Commodity trade and risk management (CTRM) solutions are by default complex and rich in functionalities to support all the flexibility that characterizes the industry. That’s why the full Agiblocks CTRM suite offers a wide variety of detailed features and functionalities. In many cases specialized for a certain commodity or commodity group. You can read all about it here.
The specialization of our software is what makes it the foremost CTRM solution for agricultural commodities in general, and for four of the biggest soft commodities specifically; Sugar, Coffee, Cocoa and Grains. That’s why we would like to address these commodities in depth, as well as explain to you how Agiblocks caters to them with unrivalled dedication. In this first episode of our series, we will be focusing on sugar.
In chapter 1, we will explain – as briefly as possibly – how and why sugar is such a complex commodity. In chapter 2, we’ll turn the spotlight on Agiblocks’ prowess to handle that complexity in ways that basically no other CTRM solution can.
1. The complexity of sugar: an introduction
Sugar is a sweet-flavored ingredient, used in many types of food and drinks around the world. It can be found in pretty much every plant, but it can only be extracted – or at least economically efficiently – from sugarcane and sugar beet. This sweetener has become a preferred ingredient in almost every food product. The three biggest producers of sugar are: Brazil, India and the European Union.
Sugar can be produced from either sugarcane or sugar beet. The former is by far the more popular resource, as it is used for approximately three quarters of all production. There are a number of reasons why sugarcane exceeds sugar beet in production volume, the two most notable are the climate and production costs. These two factors are to a great extend intertwined. Thailand, China, Brazil and India are major producers of sugarcane due to their favorable tropical climate. This climate provides a significant longer production period when compared to sugar beet. Sugar beet is produced mainly in Europe and the U.S.
1.1 Trading and exchanges
Now, none of this introduction into the world of (producing) sugar reflects the complexity of its trade. The sugar commodity market can be impacted by a number of factors. Sugar remains one of the most heavily subsidized commodities worldwide and changing government policies can greatly impact the sugar trade. Sugar production is subsidized and tariffed all over the world. The real price of sugar is actually unknown, which obviously IS a huge factor in its complexity.
Let’s start by talking about the various exchanges. There are four different types of sugar contracts traded on exchanges around the world:
- On the NYMEX, they trade sugar [Derivatives|futures contract] no. 11 for raw sugar;
- On the ICE, they trade sugar futures contract no. 16 for raw sugar;
- On the NYSE Euronext LIFFE, they trade sugar futures contract no. 407 which is either for white beet, cane crystal or refined sugar;
- On the Olsa de Mercadorias & Futuros (Brazil), they trade sugar futures contract for cane crystal sugar.
The futures contract for sugar is traded at the Intercontinental Exchange (ICE), Brazilian Mercantile and Futures Exchange (BF&M), Kansai Commodities Exchange (KEX), Multi Commodity Exchange (MCX), National Commodity Exchange Limited (NCEL), National Commodities and Derivatives Exchange (NCDEX) and Zhengzou Commodity (CZCE) Exchange. Sugar options are also offered as several exchanges. The most important exchange is the New York Mercantile Exchange (NYMEX) and sugar prices at this exchange function as a benchmark for sugar prices.
At the NYMEX, they trade sugar futures no. 11 for raw sugar, on ICE they trade sugar futures no. 16 for raw sugar while at NYSE Euronext it is sugar futures contract No. 407 for either white beet, cane crystal or refined sugar and finally, on the Olsa de Mercadorias & Futuros, they trade sugar futures contracts for cane crystal sugar. These contracts are mainly based on the origin of the product and the area in which they are being traded.
1.2 Different kinds of sugar
Another factor to complicate the story is the fact that sugar it not one, single product – or at least not in the way that gold is a product (measured in weight), or oil is a product (measured in volume), or even chickpeas and coconuts. As previously noted, sugar is derived from either sugar cane or sugar beets. Sugar, in other words, comes in different shapes and sizes – or at least more so than the aforementioned commodities.
Given that beet sourced sugar requires a single stage of processing, beet sugar is always produced in its “white” consumable form, as opposed to cane sugar, which can be in either a raw form after milling, or a white form after refining. A large portion of the global sugar trade is in raw, or unrefined cane sugar. This market for raw sugar has seen growth with the advent of refineries being built near the ports where sugar is imported. The expansion of the white sugar trade has been tied to the emergence of the EU as a large exporter and the rise of sugar demand in the Arab world and Black Africa in the 1970s. For many years, the EU had a market share of 50% in white sugar, but the growth of refining capacity at destination has helped remove some white sugar demand. Additionally, low quality white sugars have begun to displace high quality white sugars as well.
