aboutSUGAR BUYINGfor Jobbers _How you can lessenbusiness risks by trading inRefined Sugar Futures_ _by_ B. W. DYER A BOOKLETFOR JOBBERS WHOSELL SUGAR _Lamborn & Company_SUGAR HEADQUARTERS132 FRONT STREET · NEW YORK Copyright, 1921LAMBORN & COMPANY About Sugar Buying Jobbers who have had considerable experience in exchange operationswill find in this booklet a simplified and non-technical description ofactivities with which they may be in general familiar. We believe, however, that the inauguration of trading in refined sugarfutures on the New York Coffee and Sugar Exchange, Inc. , throws open anew realm of opportunity. We have attempted to outline briefly the chief advantages to be gainedby a jobber's use of this new market, assuming that those who have inthe past dealt in raw sugar as a protection for their refined sugarneeds will welcome suggestions as to the benefits to be derived fromtrading directly in refined sugar. Time, the Croupier of Business Like a croupier at a vast roulette table, Time presides over the realmof business. Time is the tap-root of most business uncertainties. No one can tell what will happen a year, a month, a day, a minute fromnow--the future may bring floods and wars, pestilence and drouth; or itmay bring great crops and fair weather, happiness and prosperity. As business has become more and more complicated, the time element hasbecome larger and larger. The time element as we know it does not existin simple barter--a man weaves a piece of cloth and exchanges it for abushel of corn: time is of no account in the transaction. A smalljobber located in the same territory as refiners buys a small amount ofsugar today and distributes it to his trade the next--time isnegligible. A large jobber, buying perhaps for several branch houses, or located at points which necessitate a delay of two or three weeks intransit, may find it necessary even on a declining market to purchase aconsiderable amount of sugar, and, as a result, weeks may go by beforehis sugar arrives and is sold--time is vitally important. Time is an element in costs and prices, because over any extendedperiod of time many things may happen to influence costs and prices. All business planning must deal with Time. To the unenlightened business man, Time is a bugaboo--a gambler whosecards are stacked and against whom there is no defense. Such a manconducts his business from hand to mouth, in constant fear. He is afatalist, taking his profits and losses as if they were gifts or blowsof Fortune. The enlightened man works with Time as an impartial, exacting, inevitable power for his own good or ill. He shapes his actions andenlists the services of Time to prevent catastrophe on the one hand, and to enforce prosperity and happiness on the other. Storms may come, but so far as his mind may control it, he is "the master of his fate. " Cost and Selling Prices That the element of TIME is important in the jobber's business no onewill deny. He does not base his selling price on cost, but rather onthe market price. Regardless of his cost, he must sell to meetcompetition. It is equally obvious that the larger his business, or thegreater his distance from the source of supplies, the more importantpart TIME plays in both his cost and selling prices. All jobbers, large or small, are obliged to assume greater risks (evenproportionately) and exercise greater care, than, for instance, retailers buying in small quantities. A jobber's business may enlargeby a perfectly natural process of expansion, but his purchasing risksincrease in greater ratio than his business expands. Similarly, under abnormal conditions, jobbers located at pointsrequiring several weeks in transit prior to delivery, must assumegreater risks than those located at the source of supply. In the eventof serious delays in deliveries or in shipments, even buyers located atshipping points are confronted with this problem, and the difficultiesof those located at a distance are increased immeasurably. These difficulties tend to accentuate the importance of TIME in modernbusiness. As business grows, instead of decreasing--risks increase. Anymachinery which might operate to eliminate or reduce this uncertaintyor speculative element in a jobber's business, would, we believe, bewelcomed. Exchanges provide just such machinery. Other commodities, such as raw sugar, wheat, cotton, pork and coffeehave had this machinery for years and it was provided for refined sugaron May 2, 1921, when trading in refined sugar futures was inauguratedon the floor of the New York Coffee and Sugar Exchange, Inc. Where Buyers and Sellers of Sugar Meet The Sugar Exchange is a market place, where buyers and sellers of sugaror their representatives meet to trade. The Exchange provides a concentration point, where, under any marketconditions, sugar may be bought or sold _at a price_. What that price is, is determined by how much sugar is for sale and howmany people want it. If the supply is large and buyers are few, theprice will be low. If sugar is scarce and buyers are numerous, theprice will be high. Or, to put it in another way, when there are moresellers than buyers, the market declines; when more buyers thansellers, it advances. If the supply and the number of buyers arenormally well balanced, the price will be determined largely by thecost of production and transportation. If events or circumstancesoperate to increase or curtail either the sugar supply or the number ofbuyers, and such events or circumstances follow one after the otheralternately, the price will fluctuate. These are the results of the operation of well-known economic laws. In the case of all commodities which cannot be bought or sold at acommon market place (or exchange), price fluctuations are usually wideand frequent, because no large group ever has common knowledge ofsupply, demand and other factors that govern prices--purchases andsales are made direct between individuals, and knowledge of the amountasked or paid is restricted to a limited few. Through the common market place provided by an exchange, on the otherhand, market conditions and prices become common knowledge almostinstantly over the entire country. This tends toward stabilization--afact which, alone, helps to eliminate risks, and enables merchants tobuy at lower prices than if forced to deal direct with one another. Sellers do not have to take such long chances and can thus afford tosell on a smaller margin of profit. Competition is stimulated and freedfrom many of its complications and uncertainties to the advantage ofthe seller, the buyer and the public. It is now admitted that, had exchange trading in refined sugar existedin 1920, a general use of the exchange by all branches of the trademight have prevented, to a considerable extent, the abnormal advance insugar prices of that period, with the hardship and misfortune thatattended. The fact that an exchange always provides a buyer and a seller, _at aprice_, tends toward keeping business fluid. Jobbers are able toprotect their future requirements. Producers are sure of a market fortheir crops. Crop financing is made easier because bankers are morewilling to loan on crops sold in