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.
Introduction 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 Parities Forward-Hedging Producers 4 The Industry’s Balance Sheet Background CS Brazil Financial Predicament Looking Forward 5 The Future Foreign Exchange Market New Currencies Transactional Electronics 6 Conclusion Annex