Sugar cane is essentially a giant grass that grows up to 3 meters in height in tropical and semitropical regions. It needs rainfall and sunlight to grow and the majority of the sugar cane production is not irrigated relying solely on rainfall. Harvesting the sugar cane is performed either manually or mechanically and in both cases the cane is cut close to the ground and the leaves removed. The plant re-grows each year from the original root. The harvested sugar cane is transported as quickly as possible to the sugar mill to maximize the extraction of the sugar. The sugar mill is typically located close by the sugar cane growing area in order to avoid delays, reduce transport costs and related environmental impacts.
At the mill the cane will be crushed and the juices will be collected. The cane juiced will then be cleaned using slacked lime, and then reduced to syrup via boiling off excess water. Finally the syrup is crystallized through additional boiling allowing sugar crystals to grow. Once the sugar is in a crystalline state, any excess liquids are spun out in centrifuges and the crystals are dried with hot air. Once dried, the crystalline sugar is placed storage, awaiting shipping. Usually, these local mills produce raw sugar that required refining to a pure form; however, in some cases the sugar mills have been modified to enable production of direct consumption sugars.
Raw sugar is shipped in bulk ocean-going vessels from the sugar mill directly to port-based refineries, which will remove any remaining impurities and color from the raw sugar. Once refined, the sugar can then be tailored to meet the customers’ requirements. A full portfolio of sugars is produced in crystal, liquid and syrup form.
White beet sugar
White beet sugar is made from the beets in a single process, rather than the two steps involved with cane sugar. The beets are harvested in the autumn and early winter and transported to the factory by large trucks. Beet is a rotational crop requiring almost 4 times the land area of an equivalent sugar cane crop. The beets are also dirtier and have to be thoroughly washed and separated from mud, stones, leaves and other debris and waste.
The clean beet is sliced into thin chips to increase the surface area for enhanced sugar extraction. These chips are placed in a diffuser with hot water for an hour. Afterward, the exhausted beet slices are run through screw presses to extract as much of the juice as possible. The pressed beet is turned into pellets, used as a constituent of animal feed.
The raw juice will usually contain about 14% sugar and must be cleaned before it can be used for sugar production. Once cleaned through a process known as carbonation, the liquid is processed in a multi-stage evaporator to reduce it to a sugar syrup. Finally, that syrup is placed into a very large pan, typically holding 60 tons or more of sugar syrup where the remaining water is boiled off until sugar crystals to grow. The wet crystalline sugar is then spun in centrifuges to separate the liquid. The crystals are then fully dried with hot air prior to being packed and/or stored ready for shipping. The final sugar is white and ready for use, whether in the kitchen or by an industrial user such as a soft drink manufacturer.
A byproduct of the beet refining process is beet molasses, which is usually turned into a cattle food or sent to a fermentation plant such as a distillery for alcohol production.
1.3 Different kinds of sugar – a summary
To sum up the previous section, there are various types of sugar, including:
- Crystal Muscavado
- Caster Icing
- Premium Liquid Sugar
- Fine Liquid Sugar
- White Crystal
- Refined – Fine Granulated
We can slowly start to understand why sugar is such a complex commodity market. It is traded at different markets and traders, merchandisers and consumers all use different specifications. There are four sugar contracts and also raw sugar is priced based on terminal markets, but purity or the Polarization Premium, is an important aspect of sugar price.
It is essential for the various types of players in the market to be able to manage, trade and arbitrage on and between these markets based on the difference between raw and white sugar prices. Additional complexity results from the need of the larger sugar consumers to set their own specifications for sugar and that sugar is increasingly containerized having traditionally been a bulk product.
1.4 Different standards for sugar
In addition, there are a number of different standards that are important to players in the market. The International Commission for Uniform Methods of Sugar Analysis is the provider of the ICUMSA standards and an ICUMSA rating is an international unit for expressing the purity of the sugar in solution, and is directly related to the color of the sugar. Let’s throw them into the mix:
White Refined Sugar (ICUMSA 45)
A highly refined sugar product, Icumsa 45 is easily recognizable by its distinctive sparkling white color and pure sucrose taste. It is considered to be the world’s leading consumer sugar that possesses a standard by which other types of sugar are measured against.
Sugar (ICUMSA 100)
Icumsa 100 is refined sugar that has a lower grade and lower cost than Icumsa 45. Having a light white color, this kind of sugar does not possess the visual appeal of sparkling white Icumsa 45, however, Icumsa 100 is still a food grade sugar that is safe for human consumption.
White Crystal Sugar (ICUMSA 150)
Is recommended for most customers since it contains fewer chemicals, it is more readily available, and it is a lower cost replacement to the traditional white refined sugar, Icumsa 45. It is produced by crystallization process, with the absence of chemical refining.
VHP Sugar (ICUMSA 600-1200)
Icumsa 600-1200 is typically the rating into which VHP sugar falls. VHP or Very High Polarity sugar is a raw sugar with a polarity of more than 99.4 percent that contains relatively few contaminants, two reasons that make this sugar light brown in color. The term VHP is widely understood to mean that 99.4 percent of the total mass of a raw sugar is pure sucrose, and that 0.6 percent or less is waste material. VHP remains in high demand, as it is much cheaper and easier to refine than standard raw sugars.