advance--an operation made possible byan exchange. Exchanges operate to take the gamble out of business. They help to putand maintain business on a sound basis. That some people who have noreal interest in the commodity use the exchange speculatively does notalter this fact. In providing machinery by which speculative risks incident to ajobber's business may be shifted from the jobber to those who make abusiness of assuming such risks, exchanges help to stabilize hisbusiness and to remove a large part of the destructive uncertainty withwhich he would otherwise have to contend. Exchanges are the creations of modern economic development, designedand operated for the benefit of the commerce, industry and people ofthe civilized world. Therefore we welcome trading in refined sugar futures and theopportunity to offer you the advantages that may be derived from aconservative, intelligent use of its services. The Exchange provides certain quality standards and other regulationsto safeguard your interests. But your real assurance of protection liesin the _character_ and reliability of your broker. If your broker isnot strong financially you do not have back of your contract theresponsibility that you might otherwise have. If you had a favorable contract with a broker who became insolvent, youwould have no means of forcing the fulfillment of the contract, and noway of securing the profit which was due you. The thing to do, ofcourse, is to choose a broker who is so strong financially that youincur no danger in this respect whatsoever. Use the Exchange when the Market is Favorably out of line In considering the illustrative examples in this booklet, it should beborne in mind that the measure of protection afforded is relative andnot absolute. The theory of exchange operations is that the exchangemarket will move relatively the same as the market for the actualcommodity. This cannot be strictly true, although the exchange market must ofnecessity follow very closely the actual market, because all the sugarmust, in the final analysis, come from the actual market. If thrown outof parity with the actual market, the exchange market is bound to comeback eventually. In the exchange market anyone can buy and anyone can sell. The marketis subject to many outside influences, and the fluctuations reflect andaccentuate the varying shades of market opinions of many individuals. But in the market for the actual commodity, the quotations are made bycomparatively few men, which means that there will be less fluctuation. Therefore, it is obvious that although the exchange market _should_ beon a parity with the actual market, the unequal fluctuations of the twomarkets will be constantly throwing them out of parity or "out ofline. " There are times when the market will be so out of line that the _buying_of futures should result profitably. At other times, with conditionsreversed, _selling_ of futures seems obviously advisable. We do notclaim that jobbers can protect sugar purchases with absolute and exactprecision. On the basis of long exchange experience, we _do_ believe, however, that by a discreet use of the Exchange, and by using themarket when quotations are _favorably_ out of line, jobbers can do soto their decided advantage. Selling of Futures--Hedging As the word itself indicates, a "hedge" on the Exchange is aprotection. You hedge by buying or owning actual sugar, and "selling short" in thesame amount. You sell sugar futures although you do not own any. Youactually contract to deliver an amount of sugar during a specifiedfuture month at a specified price. Eventually, you must either buy and deliver actual sugar to carry outthis contract, or you must buy another contract for futures to cancelyour short sale. This is known as a "covering" operation, and thecancelling of one by the other takes place automatically through thechannels of the Exchange. From the jobber's point of view, the operation of hedging has threeoutstanding purposes. He may hedge: 1. To eliminate the probability of speculative profit or loss, due to market fluctuations. 2. To protect a profit on a favorable purchase of actual sugar. 3. To establish and limit a loss on an unfavorable purchase of actual sugar. HEDGING _to protect a normal jobbing profit by eliminating theprobability of a speculative loss or gain_. This operation is particularly useful to jobbers with whom conditionsare such that they desire to be assured that their cost will be atabout the market price at the time they dispose of their sugar, regardless of whether the market be higher or lower. Although there are times when any jobber, no matter where located, willfind this a useful transaction, it is obvious that many buyers will notwish to use the market in this way unless they feel it will decline. But it is particularly of advantage to a jobber located in marketsnecessitating a delay of from one day to several weeks in transit. For instance, on a certain day in April, two jobbers bought their usualquantity of sugar. One was located in Syracuse, the other in New York. Two days following the purchase, the market broke half a cent perpound. In view of the fact that his sugars were still in transit whenthe market declined, the Syracuse buyer was obliged to sustain thisentire loss, in order to meet competition. On the other hand, becausehe received and distributed the sugar before the market broke, the NewYork jobber was able not only to avoid a loss, but make his regularprofit. CHART 1 ----------------------------------------------------------------------------HEDGINGto protect a normal jobbing profit by eliminating the probability ofa speculative loss or gain------------+-----------------------------------------+-----------+---------Initial | |Transactions| Subsequent Transactions | Result------------+-----------+---------------+-----+-------+-----------+--------- |Liquidating| Condition |Price| Result| Figure | In each | the hedge | of market | you | of | your | case |(covering) | when you |would| hedge | sugar | the | | "cover" | pay | cost | cost | same | | your hedge | in | this | this | | | |cover| way | way | | | |-ing | | |------------+-----------+---------------+-----+-------+-----------+---------You buy | When you | | |Profit |Actual cost|actual sugar| sell your |It has declined| | |less profit|at 6. 00 | sugar (or |to 4. 00 |4. 00 |2. 00 |6-2=4 | | when it is| | | | | | delivered)| | | | | | you buy | | | | |You get | the same | | | | |your | amount of | | | | |sugar | futures at| | | | |at the | the market| | | | |market | price, | | | | |price | whether | | | | |at the | higher or | | | | |time | lower. | | | | |when you | | | | | |sell it | | | | | |(or whenAt the same | | | | |Actual cost|yourtime you | |It has advanced| |Loss |plus loss |deliveryhedge by | |to 8. 00 |8. 00 |2. 00 |6+2=8 |is made. )selling the | | | | | |same amount | | | |No | |of futures | |It stands at | |profit, |Actual |at 6. 00 | |6. 00 |6. 