Although Chicago is the delivery point in all Exchange contracts for
refined sugar, it should be plainly understood that the Exchange is for
anyone, anywhere. Whether located in Chicago, or in Rochester,
Baltimore, New York or even San Francisco, a jobber can advantageously
use the Exchange.
Deliveries of Refined Sugar Futures will be made only from the
Exchange-licensed warehouses in Chicago. But, regardless of the
prospective buyer's location, the delivery point is not of any material
importance as it is an established fact that in operations on all
exchanges the percentage of actual deliveries taken is exceptionally
small. In fact, the examples used in this booklet are all based on the
supposition that the buyer may find it more convenient _not_ to take
delivery.
The usual procedure followed in sugar exchange operations is for the
buyer to close out his exchange transaction prior to the period calling
for delivery and purchasing actual sugar from the refiners, executing
both transactions practically simultaneously.
Possibly the most important problem in connection with the organization
of 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 of
its accessibility for producers and consumers from all parts of the
country, operates to that end.
Practically every refiner of cane sugars in the East and West, as well
as the Southern refiners, carries large stocks in Chicago, and its
favorable location in connection with the beet sugar industry also
makes it highly desirable. Its situation in regard to the offerings of
the Louisiana producers is also an additional protection and advantage
of considerable importance.
The Exchange-licensed warehouses in Chicago are under the direct and
constant supervision of Exchange representatives. Facilities are
provided for testing and grading sugar so as to maintain Exchange
quality standards.
When are Refiners' Prices and Exchange Quotations in line?
Since exchange quotations for refined sugar futures are net cash
ex-exchange-licensed warehouse, Chicago, while refiners' quotations are
f.o.b. refinery, less 2% for cash, it is obvious that there must be a
difference between refiners' prices and exchange quotations.
It is equally obvious that the differential should approximate the
freight rate between Chicago and the Seaboard, where the refiners are
located, with allowance also for the cash discount. When the markets
are in line such is the case. Conversely, when the differential is
higher or lower, the markets are out of line.
Therefore, in order to tell whether the markets are out of line, or to
what extent, it is necessary to determine on a differential to
represent the normal difference between the two markets. There is no
one figure, however, that will satisfy all conditions at all times, for
the reason that there are various freight rates between the Seaboard
and Chicago. It is inaccurate, for instance, to use 63c as the basis
for the normal differential. The 63c rate is one rate--the all-rail
freight 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 (48c) takes about two weeks' more time
in transit than the New York all-rail routing (63c). Interest
charges on finances involved, etc., for this extra period will
bring the expense of this routing to approximately 50c.
After a study of the amounts of sugar shipped over these various routes
we have arrived at an arbitrary figure to represent the normal
differential between refiners' prices and exchange quotations. We
believe that 57c will serve as a safe basis for calculation, but 58c or
59c might be equally--or more--accurate. In fact, anyone is entitled to
an opinion. 57c is our opinion. It is not an average of freight rates,
but is an arbitrary figure.
When the markets are in line, using 57c as a basis for calculation, 2%
should be deducted from refiners' prices, and 57c added to determine
what Exchange quotation should be. Conversely, 57c should be deducted
from Exchange quotations and 2% added to determine what refiners'
prices should be.
If you are willing to accept 57c as a safe figure, you may find the
following chart useful in determining the condition of the market: