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Trade in Sugar: Implication of Potential Liberalisation

Trade in Sugar: Implication of Potential Liberalisation. Commonwealth Familiarization Programme meeting in WTO Olivier Matringe, Economist, Commodities Branch UNCTAD December 2001. Sugar trend. Million of tonnes. Sugar: a dual market with different types of arbitrage.

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Trade in Sugar: Implication of Potential Liberalisation

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  1. Trade in Sugar: Implication of Potential Liberalisation Commonwealth Familiarization Programme meeting in WTO Olivier Matringe, Economist, Commodities Branch UNCTAD December 2001

  2. Sugar trend Million of tonnes

  3. Sugar: a dual market with different types of arbitrage • Open market influcenced by • On the production side: • Weather conditions • Price makers: Brazil has come to dominate world trade in both raw and white sugar (first arbitrage: sugar-ethanol) • Second arbitrage: raw or refined sugar • Third arbitrage: cost of production: sugar is a dual market, since both produced from cane and beet. In broad term (considering field and factory levels), beet sugar is less competitive than cane sugar (cane sugar production cost is about 60% of beet sugar production cost)

  4. Sugar: a dual market with different types of arbitrage • Open market influcenced by • On the demande side • weak demand (currency devaluation e.g. rouble in Far East and Brazilian real) • Competition with alternative sweetners • High level of stock

  5. The market before liberalisation: high instability • Imbalances between production and consumption • Domestic protection afforded by many countries including the EU and USA to domestic sugar producers. • Preferential agreements between ACP and EU, Cuba and the FSU, Caribbean producers and the USA. • == the open market (30%) alone had therefore to absorb fluctuations in demand and supply, thus price volatility has been higher than in a market where the effects of, for example, a production shortfall could be distributed more equally among all the buyers on the market.

  6. Sugar Price 2000-2001,CSC futures, delivery on March 2002

  7. Total free market exports as a percentage of world production • Total share of free market trade as percentage of world production has increased from under 18% to close to 30%

  8. Understand the instability: • From 5.60 in January 2000 to 10.45 in August 2000 to fall back below 7.60 at the end of 2001

  9. Actors affected by the instability. • Producers • Millers • Exporters • The government

  10. Does market-based tools can be used as trade policy instruments? Profit/loss Hedging with futures Underlying position (long) 10.45 August 2000 Instead of 7.60 at the end of 2001 Price of the underlying Hedge (sale of futures)

  11. Does market-based tools can be used as trade policy instruments? Profit/loss Put option Unlimited profit potential 10.45 Strike price Spot price of the physical Premium Maximum loss equal to the premium paid

  12. Guaranteed Sugar Protocol Prices Source: ACP

  13. World market sugar trades in United States dollars, whereas most input costs are incurred in local currencies.

  14. Estimated losses to ACP Sugar Suppliers due to Euro Depreciation

  15. Possible application Swap your debt: Commodity loan and bond Debt in US dollars Hedge against currency risks, e.g. put option Producing country X Preferential market Hedge against price and currency risks, e.g. swap Exports of sugar Residual market

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