00 |no loss|cost |------------+-----------+---------------+-----+-------+-----------+--------- Naturally the greater the amount of sugar any one concern may have intransit the greater the need for protection. We call this kind oftransaction particularly to the attention of buyers having branchhouses who find themselves obliged to make relatively large purchasesto supply their trade in the face of a market in which they have noconfidence. These disadvantages at which out-of-town buyers are sometimes placedmight be overcome by using the Exchange. On the other hand, whenrefiners are badly behind on deliveries, even buyers located at thesource of supply will find themselves facing a similar problem thesolution of which may be found in a use of the Exchange. It is therefore evident that the selling of futures may be a transactionthe _sole_ purpose of which is to eliminate speculation from a jobber'sbusiness. Regardless of how careful a buyer may be, there is an element of_speculation in each purchase of actual sugar_. If the price goes up, there is a speculative gain--the sugar is worthmore. But if the price goes down, the buyer sustains a speculativeloss. The measure of protection afforded by the Exchange will appeal to thosejobbers who wish to reduce the speculative element in their business. In the example immediately following, as in all others, we have nottaken into consideration the difference between the Exchange quotationsand the Seaboard Refiners' quotations, which is explained on page 38. This would simply inject an unnecessary complication, and would be ofno particular advantage for purposes of illustration. Suppose you should buy through your broker from a refiner, for promptshipment, an amount of _actual_ sugar at 6. 00, which you plan to sellwithin a short time after its receipt. Instead of worrying aboutsubsequent sugar price fluctuations, you simultaneously hedge thispurchase by _selling_ futures in the same amount on the Exchange. Theprice at which you buy actual sugar and the price at which you sellfutures should be relatively the same, since Exchange prices generallyreflect refiners' prices. You should be able to figure the cost of your sugar at about the marketprice at the time it is received or sold. (See Chart 1. ) If the price of sugar should go down to 4. 00 at about the time when yousell it, your actual sugar, for which you contracted to pay 6. 00, wouldbe worth only 4. 00; but you would then buy to cover your futures sale, making 2. 00 on this transaction, which, subtracted from the price youpaid (6. 00), brings the cost down to the market price of 4. 00. In otherwords, you have accomplished your purpose of being able to figure yoursugar cost at the market price at the time when you received it (or atthe time you sell it). That is, although every pound of actual sugarwas sold at a loss, this loss was balanced by the profit from yourhedge. If, on the other hand, the market should advance to 8. 00 after youroriginal purchase and hedge at 6. 00, the value of your actual sugarwould be increased by 2. 00. You would then buy futures at 8. 00 to coveryour short sale at 6. 00, netting a loss thereby of 2. 00. This losswould be added to your original cost of 6. 00, making your actual sugarcost 8. 00, which is the market price at the time. Had you omitted thehedge, your sugar would have cost you only 6. 00, but, in this examplewe are assuming that you would sell only when you were willing tofigure your sugar cost at the market price. This you have accomplishedby foregoing the speculative profit you _might_ have made in favor ofyour normal jobbing profit. If the market should remain relatively stable you would buy to coveryour hedge at approximately the same price as you sold for, your gainor loss being practically nothing. In other words, you would obtainsugar at the market price, which is the purpose in this kind of ahedge. HEDGING _to protect a gain on a favorable purchase of actual sugar_. All sugar buyers have had the experience of buying actual sugar, onlyto see it advance or decline before they have disposed of it. How toprotect the gain, or minimize the loss, is described in the two hedgingpositions which we now discuss. Suppose you have bought sugar, have _not_ hedged against it, and haveseen it advance. Finally you have said, "I think sugar is about as highas it is going. I am going to sell against that to protect thatprofit. " On the other hand, the reverse might be the case. You might find themarket going down, and say, "The market is going lower. I want to hedgeagainst that, and limit my loss to a definite amount. " CHART 2 ----------------------------------------------------------------------------HEDGINGto protect a gain on a favorable purchase of actual sugar--------------+-----------------------------------------+----------+--------Initial | |Transactions | Subsequent Transactions | Result--------------+--------+----------+---------+-----------+----------+-------- | Hedge |Condition |Price you| Result of | Figure | In | |of market | pay for | hedge and | actual | each | | when you | futures | covering | sugar | case | | "cover" | to cover| operation | cost | the | |your hedge| hedge | | this way | same--------------+--------+----------+---------+-----------+----------+---------You buy actual| | | | |Price paid|sugar at 6. 00, | | | | |for actual|but before you| |It has | | |sugar less|Yourhave received | |declined | | |hedging |sugarit (or before | |to | |A profit |profit |costyou sell it) | |6. 00 | 6. 00 |of 2. 00 |6-2=4. 00 |isthe price | | | | | |2. 00advances to | | | | | |under8. 00 | | | | |Price paid|the | | | | |for actual|marketYou now have |You sell|It has | | |sugar plus|your sugar at |futures |advanced | | |hedging |2. 00 under the|at |to | |A loss |loss |market |8. 00 |10. 00 | 10. 00 |of 2. 00 |6+2=8. 00 | | | | | | |You feel that | |It stands | |No profit, | |the market may| |at 8. 00 | 8. 00 |no loss | 6. 00 |recede and | | | | | |eliminate | | | | | |this gain, | | | | | |so-- | | | | | |--------------+--------+----------+---------+-----------+----------+-------- In both of these cases, the operation is relative. If a man has aprofit, let us say 2¢ a pound, and he hedges, he maintains his profitof 2¢ a pound as compared with the market at the time of delivery, orat the time when he expects to sell this sugar, regardless of whetherthe market is higher or lower. In the same way, conversely, if he has a loss on his sugar of 2¢ apound, by hedging he can limit that loss to 2¢ a pound, even though themarket goes still lower. In other words, his sugar cost at the time ofdelivery, or at the time when he expects to sell the sugar, will beabout 2¢ above the market price, whether the market is higher or lower. We shall assume that you have bought from a refiner through your brokera supply of actual sugar at 6. 00. While your sugar is in transit orbefore it has been shipped by refiners, the market advances to 8. 00, atwhich point it apparently is steady. You now have a _theoretical_ gainof 2. 00--that is, if you were to sell your sugar at once, you wouldhave an _actual_ profit of 2. 00; but you do not sell because yoursugar is in transit or you need it for your trade. However, you do wantto preserve and protect this favorable position of having your sugar2. 00 below the market at the time you want to sell it. So you sell thesame quantity of futures on the Exchange at 8. 