. Then trucks transport the billets by road to
the sugar mill within 16 hours of harvesting. Bulk raw sugar is made at the
sugar mill and placed in large storage bins for transport. The raw sugar is
loaded into a bulk tanker for transportation. The sugar is stored in bulk
terminals until it is needed for shipment or by sugar refineries. Then, the
bulk raw sugar can be transported by ship for world export. Raw sugar is
transported from the bulk terminal in a bulk tanker to the refinery, where it
is refined packaged and assembled into orders. Finally, the orders are loaded
onto pallets and into trucks and transported to supermarkets and retail outlets
or manufacturing factories.

 

 

 

 

 

 

 5. Identify major market participants

Rank

Company

2010/11 Output Mt

Country

1.

Suedzucker AG

4.2

Germany

2.

cosan SA Industria & Comercio

4.1

Brazil

3.

British Sugar Plc

3.9

UK

4.

Tereos Internacional SA

3.6

France

5.

Mitr Phol Sugar Corp.

2.7

Thailand

6.

Nordzucker Gmbh & Co KG

2.5

Germany

7.

Louis Dreyfus

1.8

Netherlands

8.

Wilmar International Ltd.

1.5

Singapore

9.

Thai Roong Ruang Sugar Group

1.5

Thailand

10.

Turkiye Seker Fabrikalari

1.34

Turkey

Table 7

In the table above,
there are the ten major market participants. The biggest player in the sugar
industry a German company, Suedzucker AG. The second one comes from Brazil.
British Sugar Plc and Tereos Internacional SA which come respectively from
United Kingdom and France, are also big players.

6. Provide a balance
sheet with latest Supply and Demand numbers. Calculate prominent ratios such as
ending stocks to usage ratio and explain its meaning

Figure 4

In the picture above,
there are the world sugar balance figures. The ending stock corresponds to the
value of goods available for sale at the end of the accounting periods. The
consumption of sugar increased faster than the production during the period
from 2009 to 2016. That is why the ending stock increased during this period.
The level of import demand and the level of the export availability is stable.
The stocks-to-use ratio is a convenient measure of supply and demand
interrelationships of commodities. This ratio indicates the level of carryover
stock for any given commodity as a percentage of the total use of the
commodity. The mathematical formula for this relationship is

(beginning stock + Total production – Demand) / Demand

In 2015/2016, it is equal to (85,560 +166,833 – 171,851) / 171,851
=46,87%

7. Factors affecting
S

The sugar market and its
supply/demand figures are effected by many factors due to the nature of being a
commodity. Some of them are explained below.

-Exchange rates: The exchange rate is another factor effects supply
and demand of sugar. If the commodity producer`s country currency becomes
weaker, the consumer will increase their demand. This will eventually an
increase in the price of commodity. On the other hand, if the consumer`s
country currency becomes stronger, this will lead an increase in price of
commodity. Furthermore, if nothing changes except the demand of commodity, this
will lead an increase in value of producer`s countries currency. A recent
increase in value of Canadian Dollar can be good example for this (ThoughtCo,
2017).

-Interest rates: Historically, the commodity prices are and the
interest rates are inversely correlated. When the interest rate rises, the
commodity prices decrease. This relationship can be explained by cost of carry.
If the interest rate increases, the cost of carry increases. The consumers of
commodities choose to buy the commodity only when they need to consume instead
of stocking for future usage because the storing costs are increasing (The
Balance, 2016).

-Livestock prices: Latest development in the animal feeding
technology suggests that feeding cows with sugar increase microbial protein
yield. Last years, more and more cows are feed with sugar. The latest research
and behaviours in livestock industry can affect supply and demand of sugar industry
(Wattagnet.com, 2012).

-Oil prices: The sugar price is highly correlated with the oil
prices because the ethanol is produced from sugar and the ethanol is being used
for increasing octane ratings and reducing carbon emission (Sugarcane.org,
n.d.) when it is blended with gasoline. This means that if there is an increase
in oil prices, this can directly lead to an increase in sugar price (Reuters,
2017).

-Equity market: Equity market and commodity market are linked
together. An increase in commodity prices leads a decrease in stock values of
companies that need those commodities due to the increased cost of using the
commodity and decrease in profit (Finance.zacks.com, n.d.).

-Weather: The sugar is directly affected by environmental factor as
a commodity. Changes in weather condition can lead changes in quality of
product or lose product itself because there are minimum environmental
requirements for growing and transporting sugar.

