Part 2

The Exchange provides a concentration point, where, under any market conditions, sugar may be bought or sold at a price.

What that price is, is determined by how much sugar is for sale and how many people want it. If the supply is large and buyers are few, the price will be low. If sugar is scarce and buyers are numerous, the price will be high. Or, to put it in another way, when there are more sellers than buyers, the market declines; when more buyers than sellers, it advances. If the supply and the number of buyers are normally well balanced, the price will be determined largely by the cost of production and transportation. If events or circumstances operate to increase or curtail either the sugar supply or the number of buyers, and such events or circumstances follow one after the other alternately, 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 a common market place (or exchange), price fluctuations are usually wide and frequent, because no large group ever has common knowledge of supply, demand and other factors that govern prices--purchases and sales are made direct between individuals, and knowledge of the amount asked or paid is restricted to a limited few.

Through the common market place provided by an exchange, on the other hand, market conditions and prices become common knowledge almost instantly over the entire country. This tends toward stabilization--a fact which, alone, helps to eliminate risks, and enables merchants to buy 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 to sell on a smaller margin of profit. Competition is stimulated and freed from many of its complications and uncertainties to the advantage of the seller, the buyer and the public.

It is now admitted that, had exchange trading in refined sugar existed in 1920, a general use of the exchange by all branches of the trade might have prevented, to a considerable extent, the abnormal advance in sugar prices of that period, with the hardship and misfortune that attended.

The fact that an exchange always provides a buyer and a seller, at a price, tends toward keeping business fluid. Jobbers are able to protect their future requirements. Producers are sure of a market for their crops. Crop financing is made easier because bankers are more willing to loan on crops sold in advance--an operation made possible by an exchange.

Exchanges operate to take the gamble out of business. They help to put and maintain business on a sound basis. That some people who have no real interest in the commodity use the exchange speculatively does not alter this fact.

In providing machinery by which speculative risks incident to a jobber's business may be shifted from the jobber to those who make a business of assuming such risks, exchanges help to stabilize his business and to remove a large part of the destructive uncertainty with which he would otherwise have to contend.

Exchanges are the creations of modern economic development, designed and operated for the benefit of the commerce, industry and people of the civilized world.

Therefore we welcome trading in refined sugar futures and the opportunity to offer you the advantages that may be derived from a conservative, intelligent use of its services.

The Exchange provides certain quality standards and other regulations to safeguard your interests. But your real assurance of protection lies in the character and reliability of your broker. If your broker is not strong financially you do not have back of your contract the responsibility that you might otherwise have.

If you had a favorable contract with a broker who became insolvent, you would have no means of forcing the fulfillment of the contract, and no way of securing the profit which was due you. The thing to do, of course, is to choose a broker who is so strong financially that you incur 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 be borne in mind that the measure of protection afforded is relative and not absolute. The theory of exchange operations is that the exchange market will move relatively the same as the market for the actual commodity.

This cannot be strictly true, although the exchange market must of necessity follow very closely the actual market, because all the sugar must, in the final analysis, come from the actual market. If thrown out of parity with the actual market, the exchange market is bound to come back eventually.

In the exchange market anyone can buy and anyone can sell. The market is subject to many outside influences, and the fluctuations reflect and accentuate the varying shades of market opinions of many individuals. But in the market for the actual commodity, the quotations are made by comparatively few men, which means that there will be less fluctuation.

Therefore, it is obvious that although the exchange market should be on a parity with the actual market, the unequal fluctuations of the two markets will be constantly throwing them out of parity or "out of line."

There are times when the market will be so out of line that the buying of futures should result profitably. At other times, with conditions reversed, selling of futures seems obviously advisable. We do not claim that jobbers can protect sugar purchases with absolute and exact precision. On the basis of long exchange experience, we do believe, however, that by a discreet use of the Exchange, and by using the market when quotations are favorably out of line, jobbers can do so to their decided advantage.

Selling of Futures--Hedging

As the word itself indicates, a "hedge" on the Exchange is a protection.

You hedge by buying or owning actual sugar, and "selling short" in the same amount. You sell sugar futures although you do not own any. You actually contract to deliver an amount of sugar during a specified future month at a specified price.

Eventually, you must either buy and deliver actual sugar to carry out this contract, or you must buy another contract for futures to cancel your short sale. This is known as a "covering" operation, and the cancelling of one by the other takes place automatically through the channels of the Exchange.

From the jobber's point of view, the operation of hedging has three outstanding 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 the probability of a speculative loss or gain.