Refiners do not make a practice of taking orders more than thirty days
in advance of actual delivery--but there are obviously times when it is
advisable to cover one's requirements for a longer period. A jobber may
do 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 higher
prices_
No doubt many jobbers will recall occasions when anticipating their
requirements seemed obviously advisable, perhaps almost imperative.
Such a jobber would be one who believed in the market. His action would
be based on his opinion of the market. He might note in January, let us
say, that the price of May or July futures is favorable. He would like
to get his May or July sugar at about that figure. You yourself
probably can recollect many times in the past, when the general market
was in such a strong position fundamentally that anticipating your
requirements seemed advisable. You decided to buy a considerable
quantity only to find that refiners would not sell you to the extent
that you wished to purchase. When covering your future requirements on
the Exchange, you can buy any quantity desired.
Consider also on how many occasions when you wanted and _needed_ a
definite future month of shipment, you have been told that "_as soon
as possible_" was the only acceptable basis.
Or have you had the experience of placing an order and waiting
twenty-four or thirty-six hours without knowing if the refiner would
accept your order? Meanwhile the market might have advanced, and, if
your order had been declined, you would have had to pay an even higher
price for your sugar. The facilities of the exchange offer opportunities
for protecting requirements _quickly_ and without the uncertainty and
delay sometimes encountered from refiners.
A jobber must anticipate the market in order to take full advantage of
it, and in this connection it should be borne in mind that the Sugar
Exchange, as in the case of practically all exchanges, usually
anticipates either favorable or unfavorable developments in the market
for the actual commodity. Consequently, prompt action is necessary when
either a higher or lower market is expected, as the Exchange market
will usually be the first to reflect changing conditions.
Suppose you feel that the price of sugar is low and probably going
higher. 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 month
desired. Assume then, that you pay 6.00 for your futures. Now, whatever
happens in the sugar market, you know you can get the quantity of sugar
desired 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 your
Exchange contract and buy actual sugar, the price may have gone up to
8.00. You will then sell your futures at about 8.00, go into the market
and buy actual sugar at the same price, assuming, of course, that the
actual market has advanced in relative proportion--which is likely.
Although actual sugar has cost you 2.00 more than you had figured, you
have made 2.00 on your futures. Profit and loss cancel each other. Your
sugar cost is 6.00.
On the other hand, suppose the market declines after you have bought
futures at 6.00, and goes down to 4.00, when it seems advisable to
close out your Exchange contract. You sell your futures at 4.00, a loss
of 2.00. But you will also buy your actual sugar at 4.00, which is 2.00
lower 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 would
sell your futures and buy your actual sugar at about the same price.
Thus you have neither gained nor lost, but you have been sure of
getting sugar at 6.00, which is the price you felt was low.
The time to buy actual sugar is generally when the market becomes
strong and an advance in the price of the actual commodity seems
imminent; but the time to buy sugar futures is before the strength
develops. The future market invariably discounts declines and
anticipates advances.
_2. Buying of Sugar Futures to protect profits on advance sales to
customers_
While it may not be an established custom, we know numerous instances
where jobbers have sold sugars in small quantities for future delivery.
The examples to which we refer are small manufacturers buying sugar
locally, who, when the market appears in a strong condition desire to
be assured of their regular supply of sugar at a specified price. Under
such conditions we have known jobbers to sell them sugar for delivery
over several months. If at any time you are placed in a similar
position, and desire to take care of your customers in this manner,
without incurring too great a risk, the Exchange offers exceptional
opportunities for protection, as, of course, you would be able to buy
sugar for delivery in any month you desire, even as far in advance as
one year.
It is clear that if you sell at a specified price for delivery at a
certain time, your only protection is your belief that you'll be able
to buy sugar cheaply enough to make a profit.