When the JSE first launched commodities derivatives 20 years ago, its inaugural product was a beef futures contract. At that time, the agricultural sector – including the beef market – was undergoing many changes and it was the first time it had been exposed to derivatives instruments. As a result, the pilot beef carcass contract failed to find traction and was discontinued.

‘The JSE then introduced white and yellow maize contracts, which took off to become globally recognised as a success story in the agricultural sector,’ says Raphael Karuaihe, JSE Commodity Derivatives Manager.

The success of the maize contracts led to renewed interest from the beef sector in derivative instruments to manage price risk.

When the beef carcass futures contract was launched late last year, four initial contracts were traded in the first week.

‘Now that the product is established, it is easier for us to start with an aggressive education campaign with abattoirs, wholesalers who buy beef carcasses and feedlot operators, who can see the buying and selling prices,’ says Karuaihe.

One contract is equal to 1 000 kg of A2- and A3-graded carcasses. The contract expiry months are March, June, September and December – and on expiry, settlement takes place in cash.

For the cash-settled contract to be credible, the cash-settled price needs to reflect spot-market costs. The JSE has partnered with the Red Meat Abattoirs Association (RMAA), which publishes weekly producer and selling beef prices, to use its price information to settle the beef contracts.

‘Using two weeks of data makes it more difficult to influence the price, as we work hard to eliminate market abuse’

RAPHAEL KARUAIHE, COMMODITY DERIVATIVES MANAGER, JSE

The RMAA uses transactional data from a number of abattoirs and the JSE has the right to audit the data down the level of the contributing abattoirs to ensure accuracy.

The JSE uses two weeks’ worth of data preceding the last trading day to determine the settlement price. ‘Using two weeks of data rather than one week makes it more difficult to influence the price, as we work hard to eliminate any market abuse,’ says Karuaihe. This methodology should give participants peace of mind that the price is not a thumbsuck or open to market abuse.

The product is aimed at abattoirs, farmers, feedlotters (who are producing carcasses), wholesalers and retailers that are exposed to beef prices.

‘If you make beef burgers, for example, and are concerned that the price of beef patties might go up, you could buy a contract and protect the price of your raw material.’

A futures contract allows clients to lock in a price for a future date of expiry, which protects their business from price volatility. As liquidity in the contracts picks up, speculators might also start trading the product, says Karuaihe.

The JSE plans to introduce feeder calf (or weaner) futures contracts at a later stage. It is currently in consultation with feedlot participants to develop the product.

‘It would allow feedlotters who buy calves to lock in the price to buy feeder calves, then raise them, and lock in the price at which they sell the carcasses. This would remove significant price risk from their business.’

Karuaihe says players in the beef industry have shown ‘encouraging’ interest in the futures products, as they are keen to find better ways to manage pricing risk. ‘Many participants already understand the contracts through the white and yellow maize products, which have been proven to work.’

The JSE will conduct an education drive to convert this interest into transactions to deepen market liquidity. ‘The more liquid the product, the more efficient it is for everyone,’ says Karuaihe.

By Gene Michelson
Image: iStockPhoto