00. Three things may occur--the market may decline, or it may continue toadvance, or it may remain steady. You have accomplished your purpose inany case (see Chart 2). By the time you sell your sugar (or at the time of its delivery) itbecomes necessary for you to cover your hedge and if the market hasdeclined from 8. 00 (at which point you hedged) and stands at 6. 00again, your hedging operations considered alone would net you an actualprofit of 2. 00. Your original sugar cost was 6. 00. Your profit on yourhedge was 2. 00, so that you would figure your actual sugar cost at4. 00. You would have accomplished your purpose of getting your sugar2. 00 under the market at the time of selling it (or at the time of itsdelivery). That is, your delay in selling your sugar has cost youpractically nothing, even though the market has declined. If the market has advanced to 10. 00, when it becomes necessary for youto cover your hedge (at the time of selling your sugar or when it isdelivered) your hedging operations considered alone would net you a_loss_ of 2. 00. You would buy in futures at 10. 00, which you sold at8. 00. Your original sugar cost was 6. 00, your loss on your hedge was2. 00, so that you would figure your actual sugar cost at 8. 00. But themarket at that time was 10. 00, so that you have accomplished yourpurpose of getting your sugar 2. 00 under the market at the time ofselling it (or at the time of delivery). In other words, you would makethe same profit as though you had re-sold your sugar to second-handsoriginally, instead of hedging, but had you followed this course, youmight not have had sugar in stock for your regular trade. On the other hand, when it becomes necessary for you to cover yourhedge, if the market has remained steady and is again at 8. 00, the twofutures transactions cancel themselves without profit or loss. Youroriginal cost of 6. 00, therefore, stands as your actual sugar cost atthe time of selling (or at the time of delivery). This is 2. 00 underthe market and you have accomplished your purpose. HEDGING _to establish and limit a loss on an unfavorable purchase_. This operation is identical in its working with the previous example, except that you have a different end in view. CHART 3 --------------------------------------------------------------------------HEDGINGto establish and limit a loss on an unfavorable purchase------------+--------+---------------+-------+----------+----------+-------Initial | |Transactions| Subsequent Transactions | Result------------+--------+---------------+-------+----------+----------+------- | Hedge | Condition of | Price | Result | Figure | In | | market when | you | of | actual | each | | you "cover" | pay | hedge | sugar | case | | your hedge | for | and | cost | the | | |futures| covering | this | same | | | to | operation| way | | | | cover | | | | | | hedge | | |------------+--------+---------------+-------+----------+----------+-------You buy | | | | |Price paid|actual sugar| | | | |for actual|at 6. 00 but | | | | |sugar less|before you | | | | |hedging |have | |It has declined| | A profit |profit |received it | |to 4. 00 | 4. 00 | of 1. 00 |6-1=5. 00 |(or before | | | | | |you sell it)| | | | | |the price | | | | | |declines to | | | | | |5. 00 | | | | | | | | | | | |You now have| | | | |Price paid|Youryour sugar | | | | |for actual|sugarat 1. 00 | | | | |sugar plus|cost isabove the |You sell| | | |hedging |1. 00market |futures |It has advanced| |A loss of |loss |above |at 5. 00 |to 6. 00 | 6. 00 |1. 00 |6+1=7. 00 |the | | | | | |marketYou feel | |It stands at | |No profit, | |that the | |5. 00 | 5. 00 |no loss | 6. 00 |market may | | | | | |decline | | | | | |still | | | | | |further and | | | | | |increase | | | | | |this loss, | | | | | |so-- | | | | | |------------+--------+---------------+-------+----------+----------+------- Let us say that you purchase actual sugar at 6. 00. If the marketdeclines to 5. 00 after your original purchase at 6. 00, you have a_loss_ of 1. 00, in the value of your sugar. Facing the possibility of afurther decline and desiring to _limit_ this loss to 1. 00, you hedge byselling futures. In this case you should limit your _loss_ to 1. 00 justas effectively as in the previous example you preserved your _gain_ of2. 00, and by the same course of procedure. (See Chart 3. ) By the time it is necessary for you to cover your hedge by buying anequivalent amount of futures, the market may have declined stillfurther, say to 4. 00. You sold at 5. 00, you bought at 4. 00, profit onthat operation, 1. 00. Subtract this profit from your original cost(6. 00) and figure your sugar cost at 5. 00. In other words, although themarket went still lower, you succeeded in limiting your loss to 1. 00, as compared with the market price at the time of the delivery of yoursugar (or at the time you sell it). Had you omitted the hedge, youractual sugar cost would have been 6. 00, which was 2. 00 above themarket. After your original purchase at 6. 00, and market decline to 5. 00 (atwhich point you hedged), the market might advance again to 6. 00, orremain steady at 5. 00, but the operation is no different from thatpreviously described, and you in each case attain the same result. Buying of Sugar Futures Refiners do not make a practice of taking orders more than thirty daysin advance of actual delivery--but there are obviously times when it isadvisable to cover one's requirements for a longer period. A jobber maydo this on the Exchange where he will always find a seller at _some_price for the quantity he desires. This privilege is particularly valuable to: 1. Jobbers who believe that the market price of Sugar is going higher and who desire to cover their future requirements beyond the delay period which refiners will extend. 2. Jobbers, who desire to sell to manufacturing customers for future delivery at a fixed price so that these manufacturing customers may determine their selling price, may do so by the use of the Exchange. _1. Buying of sugar futures--Based upon the expectation of higherprices_ No doubt many jobbers will recall occasions when anticipating theirrequirements seemed obviously advisable, perhaps almost imperative. Such a jobber would be one who believed in the market. His action wouldbe based on his opinion of the market. He might note in January, let ussay, that the price of May or July futures is favorable. He would liketo get his May or July sugar at about that figure. You yourselfprobably can recollect many times in the past, when the general marketwas in such a strong position fundamentally that anticipating yourrequirements seemed advisable. You decided to buy a considerablequantity only to find that refiners would not sell you to the extentthat you wished to purchase. When covering your future requirements onthe Exchange, you can buy any quantity desired. Consider also on how many occasions when you wanted and _needed_ adefinite future month of shipment, you have been told that "_as soonas possible_" was the only acceptable basis. Or have you had the experience of placing an order and waitingtwenty-four or thirty-six hours without knowing if the refiner wouldaccept