-Transportation cost: As a commodity, the sugar needs to transport
from the place where it is produced to the place where it is needed. Generally,
this transport is carried out by sea going vessels. The shipping market is
effected by many factors itself. An increase in transportation fee can lead to
decrease in demand for the sugar.

-Regulations: Environmental protective regulations related to fuels
forces consumer to use less polluting fuel. Gasoline with ethanol makes fuel
more environmentallly friendly. The regulations can cause an increase in demand
for sugar as well.

 8. Futures Price chart for the last year or so with a
description from the exchange rules identifying location of delivery, time of
delivery and deliverable form/grade

Figure
5

As an example for the question,
ICE The Sugar no 11 contract for March 2018 is shown in Figure 5. This contract
is being used for raw cane sugar trading. The contract includes FOB prices
within the country of origin of the sugar. The full specification of the
contract is listed below as it is in the ICE exchange (Futures, 2018).

-Trading Screen Product name
and Hub name: Sugar No. 11 Futures and NYCC

-Contract size and settlement:
112,000 pounds and Physical delivery FOB receiver`s vessel

-Grade/ Standards/ Quality: Raw
centrifugal cane sugar based on 96 degrees’ average polarization

-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.

-Deliverable Growths: Growths
of Argentina, Australia, Barbados, Belize, Brazil, Colombia, Costa Rica,
Dominican Republic, El Salvador, Ecuador, Fiji Islands, French Antilles,
Guatemala, Honduras, India, Jamaica, Malawi, Mauritius, Mexico, Mozambique,
Nicaragua, Peru, Republic of the Philippines, South Africa, Swaziland, Taiwan,
Thailand, Trinidad, United States, and Zimbabwe.

9. Cash Price chart at
the deliver location for the futures contract, or another location of your
preference, with approval from the instructor

Figure
6

As an example for the question,
SUG45-TH-P1 Sugar 45 Thailand 1 Icumsa FOB price graph is shown in Figure 6.
Delivery location is Thailand and it shows current spot market price as well. ICE
The Sugar no 11 contract can be chosen to deliver in Thailand.

10. Example of a hedging
scenario for either a producer/merchandiser (short hedge) or consumer (long
hedge)

A
consumer can hedge against rising sugar price by taking up a position in the
sugar futures market. He will employ a long hedge to secure a purchase price
for a supply of sugar that he will need in the future. For example, a company
need to procure 10 million pounds of sugar in 3 months. The spot price for
sugar is 0,20 USD/lb while the price of sugar futures for delivery in 3 months
is 0,15 USD/lb by taking a long position in an appropriate number of Euronext
Raw Sugar futures contracts. The consumer will be able to buy 10 million pounds
of sugar for a total amount of 1’500’000 USD.

If
sugar spot price rise to 0,26 USD/lb on delivery date, it will be a gain of
0,26 USD – 0,15 USD = 0,11 USD per pound which is equal to 1’100’000 USD. In
the end, the higher purchase price is offset by the gain in the sugar futures
market, resulting in a net payment amount of 2’600’000 – 1’100’000 USD =
1’500’000 USD.

If
sugar spot price fall to 0,14 USD/lb on delivery date, it will have a lost of
0,15 USD – 0,14 USD = 0,01 per pound which is equal to 100’000 USD. In the end,
the savings realised from reduced purchase price will be offset by the loss in
the sugar futures market, resulting in a net payment amount of 1’400’000 USD +
100’000 USD = 1’500’000 USD.

11. Extra credit:
Forecast commodity price outlook

According to October World
Bank`s Commodity Market`s Outlook Report, it is expected that energy prices`
prices are forecasted to increase about 4% and agricultural products` prices
are forecasted to increase about %1 in 2018. Furthermore, agricultural
commodities’ prices are expected to increase about 3% cumulatively through 2020
(World Bank, 2017). However, the sugar is effected from many variables and due
to these expectations for energy and agricultural commodities and future
environmental friendly regulations, the sugar`s price should be expected to
increase more than average agricultural commodities.

References

Bloomberg.com. (2011). Suedzucker Leads
the Top 10 Sugar-Producing Companies. online Available at:
https://www.bloomberg.com/news/articles/2011-11-04/suedzucker-leads-the-top-10-sugar-producing-companies-table-
Accessed 7 Jan. 2018.

Encyclopedia Britannica. (n.d.). Sugar |
chemical compound. online Available at:
https://www.britannica.com/topic/sugar-chemical-compound Accessed 7 Jan.
2018.

