Physical Trading Mechanics

Physical trading is the art of buying and selling actual sugar. Unlike futures, physical trades involve real product moving from seller to buyer.

Trade Lifecycle

SOURCING → NEGOTIATION → EXECUTION → SETTLEMENT
(1-4 wks)   (1-2 wks)     (4-8 wks)    (1-2 wks)

Trade Types

Type	Description	Margin	Risk
Back-to-back	Simultaneous buy/sell	Low	Low
Proprietary	Taking position	Higher	Price
Arbitrage	Price differential	Variable	Execution
Origination	Direct from producer	Higher	Counterparty

Finding Sellers

Seller Types

Type	How to Access
Mills/Producers	Origin offices
Cooperatives	Tenders
Trading Houses	Broker, direct
Refiners	Direct negotiation

Brazil

Seller	Type
Copersucar	Cooperative
Raízen	Integrated
São Martinho	Mill
Tereos	Mill

Thailand

Seller	Type
Thai Sugar Trading	Industry body
Mitr Phol	Producer
KSL Group	Producer

Australia

Seller	Type
QSL	Marketing body
Mackay Sugar	Producer

Finding Buyers

Buyer Types

Type	Requirements
Refiners	Consistent quality
Food/Beverage	ICUMSA 45, food safety
Industrial	Cost efficiency
Traders	Competitive pricing

Key Markets

Region	Major Buyers
Middle East	Al Khaleej, United Sugar
Asia	Wilmar, Cofco
Indonesia	Multiple refiners

Deal Negotiation

Negotiation Elements

Element	Typical Range
Price	Market ± 1-3%
Quantity	10-50,000 MT
Shipment	2-8 week window
Quality	Standard specs
Payment	CAD to 180 days
Tolerance	±5%

Typical Flow

1. Day 1-3: Initial inquiry → Indicative offer
2. Day 4-5: Counter/negotiation
3. Day 6: Agreement reached
4. Day 7-10: Contract signed, L/C opened

Incoterms 2020

Common Sugar Terms

Term	Seller Responsibility
FOB	Load onto vessel
CFR	Pay freight to port
CIF	Pay freight + insurance
DAP	Deliver to destination

FOB (Most Common)

Risk Transfer: Ship’s rail at load port

Seller covers:

• Production
• Transport to port
• Port handling
• Loading
• Export clearance

Buyer covers:

• Ocean freight
• Insurance
• Destination charges
• Customs

CFR / CIF

Risk Transfer: Still at load port (same as FOB!)

With CFR: Seller also pays freight With CIF: Seller pays freight + insurance

Caution

Under CIF, seller buys insurance but risk already transferred to buyer at load port.

Documentation

Essential Documents

Document	Purpose
Sales Contract	Legal agreement
Letter of Credit	Payment security
Bill of Lading	Title document
Commercial Invoice	Value declaration
Quality Certificate	Spec proof
Weight Certificate	Quantity proof
Certificate of Origin	Source proof
Phytosanitary Cert	Health clearance

Document Flow

CONTRACT → L/C OPENED → VESSEL NOMINATED →
CARGO LOADED → DOCS ISSUED → DOCS TO BANK →
PAYMENT RELEASED

Sample Contract Terms

COMMODITY: Brazilian VHP 99.3° Pol min
           ICUMSA 1500 max

QUANTITY:  25,000 MT (±5% seller option)

PRICE:     ICE No.11 [Month] + [XX] points
           FOB Santos, Brazil

SHIPMENT:  March 1-31, 2025

PAYMENT:   Irrevocable L/C at sight

QUALITY:   Per GAFTA Sugar Rules #4
           Final at load port by SGS

ARBITRATION: GAFTA, London

Trade Execution

Timeline

Phase	Duration	Activity
Pre-shipment	2-4 wks	Contract, L/C, vessel
Loading	5-10 days	Load, test quality
Shipping	2-6 wks	Transit, prepare docs
Discharge	3-7 days	Unload, customs
Settlement	1-2 wks	Payment, claims

Vessel Nomination

VESSEL NOMINATION

Vessel: MV SUGAR TRADER
IMO: 9876543
ETA Santos: February 5, 2025
Laycan: February 5-15, 2025
Loading Rate: 12,000 MT/day (WWWD SHEX)

Quality Testing

Test	Standard
Polarization	ICUMSA GS2/3-1
Color	ICUMSA GS2-13
Moisture	ICUMSA GS2-1
Ash	ICUMSA GS2-5

Deal Structures

Back-to-Back

Buy:  25,000 MT VHP, FOB Santos, No.11 H + 35
Sell: 25,000 MT VHP, CFR Jeddah, No.11 H + 85
Freight: $35/MT

Margin: 85 - 35 - 35 = 15 pts = ~$66/MT = 3%

Priced Position

Buy:  25,000 MT VHP, flat 21.50 c/lb
Hedge: Sell No.11 futures @ 21.50

Position: Long physical, short futures
Exposure: Basis only (not flat price)

Best Practices

Do’s ✓

• Always use written contracts
• Verify counterparty before trading
• Understand all costs before quoting
• Use reputable surveyors
• Hedge price exposure
• Keep detailed records

Don’ts ✗

• Trade without credit check
• Accept verbal agreements only
• Ship without L/C confirmation
• Ignore quality specs
• Take naked price positions
• Ignore sanctions screening

Common Mistakes

Mistake	Prevention
Underestimate freight	Get firm quotes
Wrong Incoterm	Clear contract terms
Currency mismatch	Match invoice currency
Document delays	Prepare docs early

Key Takeaways

1. Know counterparties — Verification essential
2. Document everything — Written contracts protect
3. Understand costs — All-in determines margin
4. Use standard terms — GAFTA rules
5. Hedge risk — Physical needs futures cover

References

• GAFTA — Standard contracts
• Incoterms 2020
• SGS — Inspection