your order? Meanwhile the market might have advanced, and, ifyour order had been declined, you would have had to pay an even higherprice for your sugar. The facilities of the exchange offer opportunitiesfor protecting requirements _quickly_ and without the uncertainty anddelay sometimes encountered from refiners. A jobber must anticipate the market in order to take full advantage ofit, and in this connection it should be borne in mind that the SugarExchange, as in the case of practically all exchanges, usuallyanticipates either favorable or unfavorable developments in the marketfor the actual commodity. Consequently, prompt action is necessary wheneither a higher or lower market is expected, as the Exchange marketwill usually be the first to reflect changing conditions. Suppose you feel that the price of sugar is low and probably goinghigher. You try to anticipate your requirements for some time to come, but find that refiners will not sell for more than thirty days. You can go on the Exchange and buy futures in the quantity and monthdesired. Assume then, that you pay 6. 00 for your futures. Now, whateverhappens in the sugar market, you know you can get the quantity of sugardesired at about 6. 00 (see Chart 4). The market will advance, decline or hold steady. Say the market advances. When it seems advisable to close out yourExchange contract and buy actual sugar, the price may have gone up to8. 00. You will then sell your futures at about 8. 00, go into the marketand buy actual sugar at the same price, assuming, of course, that theactual market has advanced in relative proportion--which is likely. Although actual sugar has cost you 2. 00 more than you had figured, youhave made 2. 00 on your futures. Profit and loss cancel each other. Yoursugar cost is 6. 00. On the other hand, suppose the market declines after you have boughtfutures at 6. 00, and goes down to 4. 00, when it seems advisable toclose out your Exchange contract. You sell your futures at 4. 00, a lossof 2. 00. But you will also buy your actual sugar at 4. 00, which is 2. 00lower than you had planned. Your actual sugar cost was therefore 6. 00, which is the price you had figured was favorable. If the price still is at 6. 00 when you desire to liquidate, you wouldsell your futures and buy your actual sugar at about the same price. Thus you have neither gained nor lost, but you have been sure ofgetting sugar at 6. 00, which is the price you felt was low. The time to buy actual sugar is generally when the market becomesstrong and an advance in the price of the actual commodity seemsimminent; but the time to buy sugar futures is before the strengthdevelops. The future market invariably discounts declines andanticipates advances. _2. Buying of Sugar Futures to protect profits on advance sales tocustomers_ While it may not be an established custom, we know numerous instanceswhere jobbers have sold sugars in small quantities for future delivery. The examples to which we refer are small manufacturers buying sugarlocally, who, when the market appears in a strong condition desire tobe assured of their regular supply of sugar at a specified price. Undersuch conditions we have known jobbers to sell them sugar for deliveryover several months. If at any time you are placed in a similarposition, and desire to take care of your customers in this manner, without incurring too great a risk, the Exchange offers exceptionalopportunities for protection, as, of course, you would be able to buysugar for delivery in any month you desire, even as far in advance asone year. It is clear that if you sell at a specified price for delivery at acertain time, your only protection is your belief that you'll be ableto buy sugar cheaply enough to make a profit. CHART 4 ----------------------------------------------------------------------------BUYING SUGAR FUTURES 1. Based on the expectation of higher prices. 2. To establish costs, pre-determine selling prices and protect profits on advance sales. ----------------------------------------------------------------------------Initial | | |Transactions | Subsequent Transactions |Sugar Cost | Result-------------+------+----------+--------+-------+------+------------+------- | |Condition | Price |Result |Price | Figure it | In | |of market | you | of | you | this way |each | | when you | would |selling| pay | |case | |buy actual| obtain | your | for | |the | | sugar |for your|futures|actual| |same | | |futures | |sugar | |-------------+------+----------+--------+-------+------+------------+------- | | | | | |Price paid |Your | | | | | |for actual |sugar | | | |A | |sugar less |cost isYou buy Sugar|When |If it has | |profit | |hedging |6. 00Futures at |you |advanced | |of | |profit |as pre-6. 00 to cover|buy |to 8. 00 | 8. 00 |2. 00 | 8. 00 |8-2=6 |deter-future |actual| | | | | |minedrequirements;|sugar, | | |A | |Price paid |fix your |you |If it has | |loss | |for actual |price and |sell |declined | |of | |sugar plus |take orders |your |to | | | |hedging loss|on the basis |fu- |4. 00 | 4. 00 |2. 00 | 4. 00 |4+2=6 |of 6¢ sugar |tures | | | | | | | |If it is | |No | | | | |still at | |profit, | | | | |6. 00 | 6. 00 |no loss| 6. 00 | 6. 00 |-------------+------+----------+--------+-------+------+------------+------- It is equally clear that if a manufacturer names a price and takesadvance orders without pre-determining his sugar cost, his profit is amatter of guesswork. He is not going to know the cost of hismanufactured product until he buys his sugar. Assume that you have contracted to deliver sugar to a manufacturer orto any customer at a definite date and a specified price, withoutbuying sugar to cover your requirements. If the price of sugar isfavorable when you deliver it, you are fortunate and net a profit. Butsugar may have advanced to a point where you are forced to pay such aprice that your profit is lower than it should be. In fact there maynot be any profit at all. By conservative, wise use of the Sugar Exchange, most of this risk anduncertainty can be eliminated and both you and your customer can goahead with your plans with your prices determined through a known sugarcost. Suppose that in March or April, for example, the market appears strongand you find that some of your manufacturing customers are anxious tobe assured of an adequate supply of sugar at a definite price. In sucha case, if these advance orders called for a sufficient volume, andprovided Exchange prices were favorable, you could take care of yourtrade's future requirements at a fixed price, without yourself taking aspeculative position. We also believe that buyers making thesearrangements with any of their trade would be justified in requestingthe same proportionate marginal protection which it is necessary forjobbers themselves to give the seller on the Exchange. There will nodoubt be many occasions when it would be worth while to solicit orderson this basis. With your own sugar cost fixed by the use of the Exchange, you couldtake proper care of these buyers without worrying about subsequentfluctuations of the market, as you would know that your sugar costwould be about the price paid for your futures which, let us say, is6. 