Although the South African Futures Exchange (SAFEX) was bought out by the then JSE Securities Exchange in 2001, it is not uncommon to find the trading of commodities still referred to as “SAFEX” in agricultural circles.
Agricultural Derivatives from the Johannesburg Stock Exchange (JSE) provide a platform for price discovery and efficient price risk management for the grains market in South and Southern Africa. Trading on a formal exchange that connects buyers and sellers provides transparent price discovery and all transactions are assured through the Derivatives clearing structure.
- Futures Contracts have a future expiry date and both parties have to honour the position at the traded price on that date.
- Option Contracts give buyers the opportunity to secure a floor price (Put Option) or a ceiling price (Call Option) at the cost of an agreed premium. The sellers have to take on the opposite position if the buyer wishes to exercise their Option. Buyers don’t have to exercise their Option
Grain Futures and Options are Derivatives Contracts that provide local market participants with a tool for hedging against agricultural price risk. The JSE currently offers Futures and Options on white maize, yellow maize, wheat, soya beans and sorghum. Contracts are priced and traded in rands per ton and can be physically settled should the futures position be held on until last trading day.
Source: www.jse.co.za/trade/derivative-market/commodity-derivatives (Find the notes on here on how the commodity trading works)
Grower points of interest
Some market participants have been caught short because they thought that they could read the market and left themselves open to price volatility. It is easy to make money on a rising market (bull phase), but when it ends you could suffer great losses. Farmers and experts alike, and unfortunately some pension funds, have lost money by speculating on the JSE.
Any farmer can have agricultural derivative prices delivered to their cell phone. Some use these as indicators and sign fixed-price contracts based on that exchange price. However, if the price changes those farmers will still have to accept the contract price, even though it is worse than the current exchange price.
Tips for Farmers:
- Keep in touch with the supply and demand conditions relating to your commodity. Try to obtain price forecasts, from 2 to 3 different sources.
- Regularly contact their grain brokers to get their opinion of the market – whether prices are going to rise in the future or decline, and their reasons for this.
- Understand domestic and world markets. Understand the limitations of price forecasting – accurate forecasting is impossible.
- Have a well thought-out, written marketing plan. It is recommended that you follow and chart futures prices daily. Analysis of why prices were strong or weak on a particular day is one of the most efficient methods of gaining knowledge of the grain markets.
- Where your marketing plan includes hedging; futures or options, be sure to include the costs in your calculations.
- Your marketing plan should be updated regularly and objectively. Use this information when deciding to sell or store your crop to take advantage of future price increase.
- Realise that high prices often stimulate production which can result in prices declining, hence the importance of locking in prices when prices are high.
- Do not store for too long, as storage fees are high and you will lose interest on the money you could have made if you sold. Farmers can always obtain the upside of rising prices with the use of financial instruments on the JSE. Consider all the costs involved and include shrinkage.
- Understand the futures markets – since futures are traded up to 12 months in advance, they extend the marketing season from a few weeks to 12 months – allowing you to take advantage of frequent temporary price increases.
- If prices increase at any stage – because of weakening exchange rates, weather and crop factors, international supply and demand factors and intentions to plant later in the year – then you have an opportunity to take part in those price increases. This strategy prevents “if only” scenarios.
- Prior to planting any crop, a farmer must see what price the futures contract for that commodity is trading at the time of planting i.e. July contract. If it is profitable to plant based on that price using an average three-year yield for that commodity, he can go ahead and plant. He must however hedge (lock in) that price by either forward contracting / or buying puts or futures. This means that he will not be exposed to possible price declines before he harvests the crop.
- Understand the options markets: Options offer new opportunities. Buy insurance against adverse price movements without you losing the benefits associated with favourable price movements. You do not have to put up margin money, as in the futures market and do not have to worry about having sufficient cash to meet margin calls. Also, there is no production risk associated with your marketing decision. Should your production be less than expected, you are not committed to delivery grain or offsetting your position. The ultimate value of these options depends on the cost of the insurance premium, (which changes daily), and the risk of adverse price movements.
Source: The publication ‘Finance for Farmers’ by Standard Bank.
