South Africa’s JSE Ltd (www.jse.co.za) traded 2.1 million commodity derivative contracts in 2010, up 12% on the previous year but still below the record 2.5 mn contracts traded in 2008. The JSE’s Commodity Derivatives market offers grain trading in white and yellow maize, soya, sorghum, wheat and sunflower seed. It also trades metals including gold, platinum, silver and copper and a crude-oil based derivative called the Western Texas Intermediate (WTI), reportedly the world’s most traded commodity.
White maize accounted for 46% of all grains traded on the JSE, wheat accounted for 27% and yellow maize 16%.
The JSE’s head of commodity derivatives, Rod Gravelet-Blondin, said in a press release today (18 Jan) that the local commodity derivatives market continues to attract new participants who aim to eliminate price risks in an increasingly volatile trading environment: “There is far greater understanding among farmers and millers of the uses of agricultural commodity derivatives as a tool to reduce price risk. Because we are a physical delivery market, farmers can lock in prices at the start of a growing season by taking out agricultural commodity derivatives, so that no matter what happens in the course of the year, they will be able to get their Safex price provided they deliver grain to the quantity and quality specified.”
In 2011, the JSE’s Commodity Derivatives market plans to consolidate and build. Gravelet-Blondin says: “That means encouraging new market participants, and continuing to educate people in the benefits and advantages of commodity derivatives.”
Farm productivity soaring in southern Africa
Production is soaring in South Africa and in neighbouring Zambia. South Africa’s maize crop was over 12 million tons in 2010, near a record and helped by relatively strong prices at the start of the growing season, above-average rainfall and better farming practices. Prices are down by about 30% from a year ago, with white maize for delivery in July 2011 now trading at about R1,400 a ton, unusually R80 less than yellow maize, traditionally lower priced and used for animal feed.
Gravelet-Blondin says this is due to: “..a large carry-over of white maize from the previous season, and export demand for South African maize is less buoyant due to improved yields coming out of countries like Zambia. Another factor contributing to the increase in size of the maize crop is the fact that we are now seeing yields of close to five tons per hectare, which is virtually double what we were seeing 10 or 15 years ago. This is due in part to biotechnology, but also to improved farming practices. South African commercial farmers are far more business-minded and professional than was the case 20 or 30 years ago.”
How commodity exchanges reduce risk
Safex was launched in 1995 to provide agricultural commodity derivatives trading as a mechanism to address price risk for producers and users. It started out offering grain futures contracts, but has since expanded its range of traded instruments. It is part of the evolution of risk control. Initially the government used to manage price risks for farmers and millers through price controls. When the market deregulated in the 1990s the price risk moved to farmers and users.
Grains trade on the basis of physical delivery meaning that any contract traded can result in physical delivery to a grain silo in South Africa. However, recently the JSE introduced cash-traded corn contracts, for which physical delivery is not required, which are based on prices set by the Chicago Board of Trade, part of the largest commodities trading market in the world. US corn contracts currently trade at a R450 premium to South African white maize, according to the JSE. These contracts are pure financial instruments which makes them appealing to a broader range of market participants.
Chris Sturgess, general manager at the JSE’s Commodity Derivatives market, says: “The price of South African maize is often correlated to the international prices set in Chicago. But South Africa maize prices fluctuate between import and export parity depending on whether there is a surplus or shortfall of maize. Many traders keep an eye on the spread between US corn prices and South African white maize and look for opportunities to profit from a widening or narrowing of this spread.”
The WTI oil contract can also help companies reduce their fossil fuel costs by buying WTI futures when prices are low. Should oil prices rise, companies will be able to offset higher fuel prices paid at the pump with profits made on the oil futures. WTI contracts on the JSE are traded in rand rather than US dollars, providing greater price transparency for local companies. Sturgess says: “This is something we are encouraging local companies with high fuel bills to explore… Companies can also reduce currency exposure through the JSE’s range of currency derivatives.”
Gravelet-Blondin says there is a greater level of sophistication among commodity derivatives traders seeking opportunities for hedging or profit. For example, it is possible to trade the difference between gold and platinum prices, on the basis that the two prices are correlated and any divergence in the spread provides an opportunity for profit.