00. (See Chart 4. ) The market may advance so that by September, sugar is selling at 8. 00. (You are now making deliveries to your trade as contracted). So yousell your futures at 8. 00, go into the market and buy actual sugar forabout the same figure, assuming, of course, that actual sugar has alsoadvanced in relative proportion, which is likely. You pay 2. 00 more foryour actual sugar than you had figured but you have profited to theextent of 2. 00 on the sale of futures. Profit and loss cancel eachother and you have your sugar at 6. 00. In other words, although themarket is now 8. 00 you are delivering 6. 00 sugar to your customers, with a profit to yourself. If the market declines after your original purchase at 6. 00 so that inSeptember sugar is selling at 4. 00, you will sell your futures at 4. 00, taking a loss of 2. 00. But you will buy your actual sugar at about4. 00, also, which is 2. 00 lower than you planned for. This gain of2. 00, while not to be termed an actual profit, may certainly beconsidered as canceling the loss on the sale of your futures, so thatthe cost of your sugar is really 6. 00, your original price. Another way of looking at this is to add the loss of 2. 00 on the saleof your futures to 4. 00, the cost of your actual sugar, making 6. 00, the price upon which you had based your plans. If you had waited, youwould have been able to get your sugar for 4. 00, but by buying it aheadyou have had the benefits of protection and the elimination ofspeculation and risk. If the market remains steady after your June purchase, or after variousfluctuations, returns to 6. 00 by September, you sell your futures at6. 00 and buy spot sugar for about the same amount. Thus you haveneither gained nor lost, but you have been protected in your sugarcost. This is essentially a "playing-safe" operation. It results in profitinsurance for the jobber who is willing to sacrifice the possibility ofa speculative gain on advance sales to customers. It is thoroughlysound business policy and is neither expensive nor difficult to carryout. Point of Delivery Although Chicago is the delivery point in all Exchange contracts forrefined sugar, it should be plainly understood that the Exchange is foranyone, anywhere. Whether located in Chicago, or in Rochester, Baltimore, New York or even San Francisco, a jobber can advantageouslyuse the Exchange. Deliveries of Refined Sugar Futures will be made only from theExchange-licensed warehouses in Chicago. But, regardless of theprospective buyer's location, the delivery point is not of any materialimportance as it is an established fact that in operations on allexchanges the percentage of actual deliveries taken is exceptionallysmall. In fact, the examples used in this booklet are all based on thesupposition that the buyer may find it more convenient _not_ to takedelivery. The usual procedure followed in sugar exchange operations is for thebuyer to close out his exchange transaction prior to the period callingfor delivery and purchasing actual sugar from the refiners, executingboth transactions practically simultaneously. Possibly the most important problem in connection with the organizationof any commodity exchange is to reduce the possibility of corners, however remote, to the smallest possible degree. In the case under discussion, the Chicago delivery point, by virtue ofits accessibility for producers and consumers from all parts of thecountry, operates to that end. Practically every refiner of cane sugars in the East and West, as wellas the Southern refiners, carries large stocks in Chicago, and itsfavorable location in connection with the beet sugar industry alsomakes it highly desirable. Its situation in regard to the offerings ofthe Louisiana producers is also an additional protection and advantageof considerable importance. The Exchange-licensed warehouses in Chicago are under the direct andconstant supervision of Exchange representatives. Facilities areprovided for testing and grading sugar so as to maintain Exchangequality standards. When are Refiners' Prices and Exchange Quotations in line? Since exchange quotations for refined sugar futures are net cashex-exchange-licensed warehouse, Chicago, while refiners' quotations aref. O. B. Refinery, less 2% for cash, it is obvious that there must be adifference between refiners' prices and exchange quotations. It is equally obvious that the differential should approximate thefreight rate between Chicago and the Seaboard, where the refiners arelocated, with allowance also for the cash discount. When the marketsare in line such is the case. Conversely, when the differential ishigher or lower, the markets are out of line. Therefore, in order to tell whether the markets are out of line, or towhat extent, it is necessary to determine on a differential torepresent the normal difference between the two markets. There is noone figure, however, that will satisfy all conditions at all times, forthe reason that there are various freight rates between the Seaboardand Chicago. It is inaccurate, for instance, to use 63¢ as the basisfor the normal differential. The 63¢ rate is one rate--the all-railfreight rate from New York to Chicago. Other important routes and rates are as follows: Routing: Freight Rate: New Orleans--Chicago (barge and rail) $0. 50[1] New York--Chicago (rail and lake) . 58 New Orleans--Chicago (all rail) . 60 Philadelphia--Chicago (all rail) . 61 New York--Chicago (all rail) . 63 Savannah--Chicago (all rail) . 63 Boston--Chicago (all rail) . 63 [1] The cheapest routing (48¢) takes about two weeks' more time in transit than the New York all-rail routing (63¢). Interest charges on finances involved, etc. , for this extra period will bring the expense of this routing to approximately 50¢. After a study of the amounts of sugar shipped over these various routeswe have arrived at an arbitrary figure to represent the normaldifferential between refiners' prices and exchange quotations. Webelieve that 57¢ will serve as a safe basis for calculation, but 58¢ or59¢ might be equally--or more--accurate. In fact, anyone is entitled toan opinion. 57¢ is our opinion. It is not an average of freight rates, but is an arbitrary figure. When the markets are in line, using 57¢ as a basis for calculation, 2%should be deducted from refiners' prices, and 57¢ added to determinewhat Exchange quotation should be. Conversely, 57¢ should be deductedfrom Exchange quotations and 2% added to determine what refiners'prices should be. If you are willing to accept 57¢ as a safe figure, you may find thefollowing chart useful in determining the condition of the market: ARE REFINERS' PRICES AND EXCHANGE QUOTATIONS IN LINE? Based on a 57¢ differential and 2% cash discount When ExchangeRefiners' QuotationsPrices Are Should Be 4¢ 4. 49 4. 05 4. 54 4. 10 4. 59 4. 15 4. 64 4. 20 4. 69 4. 25 4. 73 4. 30 4. 78 4. 35 4. 83 4. 40 4. 88 4. 45 4. 93 4. 50 4. 98 4. 55 5. 03 4. 60 5. 08 4. 65 5. 13 4. 70 5. 18 4. 75 5. 22 4. 80 5. 27 4. 85 5. 32 4. 90 5. 37 4. 95 5. 42 5. 00 5. 47 5. 05 5. 52 5. 10 5. 57 5. 15 5. 62 5. 20 5. 67 5. 25 5. 71 5. 30 5. 76 5. 35 5. 81 5. 40 5. 86 5. 45 5. 91 5. 50 5. 96 5. 55 6. 01 5. 60 6. 