Training and Research
- AMT www.amtrends.co.za Market information and research
- Bureau for Economic Research www.ber.ac.za
- Bureau for Food and Agricultural Policy (BFAP) www.bfap.co.za
- Grain SA offers a short SAFEX Course. See www.grainsa.co.za.
- There are various measures through which the Johannesburg Stock Exchange introduces learners at schools to financial literacy and investment. See https://schools.jse.co.za and https://virtualtradinggame.jse.co.za.
- South African Institute of Financial Markets (SAIFM) www.saifm.co.za
- TMS Training Services www.hochfeld.co.za TMS runs the successful “Fundamentals of Futures” course.
- The University of the Free State runs a one-day course on SAFEX. Contact 051 401 9518 or email combrincksf [at] ufs.ac.za.
Universities conduct research on SAFEX and various models based on SAFEX are developed. Find contact details on the “Agricultural education & training” page.
National strategy and government contact
Find information on the various directorates of the Department of Agriculture, Land Reform and Rural Development (DALRRD) under the “Branches” menu option at www.daff.gov.za. Of relevance to this chapter are the Marketing and International Trade Directorates. The Crop Estimates Committee is housed in the Statistical and Economic Analysis Directorate.
In a November 2017 report, the then DAFF said that it was working with the different grain commodity organisations to to formalise the integration of smallholder farmers in the grains value chain through South African Futures Exchange 10-ton Black Economic Empowerment White Maize contracts for smallholder farmers producing grain (Parliamentary Monitoring Group, 2017).
National Agricultural Marketing Council (NAMC) Tel: 012 341 1115 www.namc.co.za The Crop Estimates Liaison Committee (CELC) is an official committee that functions under the auspices of the NAMC. CELC is amongst others, to monitor the performance of the Crop Estimates Committee (CEC) and make recommendations for the further improvement of crop estimates on an ongoing basis.
Johannesburg Stock Exchange Commodity Derivatives Division Tel: 011 520 7000/39 www.jse.co.za/commodities
Broking Members are those members who have one or more registered dealers and the required clearing agreement and can trade on behalf of clients. Clearing Members are members who clear deals on behalf of broking members.
Broking Member, Member Code and Telephone
- 28E Capital TEEM 012 663 8434
- Absa Bank Ltd ABLM 011 895 5512
- Afrifocus Securities (Pty) Ltd AFFM 011 290 7800
- Alpha Derivatives ALPM 011 728 1218
- Anglorand Futop ARFM 011 484 7440
- Applied Derivatives (Pty) Ltd ONEM 021 439 7714
- Bester Derivative Trading BDTM 021 809 2547
- Bester Feed & Grain (Pty) Ltd BESM 021 809 2500
- Brent Trading (Pty) Ltd BRNM 056 811 2966
- Brisen Financial Services (Pty) Ltd BFSM 012 640 1600
- Bsec Derivative Brokers (Pty) Ltd BSCM 021 976 7172
- BVG Commodities (Pty) Ltd BVGM 012 484 4000
- Cargill RSA (Pty) Ltd CGLM 011 745 9600
- CJS Securities (Pty) Ltd CJSM 011 447 3531
- Corn International (Pty) Ltd CRNM 082 332 5969
- Courtney Capital Management CCBM 011 884 0591
- Derived Market Investment and Planning (Pty) Ltd DMPM 082 922 6422
- DHJ Grain Brokers (Pty) Ltd DHJM 057 391 1900
- DWT Securities (Pty) Ltd DWTM 021 914 6460
- Farmwise Grains (Pty) Ltd FARM 011 787 3666
- FFO Securities (Pty) Ltd FOFM 011 471 0500
- First World Trader (Pty) Ltd FWT 011 214 8006
- F-Wise Capital FARM 011 787 3666
- Grocapital Broking Services AFGM 011 063 2729
