Growers opting into a new futures-based pricing mechanism within their contract to supply sugar beet to British Sugar have the chance to profit from a rising sugar market.

The mechanism, which is limited this season to just 10% of a grower’s contract, fundamentally changes the risk-reward balance between grower and British Sugar, explains Arthur Marshall, NFU senior commercial analyst for sugar.

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Under the traditional fixed price model growers get price certainty, while British Sugar carries all the risk of where the sugar market moves above and below that, he says.

“So it might make a huge margin from it, or might make a loss.”

Futures pricing turns that on its head. In this model, British Sugar is guaranteed a certain margin while the grower takes on the upside or downside risk.

“The formula relates the beet price to the sugar price.

“At any given time, it’s the forward price on the futures market minus a factor, which accounts for British Sugar’s costs and margin, that derives what is the sugar beet price paid to growers. 

Empowers growers

“Effectively, growers have sold British Sugar certainty in return for opportunity, and it empowers them to manage the decision on when to sell.”  

Futures pricing was introduced as a pilot scheme for 100 growers for the 2021 harvest, then opened out for any grower for the 2022 growing season.

About 100,000t has been committed on 217 contracts this season, says Mr Marshall.

The idea was conceived by NFU Sugar in 2018, when sugar prices were weak.

“We were trying to find a mechanism that recognised British Sugar is exposed to market risk, but allowed growers opportunities from volatility.”

Developing that concept led to a partnership with Czarnikow, as the trading partner to deliver the link between growers and the futures market.

“We’re not making a new futures market – just delivering a beet contract pricing system that relates to the existing world ICE White Sugar futures market, which sets the world price of sugar,” Mr Marshall says.

“In a post-quota deregulated world, the UK market is fundamentally related to the world market in a way it didn’t use to be.” 

© Tim Scrivener

Complex

While the mechanism behind the pricing model is complex, what growers see is designed to be straightforward.

After the grower indicates they would like to participate on the British Sugar contract form, they sign a second “Novation” agreement which forms the contract between Czarnikow, British Sugar and the grower.

Czarnikow then sets the grower up its online portal or mobile app CzApp. That system displays the current market price and provides some market analysis.

NFU Sugar also provides growers with some weekly market analysis.

Growers can choose to sell using the CzApp, all, or a proportion of their tonnage in minimum 50t parcels until the deadline of 31 August.

Once the price of that tonnage has been confirmed it cannot be changed. Any beet left unpriced will be priced automatically by Czarnikow on 1 September.

Payment from Czarnikow will be within 24 hours of British Sugar’s standard payment terms once delivery of the beet has been made.

Any other payments, such as late delivery allowance, transport allowance, BBRO and NFU levy deductions will be paid directly from British Sugar as usual. 

Time requirement

“There is a time requirement to price beet this way,” Mr Marshall says. “It requires you to actively price your tonnage, so it will suit growers who want that empowerment.

Those who prefer a more passive approach will be more suited to the traditional model.

He says it will also help to be interested in market analysis, but there’s nothing stopping farmers using it without ever looking at any analysis – the system will show them a price and they can choose to go off that.

Some growers will likely have a target price strategy, or in conjunction with costs, while others might be trying to sell at the very top.

Like many agricultural commodity markets, the sugar price is rising, although not as strongly as cereal or oilseeds, because it doesn’t have the same exposure to the Black Sea region, Mr Marshall says.

“For growers who have allocated to tonnage to be priced this way this season, £33-£34/t was achievable in early March, higher than the traditional fixed price of £27/t.

“A lot has changed since that price was agreed last summer. This type of contract allows growers to take advantage of that.”

But there is risk attached to a futures-based model – the price can obviously come down as well as go up. There’s also a risk that if you cannot deliver the beet you have committed to this pricing structure, Czarnikow could seek a lump-sum payment.

That probability has been reduced by the 10% limit on contracted tonnage priced in this way, although that proportion could increase in future, and by British Sugar allocating the first beet delivered against this contract.

That should mean growers are unlikely at present to default against their commitment, apart from where there is a complete failure of the crop. 
     

Case study: Tom Clarke, Ely, Cambridgeshire

© Tom Clarke

The futures pricing model has allowed Cambridgeshire grower Tom Clarke to profit from rising sugar prices in both the pilot year and the current season.  

In the pilot year, with 700t available to price through the model, he achieved an average price of £23.92/t, with a highest price of £30.14/t and a low of £22.06/t. That compares favourably with the one-year contract price of £20.30/t.

Farmers are used to taking market risk on other crops, such as with wheat, he says.

“Any upside with sugar, which is a highly traded commodity, has always been taken by British Sugar and it only seems fair that growers should also have the opportunity to capitalise, bearing in mind that risk can go the other way.”

He found setting up the agreement in the pilot year a little time-consuming, but believes it will improve as more growers get involved.

“Once you’re set up, it is straightforward to use the app on your phone. There’s one chart which shows you what the price is and where it has been.”

Experience of using futures in other markets is helpful, he suggests. “It’s a similar decision as you would take deciding between a one or three-year contract, just on a more immediate timescale.”

Market information from Czarnikow and NFU Sugar via LMC International helped him reach the view that the market was going to rise, so in the pilot year he held back until the price reached a certain level and then drip-sold his tonnage over time. 

“That worked well in a rising market, but I would have a different strategy in a falling market. It’s important to be aware you can end up selling your crop for less on a futures market than the fixed price contract.”

This season he has 500t to sell due to a smaller beet area, and again the rising market has led him to sell about 50% so far, at an average of around £34/t.

“I just wish I could put more of my contract tonnage on this type of contract,” he says.