06 5. 65 6. 11 5. 70 6. 16 5. 75 6. 20 5. 80 6. 25 5. 85 6. 30 5. 90 6. 35 5. 95 6. 40 6. 00 6. 45 6. 05 6. 50 6. 10 6. 55 6. 15 6. 60 6. 20 6. 65 6. 25 6. 69 6. 30 6. 74 6. 35 6. 79 6. 40 6. 84 6. 45 6. 89 6. 50 6. 94 6. 55 6. 99 6. 60 7. 04 6. 65 7. 09 6. 70 7. 14 6. 75 7. 18 6. 80 7. 23 6. 85 7. 28 6. 90 7. 33 6. 95 7. 38 7. 00 7. 43 7. 05 7. 48 7. 10 7. 53 7. 15 7. 58 7. 20 7. 63 7. 25 7. 67 7. 30 7. 72 7. 35 7. 77 7. 40 7. 82 7. 45 7. 87 7. 50 7. 92 7. 55 7. 97 7. 60 8. 02 7. 65 8. 07 7. 70 8. 12 7. 75 8. 16 7. 80 8. 21 7. 85 8. 26 7. 90 8. 31 7. 95 8. 36 8. 00 8. 41 8. 05 8. 46 8. 10 8. 51 8. 15 8. 56 8. 20 8. 61 8. 25 8. 65 8. 30 8. 70 8. 35 8. 75 8. 40 8. 80 8. 45 8. 85 8. 50 8. 90 8. 55 8. 95 8. 60 9. 00 8. 65 9. 05 8. 70 9. 10 8. 75 9. 14 8. 80 9. 19 8. 85 9. 24 8. 90 9. 29 8. 95 9. 34 9. 00 9. 39 9. 05 9. 44 9. 10 9. 49 9. 15 9. 54 9. 20 9. 59 9. 25 9. 63 9. 30 9. 68 9. 35 9. 73 9. 40 9. 78 9. 45 9. 83 9. 50 9. 88 9. 55 9. 93 9. 60 9. 98 9. 65 10. 03 9. 70 10. 08 9. 75 10. 12 9. 80 10. 17 9. 85 10. 22 9. 90 10. 27 9. 95 10. 3210. 00 10. 37 (This chart works both ways. That is, when the exchange quotation is given, if the markets are in line the refiners' prices should be as shown in the first column. ) It should be borne in mind that the above calculations are based upon anormal difference in price of 20¢ per hundred pounds between beet andcane sugars, which is the ruling difference as quoted in the Exchangecontract. Should beet refiners elect to sell at greater discounts than20 points under cane refiners' Seaboard prices, the amount in excess of20 points would have to be subtracted from our arbitrary figure of 57¢. The Function of the Sugar Broker If you should organize your company so that it could attend to all thedetails of sugar buying economically, you would probably still profitfrom the assistance of a sugar broker whose specialty is sugar buying, whose horizon is a sugar horizon, whose thoughts are sugar thoughts andwho must necessarily know more about sugar than the average buyer wouldever consider it desirable to know. The sugar broker's service to you is unaffected by prices--his pricesand all other brokers' prices are the Exchange prices; his commissionsare based on the same percentages as all other brokers' commissions. His only distinction can come from the actual service he can render. This service may be good or poor, depending upon whether hisexperience, his organization, his information and his judgment are goodor poor. If, added to his knowledge of sugar, he also possesses a broadknowledge of economic fundamentals and a perspective upon and contactwith world activities as they affect all phases of the business ofsugar, his service will be many times more valuable than if he werelimited by a small organization, by a definite locality or byexperience in only a few phases of this business. A sugar broker who merely _accepts and transacts orders_ is giving noservice worth the name. To give service in accordance with the highestmodern standards, he must stand as an adviser, as a constant seekerafter opportunities which will benefit his clients, as a partner whoseinterest in his clients' profits and progress equals his interest inhis own. Our experience has convinced us that the client secures the greatestamount of protection in filling his sugar needs when one broker handlesall sugar transactions. These exchange operations should be carried out when the market is outof line in your favor. You need the best kind of advice, based on anintimate knowledge of your business. A single brokerage house becomes thoroughly acquainted with theclient's business and personnel, with the result that the twoorganizations work in harmony virtually as partners, confusion andmisunderstandings are avoided, quicker and more advantageoustransactions are made possible. The choice of that broker should be a matter of great care, for inaddition to the willingness to serve, he must have the facilities andthe financial stability. For, bear in mind that the broker with whomyou deal is the responsible party for the fulfillment of the contract. Your contract is as good only as the reliability of your broker. Lamborn & Company has become known throughout this country and abroadas an institution for the service of all those who have a businessinterest in sugar. Lamborn Sugar Service is rendered through our head office at 132 FrontStreet, New York, and through branch offices in Philadelphia, Chicago, Savannah, New Orleans, Kansas City, Mo. And San Francisco. Lamborn Service in all its phases is available to you as a jobber. We shall be very glad to explain either in person or by letter what abrokerage relationship with us involves, how it may be accomplished andhow transactions may be carried out. LAMBORN & COMPANY _Sugar Headquarters_ 132 Front Street: New York 7 Wall Street: New York (Securities) Havana and Cienfuegos, Cuba Paris, FranceTHE LAMBORN COMPANY LAMBORN & CIE _Branches in the United States_ Philadelphia Savannah New Orleans ChicagoKansas City San Francisco _Members of_: New York Coffee & Sugar Exchange, Inc. New York Stock ExchangeNew York Cotton ExchangeNew York Produce ExchangeChicago Board of TradeLondon Produce Clearing House, Ltd. Cable Address: Lamborn Contract between Members of the New YorkCoffee and Sugar Exchange, Inc. The Standard Fine Granulated Sugar contract is as follows: Sold for . . . To . . . 800 bags (of 100 lbs. Net each) of Standard FineGranulated Sugar at . . . Cents per pound, manufactured in the UnitedStates or insular possessions, packed in cotton-lined burlap bags, deliverable from licensed warehouse in Chicago between the first andlast days of . . . Inclusive. Delivery within such time to be at Seller'soption, upon seven, eight or nine days' notice to the buyer. IfDomestic Beet Standard Fine Granulated Sugar be delivered infulfillment of this contract, Seller to make an allowance of 20¢ per100 lbs. The Seller shall have the right to deliver Foreign Cane Standard FineGranulated Sugar in fulfillment of this contract by making an allowanceto the Buyer of 25¢ per 100 lbs. , and foreign beet standard finegranulated sugar by making an allowance of 45¢ per 100 lbs. , providedsuch sugars comply with the Types adopted as Standard by the New YorkCoffee and Sugar Exchange, Inc. , and all duties have been paid thereon. This contract is subject to an adjustment for duty, as provided in theSugar Trade Rules. Either party to have the right to call for margins as the variations ofthe market for like deliveries may warrant, which margins shall be keptgood. This contract is made in view of and in full accordance with theBy-Laws, Rules and Conditions established by the New York Coffee andSugar Exchange, Inc. (Written across the face is the following) For and in consideration of one dollar to . . . In hand paid, receiptwhereof is hereby acknowledged . . . Accept this contract with all itsstipulations and conditions. Brokers' Commissions The broker's commission for either buying or selling each contract of800 bags of sugar depends upon the price at which the transaction isexecuted. The following table gives a range of prices and thecorresponding commissions: For the sale or purchase of each lot of 800 bags: _Contract Price_ _Commission_[2] Up to 9. 