Malting barley finally linked to Safex

SABMiller has finally agreed to adapt their malting barley pricing structure by linking the price to the wheat Safex price.
Issue date : 18 July 2008

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SABMiller has finally agreed to adapt their malting barley pricing structure by linking the price to the wheat Safex price. This will allow farmers to take better advantage of market fluctuations. L eon Groenewald, chairperson of the Barely Industry Committee, explained that farmers have been unable to cash in on rising grain prices due to low international stock levels during the 2007/08 season because the market movements took place after SABMiller had fixed the price. Currently there’s no derivative market for barley anywhere in the world.

Groenewald said it had therefore been decided to link the malting barley price to the wheat Safex price, as a strong correlation has been found between the Chicago Board of Trade prices for wheat and international barley prices. SABMiller will remain the final buyer of Safex linked barley, while Standard Bank has agreed to act as the financier of the Safex position and the physical product. Sentraal-Suid Koöperasie committed to managing the financing, storage and offloading of the barley.

The new pricing system would allow farmers to take part in a dynamic market environment, whereas the old structure was static. Thus farmers will be able to take better advantage of international price movements, such as shortages, resulting in better farm gate prices. F armers would now also have the ability to buffer the impact of large market fluctuations. Part of the harvest could be fixed, while the rest could be used to speculate with.

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The disadvantages are that farmers become more vulnerable to unfavourable market conditions and there are risks involved. Force majeure allows for either party being unable to fulfil their contractual commitments due to circumstances beyond their control, but it is only applicable to barley sold at the fixed price. armers therefore need sound marketing strategies, warned Groenewald. Those who don’t feel up to the new pricing mechanism would still be able to sell their barley to SABMiller at a fixed price. G roenewald said that the change is a move in the right direction, but farmers are still not entirely satisfied with the pricing mechanism. Negotiations between farmers and SABMiller to refine the pricing mechanism will therefore continue. – Glenneis Erasmus

How it works

The pricing model is in the form of a volume contract, which will be based on a farmer’s average long-term yield. According to Henk de Beer, who is in products and agricultural services at Sentraal Suid Kooperasie, farmers will be allowed to decide how much of their yield they want to sell at a fixed price and how much based on the Safex derived price, according to the following conditions: The farmer has to contract all his expected barley malt based on the hectares under production multiplied by his long-term yield average. At least 30% of the barley still has to be sold according to the fixed-price mechanism.

A farmer also has the option to sell his whole yield at a fixed price. Force majeure would be applicable to all barley sold at a fixed price, as it permits either party not to fulfil the contractual commitments due to events beyond their control. A farmer has to indicate, when he secures the volume contract, what percentage is to be sold at a fixed price and what percentage would be sold at the Safex-derived price. Of the 70% that has not been fixed, up to 65% could be sold against the Safex-derived price up to 30 September of that year.

 The remainder would not to be contracted up to 24 November of that year. A farmer who sold 65% of his barley at a fixed price would only be able to sell the rest of his barley after 30 September and before 24 November. All barley that has been contracted and has not been priced by 24 of November would be automatically priced on the Safex wheat price for 24 November. The expected fixed price for barley for 2008/09 varies between R2 997 and R2 857 depending on location.