If Sugar is a Casino, then who sets the odds ?
Farmers, Weather, Millers, Trade houses, Governments ?
Kingsman has this ability to bring complex-issues and fact situations regarding food and sugars into a non-trader lingo format accessible for an intelligent discussion between the policy makers, the industry and the public.
By 2040, our planet will be expected to support more than 9 billion people with twice today’s food demand.
Not only is there increasing uncertainty about food security with the climatic changes risk, demand for income growth will be exponential. A highly complex and the elaborate set of global trade policies will complicate matters further the business decisions…
On Food Price Inflation
“High food prices cause hunger; low prices drive farmers off their fields and into the cities. What the world needs is food prices high enough to encourage farmers to farm”.
“Before they make their planting decisions the growers will try to assess all the factors. Have they planted cane on this area before and, if they have, how it did?
How much fertilizers and pesticide will they need and what is the cost?
What about long range weather forecast and how will the weather affect the different crops that they could plant?
Most importantly the growers will try to guess what the price of their crop will be at harvest time.
Are their neighbors planning to grow cane this year and if yes how much?
What is the risk of over supply if everybody is planning to increase supply and its impact on prices? The growers will talk to people in the local business; other growers and mills owners in an attempt to get various opinions on all the various factors that may affect their production. The growers will also have to estimate their cost of production. Will the oil prices will make is cheaper to run harvesters or is the new government regulations on trucking will raise the cost of getting their harvested cane to the mills? The growers will have to make decision based on incomplete information, therefore the growers will be speculating on the future”.
[absolutely brilliant, really like the way to put he puts it into words]
On Commodity Trading:
“Due to a global surplus and world sugar prices, Thailand’s sugar producers had been reluctant sellers through 2014 and the country had been built up significant stocks. However no one was sure how much sugar Thai mills were holding in their warehouses; nor they were sure as to the quality of that sugar and whether it has deteriorated since the end of the harvest. This kept the October 2014 futures contract under pressure…
One trade house, because of their local contacts, knew both the quantity and quality of the Thai raw sugar that was available.
This knowledge enables them to sell the sugar to the Dubai refinery. Once it had been sold into Dubai it could no longer be delivered against the October Futures and the market rallied strongly, making the trade house an excellent profit in the process.”
[The sugar trade is still murky. In very rare occasions traders can engage into trade with “excess returns”].
[The trade worked against the Dubai refinery and this piece of knowledge was worth more than 200 M$. It is sure that you cannot get access to this piece knowledge unless you work closely with (f0r) the mills]
On the role of policies and how government intervene
“Government will intervene in the markets to correct perceived inefficiencies or achieve policies.
In India, mills are required by law to pay the growers a “Fair and Representative Price”
The FRP and the states’ minimum cane prices have been set high that cane farming is by far the most profitable agricultural crop now in India. This has in turn led to an expansion in production that has driven prices even lower.
When prices are low mills end up forced to pay more for the cane than they can recover when they sell the sugar. They try to sidestep this problem by running up what are called “cane arrears” whereby they pay farmers only a percentage of the minimum cane price and give them an “IOU” for the rest. At the time of writing Indian domestic prices are low and cane arrears are in excess of $1 billion. As a result the central government stepped in to try to help the mills by subsidizing bank loans to the sector. This had little impact, as banks grew increasingly reluctant to lend money to the struggling sector”. [Perhaps no other example better illustrates the distortions create by the economics of “good intentions”]
“In sugar the cane crop cycle means that the market is slow to balance supply and demand.
Cane is expensive to plant and once it is in the ground it cost relatively little to harvest. As years pass each stick of cane will yield less sucrose but the cane can economically be kept in the ground for two or 4 years depending on countries.
As long as the price of sugars is high enough to cover the marginal cost of cutting and processing the cane, the mills will keep crushing it”.
[it still begs the question in terms of profit, how much is made and lost by “the casino”each year ?]
Trade Houses are bad millers and bad farmers
“Many trade houses went into went into milling sugar to the belief that is was similar, say to crushing beans… This is not the case, cane cannot easily be transported over long distances and mills are almost entirely dependant on local supply. [the joy of competing with other mills and bidding up for local cane supply]
By getting involved in cane crushing, the trade houses became involved in farming.
Farming requires a completely different mindset than trading: farmers farm through good years and bad years…”
[Bioserv (LDC), Noble Agri, and Bunge’s investments in Brazil had business design flaws from the beginning and it transpires that a succession of poor decisions and execution has led to a total mess economically and cost-control-wise].
[It is also highlighting the risk for these organizations to be engulfed by good traders-poor businessmen placed at the top of their management].
[This could have been the Casino Moment of the book if the author wanted].
In the Martin Scorsese’s movie Casino, the Mob is knocked out of power the old casinos are purchased by big corporations and demolished to make way for gaudier gambling attractions financed by junk bonds.
Perhaps it could depict how Investment bankers have crashed into commodities in the 2000’s and then moved to gleaming trading houses after 2008. In their calculus, trading houses have tried to kick-out well run-mills locally owned by multi-generational local businessmen…
On the role of Financial flows;
We have seen mills commissioned after 2008 in Brazil and in other parts of the world which have heavy debt and those who don’t have.
As much as I acknowledge the numerous example of how governments intervene in the markets to correct perceived inefficiencies or achieve a set of policies, what transcends from the sugar trade is that investment flows in the commodity sector also intervene with excess supply capacity way above market clearing.
So in regards to this debt-profitability problem in the sugar mills industry, from my reading it would appear that financial flows is a under-looked aspect in this book.
Trade Houses are looking for more money to alleviate their debt problem**; the same money who previously killed the industry profit margins.
Current sugar prices don’t provide a rationale for new money to come in. Mills earning returns do not match up to their cost of capital. The processing profitability that was tied to the commodity forward curve- crushing capacity relationship still holds true.
In this Sugar Casino who is setting the odds of the game ?
By Jonathan Kingsman