99¢, per pound $15. 0010¢ to 12. 99¢, " " 17. 5013¢ to 17. 99¢, " " 20. 0018¢ and above, " " 25. 00 [2] These commissions apply to transactions in the United States, Porto Rico and Cuba, from non-members of the New York Coffee and Sugar Exchange, Inc. Minimum Trading Basis A "lot" of refined sugar consists of 800 bags of 100 lbs. Each, or80, 000 lbs. This is the minimum amount which can be sold on theExchange. Delivery The date upon which sugar shall be delivered on an Exchange contract isat the option of the seller, provided that date come within the monthnamed in the contract. Notice of the date of delivery must be given tothe buyer seven, eight or nine days preceding the day on which deliverywill be made. If you are not going to fill your actual sugar needs by acceptingdelivery from the Exchange warehouses, you should close out yourcontracts within two weeks, or, at the latest, ten days of the first ofthe month in which delivery is specified, as after notification ofdelivery has been given, there is usually not sufficient time to makeother plans. Orders Except in nearby localities, orders should be sent by wire, addressedto: SUGAR FUTURES DEPARTMENT, 132 Front Street, New York, N. Y. Inquiries or orders will be given prompt attention at any of ouroffices, but time will be saved and execution facilitated if they aresent direct to New York. Unless otherwise specified, orders are goodonly for the day on which they are received. If they cannot be executedat the price named before the closing of the Exchange on that day, orif they should arrive after the Exchange closes, it will be understoodthat they are automatically cancelled unless specific instructions aregiven for the execution the following day or unless formally renewed bywire. If you desire to place an order, good until countermanded, youcan do so. The general term applied to such orders is "order good tillcancelled. " The general abbreviation in the trade is G. T. C. Exchange Trading Hours Hours for trading on the Exchange are from 11:00 a. M. To 2:50 p. M. , except on Saturdays. Saturday hours are from 10:30 a. M. To 11:50 a. M. Delivery and Warehousing Charges If you make delivery on the exchange, the following are your charges: Storage 3¢ per 100 lb. Bag Handling in and out, charged with first month's storage 5¢ per 100 lb. Bag Negotiable warehouse receipt 50¢ If you accept delivery on the exchange, your charges are: Carloading 1-1/4¢ per 100 lb. Bag Acceptance of your order The form of our acceptance of your order reads as follows: In accordance with your instructions we have this day made thefollowing transactions in STANDARD FINE GRANULATED SUGAR for youraccount and risk, subject in all respects, and in accordance with, theRules, By-Laws, Regulations and Customs of THE NEW YORK COFFEE ANDSUGAR EXCHANGE, Inc. , and the Rules, Regulations and Requirements ofits Board of Directors, and all amendments that may be made thereto. All transactions made by us for your account contemplate the actualreceipt and delivery of the SUGAR and payment therefor. The right is reserved to close transactions when margins are exhaustedor nearly so, without notice. +=================================================+|Bags of Refined Sugar | Month of Delivery| Price ||----------------------+------------------+-------|| Bought | Sold | | ||----------+-----------+ | || | | | || | | | || | | | || | | | || | | | || | | | || | | | ||__________|___________|__________________|_______| Raw Sugar Futures Prior to the inauguration of trading in Refined Futures, Raw SugarFutures were used by many jobbers for hedging and protecting theirRefined requirements. The theory of operation is that the raw price will be about equivalentto the refined price after duty and the charge for refining are added. While the Raw Sugar market will at times get out of line with refined, both favorably and unfavorably, this cannot continue for any longperiod. When the Raw Futures market is favorably out of line, it may be more toyour advantage to use this market, rather than the Refined Futuresmarket. At the present time there is the added advantage that thevolume of trading is greater in Raw than in Refined. When buying or selling Raw Sugar Futures, you may figure that thevariation on a minimum lot of 50 tons would be equivalent to the samevariation of 1120 bags or 320 barrels. We give you below herewith details of contract and trading conditions: All contracts for future delivery shall be for 50 tons of 2, 240 poundseach and multiples thereof. CONTRACTS: Sold for . . . To . . . , 50 tons of 2, 240 pounds each of sugarin bags, deliverable from licensed warehouse in the port of New York, between the first and last days of . . . Inclusive. The delivery withinsuch time to be at seller's option, upon 7, 8 or 9 days' notice to thebuyer. The sugar to be of any grade or grades of Raw sugars based onCuban Centrifugal of 96 degrees average polarization outturn at theprice of . . . Cents per pound in bond, net cash with additions ordeductions for other grades according to the rates of the New YorkCoffee and Sugar Exchange, Inc. , existing upon the afternoon of the dayprevious to the date of notice of delivery, and shall embrace allCentrifugals first running. The foreign sugars deliverable other thanCuban Centrifugals, are: Centrifugals from British West Indies, Demerara, Surinam, San Domingo, Brazil, Peru, Java, Mauritius, Venezuela and Haiti, all basis of 96 degrees average polarizationoutturn at . 2512 cents per pound (difference in duty) less; but no lotof 50 tons is to consist of sugar from more than one country of origin. Allowances on Centrifugal sugars to be . 03125 cents per pound perdegree above 96 degrees, up to 98 degrees and . 0625 cents per pound perdegree below 96 degrees, down to 94 degrees and . 09375 cents per poundper degree below 94 degrees, down to 92 degrees, with fractionaldegrees pro rata. Exchange Trading Hours Hours for trading in Raw Sugar Futures are from 10:45 a. M. To 2:45 p. M. On week days and from 10:15 a. M. To 11:45 a. M. On Saturdays. Trading Differences A fluctuation of 1¢ per 100 pounds is equivalent to $11. 20 per lot of50 tons. Margins An original margin in New York funds must accompany all orders, wereserving the right to call for variation margins when contract showsdepreciation. We also reserve the right to close transactions whenmargins are exhausted or nearly so without further notice. The amountof this original margin will of necessity fluctuate with conditionsexisting at the time orders are placed. At the present time inlocalities that are in position to make prompt remittance for anyvariation margins required, the margin is $400. Commissions For either buying or selling each contract of 50 tons Based upon a price Below 4 cents $12. 50 4 cents to 9. 99 15. 00 10 cents to 12. 99 17. 50 13 cents to 17. 99 20. 00 18 cents and above 25. 00 NOTE: All orders for Raw Sugar Futures shall be in accordance with theBy-Laws and Rules of the New York Coffee and Sugar Exchange, Inc. Andthe New York Coffee and Sugar Clearing Association, Inc.