- GWK Trading (Pty) Ltd GWKM 053 298 8491
- Intrepid Capital INCM 011 234 6570
- Investec Securities ISLM 011 291 6212
- Kempro (Pty) Ltd KEMM 018 441 1061
- Kempro KEMM 018 441 1061
- Market Traders (Pty) Ltd MKTM 021 861 3171
- Nedbank Ltd NEDM 011 294 4721
- NWK Ltd NWKM 018 633 1000/20
- Oos-Kaap Boerdery & Graanhandelaars (Edms) Bpk OVKM 051 923 4500
- Peregrine Derivatives (Pty) Ltd MERM 011 722 7506
- Rand Merchant Bank, a division of FirstRand Bank Ltd RMBM 011 269 9800
- Robinsin Mulder De Waal Financial Services (Pty) Ltd RMDM 012 665 5010
- Russelstone Group (Pty) Ltd GVFM 012 433 9000
- SA Derivatives SSSM 021 873 1778
- SBG Securities (Pty) Ltd STEM 0860 121 161
- Senwes Ltd SWKM 0860 121 161
- Sigma Options Writers (Pty) Ltd SOWM 028 313 0104
- Standard Bank of South Africa STDM 011 415 4465
- Suidwes Landbou (Edms) Bpk SWLM 018 581 1000
- Trademar Futures (Pty) Ltd TMRM 011 244 9860
- Unigrain (Pty) Ltd UNGM 011 278 2145
- Vanguard Derivatives (Pty) Ltd MMMM 011 244 6900
- VKB Graan VRYM 058 863 8280
- Vorlon (Pty) Ltd VORM 011 502 2760
- Vorlon VRYM 011 502 2760
- Zargoscape ZARM 021 975 1482
Clearing Members, Member Code and Telephone
- ABSA Clearing – VKSC 011 895 5189
- Investec Bank Limited Clearing INVCC 011 286 7181
- JP Morgan Securities SA (Pty) Ltd JPMC +44 207 325 3687
- Nedbank Clearing – NEDC 011 667 1317
- Rand Merchant Bank – RMBC 011 282 8375
- Standard Bank Clearing – STDC 011 721 7631
Find updated lists at www.jse.co.za.
Websites and publications
- Visit the websites listed earlier in this chapter.
- Short and long of Futures Markets: SAFEX, Grain Hedging, Speculation Dr JM Geyser. A must for every grain producer. Visit www.kejafa.com.
- www.cmegroup.com – Find the CBOT (Chicago Board of Trade) option
- www.nass.usda.gov – the National Agricultural Statistics Service (USA)
- Global crop condition assessments and estimates of area, yield, and production for grains, oilseeds, and cotton – https://ipad.fas.usda.gov/
- www.usda.gov/oce/commodity – the World Agricultural Outlook Board (WAOB) serves as a focal point for economic intelligence and the outlook for world agriculture
- World Agricultural Supply and Demand Estimates Report (WASDE) – www.usda.gov/oce/commodity/wasde/index.htm
- China National Grain and Oils Information Centre – www.chinagrain.gov.cn
- www.igc.org.uk – International Grains Council
- International Grain Trade Coalition (IGTC) www.igtcglobal.org
- Regional Food Balance Sheet (East Africa) – www.rfbs.in
- ROFEX, the Argentina SAFEX – www.rofex.com.ar
- Informa Economics does commodity market research – www.informaecon.com
- African Association of Agricultural Economists, www.aaae-africa.org
- FranceAgriMer www.franceagrimer.fr
- Commodity Weather Group – www.commoditywx.com
- Find the “Economic research” option at www.agbiz.co.za, website of the Agricultural Business Chamber (Agbiz).
- Smith, M. 2018, March 15. “Liggingsdifferensiaal: nuwe oplossing voorgestel”. Landbouweekblad. Available at www.netwerk24.com/landbou/Nuus/liggingsdifferensiaal-nuwe-oplossing-voorgestel-20180315 An argument for moving the reference point from Randfontein to Durban or Cape Town.
- Coleman, A. 2017, September 5. “Learn marketing mechanisms to maximise grain profits”. Farmer’s Weekly. Available at www.farmersweekly.co.za/farm-basics/how-to-business/learn-marketing-mechanisms-maximise-grain-profits/
- Kapuya, T. 2017. “Agricultural exchanges: key to Africa’s development?” Farmer’s Weekly, October 13, page 14.
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