The JSE’s range of derivatives market trading options includes grain and oilseeds futures and options, which enable market participants to hedge against agricultural price risk. Futures and options are currently available in white maize, yellow maize, wheat, soya beans and sunflower seeds, with contracts priced and traded in rands per ton.

‘Our local grains and oil seeds derivative contracts expire into physical deliveries,’ says Anelisa Matutu, Head of Commodities at JSE Capital Markets. ‘You lock in a price today for delivery in the future, and in the future you will have the option of getting the physical underlying commodity or trade out of your futures position.’

The product is typically used by investors who have a vested interest in protecting themselves against adverse price movements in the physical agricultural commodities market – for example, producers, consumers, millers and so on.

When the Safex Futures Market was established in the 1990s, Randfontein was chosen as the reference point for the derivatives contracts because it made sense at the time owing to consumption and transportation dynamics.

‘There were sufficient railway networks to Randfontein and processing capacity in the region, but that has evolved,’ says Matutu. ‘Production and consumption are now much more dispersed, with new processing capacity having been developed closer to the main production regions.

‘In the current location differentials methodology, a location differential is calculated for every JSE-registered silo in South Africa, based on its geographical distance and cost of transportation to Randfontein.

‘The use of location differentials remains core to the design of the derivatives contract. It enables the incorporation of a variety of delivery points across the country. We use location differentials as a mechanism to achieve location price indifference.’

Following careful consideration and extensive market engagement, the JSE has decided to trial a new multiple reference points methodology to determine location differentials for soya beans. The new methodology incorporates transportation costs as well as demand and supply dynamics, and recognises multiple points of consumption.

As Matutu explains, ‘this means that the reference to Randfontein as a single reference point will no longer apply to the soya bean derivatives contract. Instead, we will now use a linear programming model to determine location differentials’.

Under this methodology, the silo closest to the processing point relative to other silos will have a zero location differential. Differentials will get progressively larger for locations further from processing points. ‘In short, the differential to a silo is not calculated by referencing a single point, but rather relative to the processing facilities surrounding it.’

That model has a dynamic nature, and not only considers transportation costs but also incorporates demand and supply dynamics, according to Matutu.

The JSE will trial this methodology for the next two years on soya contracts only, after which it will evaluate the performance of the derivatives contract.

‘First, we’ll assess that the soya contract continues to be an effective tool in managing price risk and that price convergence between the futures market price and the cash market price is achieved. Then we’ll decide on the continued implementation of the model at the end of the two-year trial,’ says Matutu.

‘The JSE has the necessary risk appetite for the approach this new model takes in addressing a few age-old arguments, and looks forward to working with the market to assess the success of the model.’

By Mark van Dijk
Image: Gallo/Getty Images