Finance.zacks.com. (n.d.). Stock Market
Vs. Commodity Market. online Available at:
https://finance.zacks.com/stock-market-vs-commodity-market-4795.html Accessed
7 Jan. 2018.

Food and Agriculture Organization of the
United Nations. (n.d.). Sugarcane. online Available at:
http://www.fao.org/land-water/databases-and-software/crop-information/sugarcane/en/
Accessed 7 Jan. 2018.

Food and Agriculture Organization of the
United Nations. (n.d.). Sugarbeet. online Available at:
http://www.fao.org/land-water/databases-and-software/crop-information/sugarbeet/en/
Accessed 7 Jan. 2018.

Futures, S. (2018). Sugar No. 11 Futures
| ICE. online theice. Available at:
https://www.theice.com/products/23/Sugar-No-11-Futures Accessed 7 Jan. 2018.

International Sugar Organization. (n.d.).
About Sugar. online Available at: https://www.isosugar.org/sugarsector/sugar
Accessed 7 Jan. 2018.

International Sugar Organization. (n.d.).
About Sugar. online Available at: https://www.isosugar.org/sugarsector/sugar
Accessed 7 Jan. 2018.

International Sugar Organization (2017).
Statistical Bulletin. online Available at:
http://isosugar.org/content/publications/Statistical%20Bulletin%20February%202016-a3da52.pdf
Accessed 7 Jan. 2018.

International Sugar Organization (2017).
Market Report. online Available at:
http://isosugar.org/content/publications/02%20-%20Market%20Report%20-%20February%202017%20-%20English-e6698c.pdf
Accessed 7 Jan. 2018.

International Sugar Organization (2016).
World Sugar Balance. online Available at:
http://isosugar.org/content/publications/World%20Sugar%20Balance%20-%20February%202016-1ef545.pdf
Accessed 7 Jan. 2018.

Maritime First Newspaper (n.d.). Sugar
cane. image Available at:
https://www.maritimefirstnewspaper.com/wp-content/uploads/2017/11/How-To-Select-And-Store-Sugarcane.jpg
Accessed 7 Jan. 2018.

Reuters. (2017). Oil price moves to
impact sugar market: analysts. online Available at:
https://www.reuters.com/article/us-sugar-oil-prices/oil-price-moves-to-impact-sugar-market-analysts-idUSKBN1D62N6
Accessed 7 Jan. 2018.

Stock
to use ratio (2018) The definition and the formula of the stock to use ratio.
Online Available at: http://futures.tradingcharts.com/learning/stocks_to_use.html
Accessed 7 Jan.2018

Sugar beet. (n.d.). image Available at:
http://diy.sndimg.com/content/dam/images/diy/fullset/2015/5/20/0/Getty-Images_Sugar-Beets_Saccherifera_Variety_Wally-Eberhart.jpg.rend.hgtvcom.1280.960.suffix/1432166924353.jpeg
Accessed 7 Jan. 2018.

Sugarcane.org. (n.d.). Ethanol —
SugarCane.org. online Available at:
http://sugarcane.org/sugarcane-products/ethanol Accessed 7 Jan. 2018.

Sugar Market. (2018). Thomson Reuter.

Tate Sugars (n.d.). World Sugar
Trade 2010/2011. image Available at:
http://cdn3.vox-cdn.com/uploads/chorus_asset/file/663148/Screen_Shot_2014-08-19_at_10.58.57_AM.0.png
Accessed 7 Jan. 2018.

TDT Victoria (n.d.). Sugar Supply Chain.
image Available at:
https://rightmoves.tdtvictoria.org.au/activity-images/activity-05-sugar-chain.png
Accessed 7 Jan. 2018.

The Balance. (2016). Higher Interest
Rates and Commodity Prices. online Available at:
https://www.thebalance.com/commodity-prices-when-interest-rates-rise-4084273
Accessed 7 Jan. 2018.

ThoughtCo. (2017). How Are Exchanges
Rates and Commodity Prices Related?. online Available at:
https://www.thoughtco.com/exchange-rates-and-commodity-prices-1146235 Accessed
7 Jan. 2018.

Usda.gov. (2018). USDA | Commodity
Forecasts | World Agricultural Supply and Demand Estimates. online Available
at: https://www.usda.gov/oce/commodity/wasde/ Accessed 7 Jan. 2018.

Wattagnet.com. (2012). Increasing cow
feed profitability with sugar. online Available at:
https://www.wattagnet.com/articles/12892-increasing-cow-feed-profitability-with-sugar
Accessed 7 Jan. 2018.

 

 

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