MECAS(21)18 - Foreign Exchange Rates and the Impact on the Sugar Industry

Foreign exchange markets are vital to the operation of the global economy, with global commerce promoting economies of scale and development. However, the operation of foreign exchange market is limited both by its structure, trading only pairs at a momentary valuation, and by the limited number of participants who can engage in it directly. Furthermore, foreign exchange rates can be erratic, to reflect underlying political and macroeconomic realities rather than just transactional flows.

In the commodity sector, the presence of futures markets has allowed producers to lock in prices, based on delivery times in the future, but the global currency markets are unable to offer a similar facility. Instead, these are still predominantly spot markets, although there have been evolutions in recent years. The locking-in of the foreign exchange element is a crucial component to a perfect hedge for both exporters and importers. Sugar ranks highly amongst arable crop products in terms of the number of exporting countries as well as the range of base currencies that are used by exporters.

The capital-intensive structure of the sugar industry also implies a level of debt financing which, in the case of many producers, but more specifically in Brazil, can be aligned with either domestic or export sales. This implies a choice of currency during periods of industry expansion, which can have significant implications for the financial situation of the industry.

Currency markets have evolved in recent decades, with the introduction of non-deliverable futures contracts, for post-dated exchanges of currency, giving some relief to exporting industries. Meanwhile, providers have also taken to providing a broad range of supplementary products around this base.

Alternative products such as global cryptocurrencies and shared ledger systems, such as Blockchain, are also becoming part of the industry’s interest in foreign exchange markets and the attainment of the perfect hedge.



1  The Foreign Exchange Markets			
    The Global Economy		 					 
     Foreign Exchange Markets						 
     Operational Mechanics		 				 
     Broader Observations							

2  Participants and Products					
    Participants in Foreign Exchange Markets				 
    Transaction Types							 
    Relevance to Sugar Industry						 
3  Interaction with Sugar Prices					
    Forward-Hedging Producers						 

4  The Industry’s Balance Sheet					
    CS Brazil Financial Predicament					 
    Looking Forward							 

5  The Future Foreign Exchange Market			
    New Currencies							 
    Transactional Electronics						 

6  Conclusion								

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