1.5 The market for sugar
The sugar market comprises a number of industry segments with the companies in each participating in some way in the trade and the market. These include producers, marketers, traders, processors and buyers and represent the entire supply chain for sugar. Marketers and traders will most likely be involved in more speculative trading from time to time whereas producers and buyers of sugar will focus more on the physical side of the business but utilize futures markets for hedging and risk management.
Marketers and traders may also be active in the physical side of the business. This means that the different players in the different market segments will have different needs and requirements when it comes to CTRM software.
2. Managing Sugar’s Complexity in a CTRM Solution
CTRM solutions for sugar need to handle the general complexities of any particular commodity, along with providing features such as usability, performance and integration. However, sugar trading has a number of very specific aspects to it that not every CTRM solution will be able to handle with ease, or even at all. We will walk you through some of them, as Agiboo has made it its mission to handle all of them – with Agiblocks.
2.1 Deposit Payment Terms
Commonly, sugar traders will utilize deposit payment terms to minimize counterparty credit issues. These can be extremely complex, including percentage or lump sum deposit requirements expressed in the payment terms for a trade or purchase/sale. Not only do these complex payment terms need to be captured at deal entry time, but they also need to be considered in monitoring credit exposures and in receiving and tracking payments.
2.2 Break bulk and bulk logistics
In sugar trading, managing logistics is made more complex by the fact that while white sugar is usually containerized, raw sugar can be traded in bulk. This means that a CTRM system for sugar must be able to handle both types of movement. For white sugar, containers will need to tracked; and deliveries may be made up of single or multiple containers whose movements need to be managed as well. On the other hand, bulk raw sugar requires a number of altogether different items to be handled, including loading times and vessel size. Many (other) CTRM solutions can cater for one or the other type of logistics, but not both.
2.3 Unique conversion
Sugar is unique in that it has two principal markets or products that can be converted to each other physically. Raw sugar can be processed and converted into white sugar and hence there is a differential known as the white premium that can value the conversion. The premium can change daily based on things like fuel costs and therefore needs to be tracked. The white premium has to be handled by a CTRM used for sugar explicitly.
Polarization is a quality measure that is specific to sugar and may also need to be tracked by the CTRM. The clearer the sugar crystals, the less it costs to convert raw sugar into white sugar. Therefore, polarization is a quality item expressed in the contract and measured using laboratory testing. This premium has to be tracked by the system and utilized in calculations and cost accruals to gain an accurate picture of profit and loss.
Many trades in sugar sell at prices to be fixed, making it very important for position screens to show the ‘to be price-fixed’ positions as well as overall position.
2.6 Product properties
Over time, a number of product properties have emerged that also need to be ‘understood’ by the CTRM and these are specific to sugar. An example is the Coca Cola specification. All of these product properties need to be captured and held in the CTRM solution.
2.7 Change and evolution
The CTRM needs to be continually maintained and upgraded in line with changing market needs across all segments of the industry. For example, new ICE containerized sugar futures will need to be properly handled. Additionally, EU quotas, export limits and guaranteed prices will almost certainly result in some market dynamic changes that could have an impact on future requirements too.
Mind you, these are just a few of the specific issues around sugar trading that are often either not supported in a generic CTRM solution, or may require some form of work-around to handle. As a result, anyone looking to procure a CTRM solution for sugar trading should ensure that the short-listed CTRM solutions are able to handle such specifics along with all of the other expected functions and features of a good and usable solution. This actually narrows the field of potential solutions quite considerably.
3. Agiblocks: a true sugar solution
Agiblocks is a multi-commodity capable system out of the box. Built on modern technology, it provides functionality for trading physical commodities and their terminal market instruments. It supports contract management, logistics fulfillment, forex and hedging, and it has tools for real-time risk analysis and risk management. It supports both trading management and financial management from the same source of data and within the same application. Its modular structure allows users to implement an end–to-end solution or to select individual functions to implement only the functions that are needed.
While Agiblocks is a strong contender across many commodities, it is extremely strong in terms of meeting the specific requirements of the sugar markets with a number of customers implemented and using the software to support their sugar trading businesses. Agiblocks provides all of the functionalities discussed above that are specific to sugar.
Experience Agiblocks and judge for yourself
Experience our CTRM software solution for free and get a front-row seat to all the benefits Agiblocks has to offer with our free demo. The full range of Agiblocks functionality is available within the demo environment for your browsing leisure. Familiarize yourself with the tools and features of our powerful and agile software solution and find out how you can make the daily practices of commodity trade and risk management more efficient. Fill out the form on agiboo.com/demo and we will get back to you.