1. What is it?
It is possible to trade with Sugar futures in BM&F. This kind of contract started to being traded in January 2013, and its object is the special crystal sugar, with a least polarization grade of 99.7%, max 0.08% humidity, max 150 of ICUMSA’s color (International Commission for Uniform Methods of Sugar Analysis), and max content of 0.07% of ashes, for delivering in São Paulo state.
Trading occurs in sacks. Each sack contains a net weight of 50 kg, with prices in BRL per sack. The minimum lot (1 contract) is equal to 508 sacks, or 25,400 tonnes of sugar. Physical deliveries are possible, but for such the buyer must meet BM&F rules, by filling a document that seals his intention of physically exercise the commodity (AILE). The sugar must meet all requirements proposed by BM&F. Physical executions also imply into transport, freight and other costs. However, if the investor is not looking for a proper delivery, the contracts will be financially liquidated by the expiry date (most cases).
Sugar futures market was firstly created to guarantee a fair price for sacks, either to sellers or buyers, offering some protection for dealers within this market. Futures trading assures fair pricing for sugar in an specific period in the future. Thus, producers can get better prices for their products, covering costs with cane and others and making profits. On the other corner, buyers can find sugar at a relatively predictable pricing, making more precise forecasts on their input needs.
Thus, trading futures contracts Sugar ensures farmers a fair price for the sale of his crop, so he can cover his costs of planting, harvesting and other costs, and ensure a profit. On the other hand, buyers of sugarcane also guarantee sufficient to make their activities profitable price.
Sugar futures pricing tends to follow physical market prices, and is also exposed to weather conditions, like rains, producing areas and regions, quality and quantity of the crop. Also, prices tend to go down by the harvest season.
The future market price of sugar varies with the fluctuation in the price of sugar in the physical market, as well as the proximity of the maturity of the futures contract. This price variation is also related to weather conditions such as rain and the area of planting, as this may alter the quality and quantity of the crop. In addition, there is also the harvest period, where usually the price of sugar drops when you are at harvest time.
Sugar trading terminology stands as follows:
1. The trading code for sugar contracts is “ACF”.
2. Each letter corresponds to the expiry month as follows:
3. Expiry year.
Example: for dealing with sugar futures expiring by April 2014, we have the following code:
ACF J 14
Futures of sugar have the following characteristics:
|Trading unit||508 sacks of 50kg each (equal to 25.4 tonnes)|
|Quotation||BRL per 50 kg sack|
|Minimal Quotation Change||R$ 0.01 per sack of 50kg|
|Maximum Quotation Change||6.5% on the price of the previous maturity day’s settlement negotiated|
|Standard Lot||1 Contract|
|Position Limits||1,200 contratos or 25% of opened positions per expiring date|
|Trading Timetable||9am – 3pm (Regular trading) / 3h50pm – 6pm (After Market)|
|Last trading day||15th day of the expiring month|
It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of ACF futures. The settlement of day trades is performed automatically on the first business day following the date of closing of the business.
The daily change is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.
For ACF contracts, the daily adjustment happens the day after the deal, or D+1. However, on the expiry date only, updates are made in the same day, or D+0.
It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily adjustments. Usually to operate options, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market.
The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.
Costs from trading Sugar futures are:
Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa. In this case, costs reach 0.30% for regular operations and 0.07% for the day trade, based on the theoretical redeem value.
Stock exchange fees – that includes emoluments and registering fees by BM&F, charged as follows:
Emoluments: The fees charged by the BMF values related to trading services. They focus on contract negotiation (opening or closing position before maturity), exercise of options, registration and early settlement and assignment of rights procedure. On Sugar futures contracts, the fees are charged according to the following table:
|Number of contracts||Range value|
Liquidation charge: this charge regards to the liquidation of the contracts by the expiry, on top of clearing expenses. Usually, this charge is a fixed value, and has nothing to do with the volume of contracts negotiated. For sugar contracts it reaches BRL 1.70 por contract.
Clearing fees: include all costs for following positions and receiving reports and filings made by the clearing house, as well as operational costs for holding inactive positions on derivatives. It affects all positions opened in contracts traded in the primary market (except for options and minicontracts) and OTC contracts. The fees are daily updated, and charged in the last work day on each month, by closing the positions or every time an investor transfers all positions to another one.
Fees are based in the number of positions opened by the calculation day, and can vary depending on the volume of contracts traded.
For ACF trading, fees reach 0.012465% per day and contract.
Registry charge: a value charged to register the operation on the clearing house, that only applies to deals that open or close positions before the expiry date, and charged one day after those events.
The table of prices for registration is disclosed by the stock exchange based on average deals for the latest 21 trading sessions. Calculations are made in the last trading session of a week, and define registration charges for the following week.
