There is a new powerhouse dominating the U.S. futures market for raw sugar contracts and it's creating a bit of confusion among the the more established trading houses of the world's most volatile commodity markets. The firm is Wilmar International, a Singapore-based agribusiness whose major shareholders include the family of Malaysian billionaire Robert Kuok and Chicago-based Archer Daniels Midland. Founded 26 years ago, Wilmar is one of the world's largest palm-oil producers but was essentially non-existent in the sugar market until just a couple of years ago.
Now, in just two short years, Wilmar has scooped up more than 6 million tons of raw sugar, enough to fill roughly 3,000 Olympic-size swimming pools at a cost of some $2.3 billion, by physically settling tens of thousands of futures contracts and collecting the commodity from ports across South America and elsewhere.
The timing and size of the purchases have raised some concerns among other futures traders that Wilmar may be looking to manipulate global sugar prices. As the Wall Street Journal points out, purchases made by Wilmar in 2015 were large enough soak up the entire global supply glut that pushed sugar prices to multi-year lows.
The effects of Wilmar's moves have been the subject of debate among traders. At one point in 2015, when sugar prices were at multiyear lows because of a world-wide glut, Wilmar bought so much that traders say the company in effect mopped up that year's global oversupply. In the rally that followed, sugar prices more than doubled.
Then, as prices peaked in September last year, Wilmar changed course and delivered excess sugar it owned to other traders on the exchange. Sugar prices fell 24% in the ensuing months.
The company's size and scale, however, are sowing concerns among some traders that it could control a large amount of the world's tradable sugar and influence prices.
"They are a market mover," Nick Gentile, head trader of New York commodities trading firm Nickjen Capital, said of Wilmar. Around two-thirds of the world's sugar production is consumed in the countries that produce it, and the rest is traded internationally.
Of course, Wilmar denies the importance of their massive trades in determining global sugar prices saying they represent just a small component of a very fragmented commodity market.
Jean-Luc Bohbot, the 48-year-old Frenchman who runs Wilmar's sugar business, said there is no evidence that the company's trades affect market prices. That is "very much an incorrect view," he said in a recent interview. "Sugar is an extremely fragmented commodity, with a very large number of players around the globe."
While Wilmar's sugar purchases and sales appear in some cases to have preceded rising and falling prices, Mr. Bohbot said, "There is no clear correlation" between the two. Over the past few decades, sugar prices have gone in both directions when there were large physical deliveries, he added.
But perhaps even more rare than Wilmar's quick rise to become one of the world's largest sugar traders, is their propensity to take physical delivery of the sweet stuff and ship it to refineries in Asia and the Middle East, often at a loss.
Physical settlements of futures trades, however, are rare. Exchange operator Intercontinental Exchange Inc. estimates that fewer than 0.5% of trades result in the actual delivery of commodities. The vast majority of futures contracts are unwound by traders before they expire because most firms want to avoid the hassle of transporting commodities to or from inconvenient locations. With sugar futures, buyers don't know where in the world they will have to pick up the sweetener until after the contracts expire.
That hasn't deterred Wilmar. Mr. Bohbot said the company has found it economical to purchase sugar in bulk using futures contracts, because the exchange's rules require sellers to deliver the sugar on board buyers' ships, which facilitates international trading. In other commodity markets, such as grains or metals, the handover usually happens inside warehouses in locations that often might not be easily accessible.
Mr. Bohbot said Wilmar ships and sells most of the raw sugar it buys to refineries in Asia and the Middle East, where consumption is growing. This sort of trading, however, is often barely profitable when shipping and other costs are factored in, he said, noting, "There is very little margin, and sometimes no margin."
And while their strategy may be confusing to other large trading houses, it certainly seems to be working as the company's sugar division posted a 33% year-over-year increase in revenue in 2016 on the back of substantially higher sugar prices...which we're sure has nothing to do with their massive trading volume but rather was just the result of a little bit of 'luck'.