Role players in the grain trading value chain have expressed disappointment after the Johannesburg Stock Exchange (JSE) announced it was suspending basis futures contracts for grain commodities until a new software system was in place. The South African Cereals and Oilseeds Trading Association (SACOTA) says this follows four years of efforts to get these contracts in place.
By Nico van Burick, Senior Journalist at African Farming and Landbouweekblad
The JSE’s internal legal division reportedly raised concerns about the fairness of initially restricting the contracts to only ten silos, warning that maintaining this arrangement indefinitely could not be justified and would not be fair to other silo operators. So if expansion was not feasible under the existing framework, the contracts could not be launched.
Dr André van der Vyver, executive director of SACOTA, says the decision came as a surprise since it was widely known that the scheme would begin as a pilot project. He also expressed concern that the JSE’s software had limitations in respect of the number of silos that could be accommodated.
“Since there is a definite need for this type of contract in the trade, the industry will have to support alternatives. One SACOTA member, Match Exchange, already offers a similar service with advanced features. The JSE is in danger of losing its leading role – and that would be a shame.”
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How Basis Futures Contracts Work
A basis futures contract reflects the relative difference between the Randfontein-based price and the price at a specific silo for a given product, such as yellow maize.
Van der Vyver explains: “If we use Bethlehem as an example, it’s a popular silo in an export year. If you have maize there, you can sell it for export. Suppose the location differential is R400/tonne and the price is R4 000/tonne – your earnings would then be R3 600 ex-silo. In a good export year, most traders would be willing to pay a premium of, say, R200/tonne. That means the seller could earn R3 800 simply for being on the export line. The basis for Bethlehem, relative to the Randfontein price, would therefore be -R200.”
Although this is an example, Van der Vyver notes that, in practice, the basis at silos has increased significantly in recent years.
“There are several reasons, but much of it has to do with rapidly changing import and export needs. Think of the Cape: One moment you’re trucking in local maize from the Northern Cape at a premium, the next you’re importing, and the need to move local maize to the Cape disappears overnight – along with the premiums.”
Basis futures contracts allow buyers and sellers to hedge this increased price-risk component and to finance it more easily, Van der Vyver says. They also help ensure fair pricing and more competitive grain markets.
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Premiums and Transparency
“We’ve worked on this for a long time. The JSE planned to start with ten silos – five for white maize and five for yellow maize – as a trial run, since its software could not yet handle more contracts,” Van der Vyver says. “Unfortunately, the whole process will now have to start again once the new software system is in place.”
In the past, this type of trading took place over the counter, but basis futures have become increasingly popular. Van der Vyver explains that premiums are often paid for maize well-situated for export to destinations such as Botswana, Maputo or local mills. However, the over-the-counter system was not transparent.
Premiums fluctuate depending on supply and demand – annually, seasonally, weekly or even daily. “These fluctuations make the market dynamic. When opportunities arise, buyers and sellers want to act in the futures market and not be limited to the cash market.
