From Contract to Cover: Hedging Strategies Every Sugar Intermediary Must Know
Sugar intermediaries are constantly exposed: prices shift daily, buyers can default, and sellers may walk away if markets move against them. Without a hedge, you are not trading—you are gambling. This expanded guide walks you through the three pillars of sugar risk management: futures, spreads, and options, with charts to show exactly how the tools work in practice.
1. Futures: The Foundation of Price Protection
Futures are contracts traded on exchanges like ICE and LIFFE that allow you to buy or sell sugar at a fixed price for future delivery.
- ICE Sugar No. 11: Raw sugar benchmark, quoted in ¢/lb. (Brazil, Caribbean origin)
- LIFFE Sugar No. 5: White sugar benchmark, quoted in $/MT. (European refined sugar)
One No. 11 contract = 50.8 MT. One No. 5 contract = 50 MT.
Example: Hedging a Brazilian FOB Sale
You sell 12,500 MT FOB Santos at $615/MT. If prices rise, your replacement cost increases—margin at risk.
Solution: Sell 246 No. 11 futures. Now:
- If prices rise → futures lose, but physical purchase cost increases by the same → net zero.
- If prices fall → futures gain, offsetting margin erosion → net zero.
Chart: Futures Hedge Locks in Margin
You can see from the chart above that while “physical” and “futures” move opposite directions, the net position stays flat. That flat line = locked-in profit.
2. Spread Trading: Understanding the White–Raw Premium
The white–raw spread is the price difference between refined and raw sugar. It represents the refining margin and is crucial for arbitrage.
Why It Matters
- If spread < refining cost → refiners won’t buy raws → spread rises again.
- If spread > refining cost → refiners buy aggressively → spread narrows.
Example Calculation
- LIFFE No. 5 = $580/MT
- ICE No. 11 = 24¢/lb ≈ $529/MT
- Spread = $51/MT
If refining + freight = $70/MT, this is negative arbitrage → no one converts.
Chart: White–Raw Spread 2022–2025
Notice how the spread spiked to $160/MT in 2024, offering clear arbitrage. Professional intermediaries monitor this daily.
3. Options: Insurance Against Buyer Default
While futures hedge price, they don’t protect against counterparty risk—your buyer walking away.
That’s where options come in.
- Put option = right to sell at fixed price → protection if prices fall.
- Call option = right to buy at fixed price → protection if prices rise.
Case Study
25,000 MT FOB Santos deal at $600/MT. Buyer may default if prices collapse.
Solution: Buy puts at strike 22¢/lb, premium $9/MT.
- If market falls to 20¢, puts pay out, covering your loss.
- If market rises, options expire worthless, but you still sell to buyer → no harm.
Chart: Put Option Payoff
The payoff diagram shows limited loss (cost of premium) but strong downside protection below strike.
4. Combined Example: Brazil to U.S. TRQ Importer
- Contract: 25,000 MT FOB Santos at $615/MT.
- Buyer: U.S. TRQ importer paying $720 CFR.
- Freight: $40/MT. Net margin = $65/MT.
Hedge strategy:
- Short ICE No. 11 futures to neutralize price swings.
- Buy puts for downside risk (buyer defaults).
- Track TRQ spread premium vs ICE for added margin.
Result: Guaranteed margin, reputation intact, ability to scale.
5. Novice-to-Pro Transformation
- Novice mistake: Signing contracts unhedged → exposed to market swings.
- Pro discipline: Futures secure price, spreads guide strategy, options protect contracts.
The real edge for an intermediary isn’t spotting cheap sugar—it’s delivering certainty in a volatile market. That’s how you stop being a “middleman” and become a risk manager.
Final Takeaway
Every sugar intermediary should master at least one hedge tool (futures), one margin tool (spreads), and one insurance tool (options). Together, they turn fragile deals into bankable contracts.