Currently, registration charges for ACF futures are estimated as follows:
|Number of contracts||Range value|
Sugar futures can just be set for expiring in particular months, which are February (G), April (J), June (M), September (U) and December (Z).
By the expiration date, all positions that remain opened, after a last adjustment, wil be financially executed by the stock exchange, by registering the inverse operation of the position held. It is possible the investor exit the position before the maturity date, only by performing a counter that it is positioned operation. If it is purchased at Sugar futures contracts, just only sell these contracts. If sold, just buy, always in the same amount.
3. Profitability and risks
Making profits from investing in ACF futures is something that depends directly on changes at the sugar and cane spot markets. Such change can be motivated by a serie of factors, peaks of demand or supply for a period, or the other way round. If the investor buys a ACF contract and prices drop, he loses money, which equally happens when he sells a contract and prices go up thereafter.
ACF futures are widely used as hedging tool, for protecting prices from floats that can be affecting both producers, herd creators, processors and companies that demand these kind of raw materials. SFIs can be also used as a tool for speculating, which can affect all the supply chain.
Taxes over ACF futures follow the same logic of any other variable income investment. Income tax is equal to 15% of the sum of all daily adjustments (if positive) and is charged just when you close a position. Also, income withholding taxes of 0.005% are due over the full amount of gains.
For day trade operations, the income tax reaches 20% of profits, and the withholding tax other 1%.
All costs and fees paid for investing can be deduced from the income tax amount, including those from BMF&Bovespa. In case of losses, a compensation can be applied in any gains in the subsequential months, as long as the operations are similar.
The payment of taxes is the responsibility of the investor himself, except when the tax is direct at source and must be calculated and paid monthly on the last business day of the month subsequent to the determination. The calculation is performed over the term of the contract and not monthly.
Let’s take a sugar cane producer as example, to whom the average output is 10,160 sacks. The producer believes the prices to go down in the next few months. So he wants to guarantee minimal selling prices for his output, making sure he can have enough profits and cover costs. To hedge himself against falling prices, he decides on selling sugar futures. By doing that, he can make profits from lower prices.
As each contract corresponds to 508 sacks, the producer sells 20 contracts in total, as follows:
Number of contracts = 10,160 sacks (output) / 508 (contract size) = 20 contracts
Consider the following characteristics:
|Output in sacks||10.160|
|Price per sack||R$ 39,00|
|Number of contracts sold||20|
As days go by, then we have the daily settlements:
|Date||Daily updates||Daily Settlements|
|D+60 (Maturity)||R$ 37,25||4.572,00|
D+0: in the first day, 20 contracts are sold at BRL39.00 per sack.
D+1: sugar futures hike, traded at R$ 39.55. Thus, the daily change is found from the difference between the current and the previous quotations (R$ 39.55 – R$ 39.00) times the number and size of contracts (20 * 508 = -5,588.00). So, as prices hiked and the producer is sold for sugar futures, then we have a negative adjustment of – R$ 5,588.00.
D+2: Another negative adjustment of – R$ 5,791.20. (R$ 40.12 – R$ 39.55) * (20 * 508) = – R$ 5,791.00.
D+3: A positive adjustment with prices going down. (R$ 39.33 – R$ 40.12) * (20 * 508) = R$ 8,026.40.
D+4: Another positive review, as prices drop. (R$ 38.17 – R$ 39.33 ) * (20 * 508) = R$ 11,785.60.
D+5: yet another positive adjustment. (R$ 37.10 – R$ 38.17) * (20 * 508) = R$ 4,775.20.
These adjustments will happen until the maturity date. It is there that we know if the producer of sugar cane will make a profit or loss on the transaction Sugar future. If at maturity the price of Sugar close to R$ 37.25, the result is the following:
1. Output is sold at spot prices, with 10,160 sacks sold at R$ 37.25, with total revenues of R$ 378,460.00 (10,160 * R$ 37.25).
2. Profits of R$ 17,780.00 from sugar futures after all daily updates accounted (sum of all positives and negatives daily settlements).
3. Producer’s total income reached R$ 396,240.00, which includes the sacks sold plus the profits from futures (R$ 378,460.00 + R$ 17,780.00). It works as though he sold the entire production for R$ 39.00 per sack rather than spot prices of R$ 37.25.
*Taxes and transaction costs have been disconsidered.
- The top advantage for sugar futures is the possibility of hedging and protecting companies against price changes, which gives producers and food companies more safety to planning and reinforcing their cash flow.
- Speculation is a strong possibility and can produce considerable profits, with a relatively small investment. If investors think the price will fall, he may sell futures contracts for sugar, without investing money (only the initial margin) with your profit or loss on a daily basis in everyday settings as price variation of Saca.
- Daily updates;
- Guaranty margin;
- Income taxes;
- Expiry dates, so you cannot undefinedly carry up positions, needing to postpone to a new expiry date if necessary;
- High risk as variable income investment.