Safex works, but it needs attention, says Marketing Council investigation

Despite the fears of Western Cape farmers that Safex is biased towards grain buyers, the National Agricultural Marketing Council (NAMC) has found that the index is a well-functioning instrument for price formation in SA’s grain and oilseed markets.
Issue date : 12 September 2008

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Despite the fears of Western Cape farmers that Safex is biased towards grain buyers, the National Agricultural Marketing Council (NAMC) has found that the index is a well-functioning instrument for price formation in SA’s grain and oilseed markets. T he NAMC’s report, commissioned by Grain SA, states that prices are influenced by supply and demand – both regional and international – as well as the rand/dollar exchange rate. Price volatility was found to be high, but corresponded with levels on the Chicago Board of Trade.

It was found that deliveries from foreign origins didn’t impact negatively on the price of wheat, but concerns were raised over the basis on which the origin discounts – that are based on the quality difference of foreign wheat delivered on – were determined. Johann Kirsten, an agricultural economist at the University of Pretoria who was involved with the NAMC investigation, explained that greater clarity was needed on the criteria on which the discounts are based. The report also found that in theory the transport differential should not negatively influence prices and that there should be alternative avenues available to farmers to deliver their product and achieve better prices. t was, however, acknowledged that the number of buyers in a particular region, which is an indication of the competitiveness of the market, has an influence.

Where there are no alternative buyers farmers have no choice but to accept the prices offered. n the Western Cape the situation is further complicated by the fact that major farmer cooperatives and agribusinesses are also shareholders in milling companies. S afex and farmers have agreed to reconsider the use of the transport differential based on these findings.

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The NAMC has, however, recommended that the transport differential be kept in place for the interim and that an investigation should be launched into how it is determined and whether it serves its purpose; as well as an investigation into the state of competitiveness of the wheat market in the Western Cape. A ndries Theron, a wheat farmer and vice chairperson of Grain SA in the Western Cape, welcomed the proposals even though past attempts to address the transport-differential conflict have failed. H e said that previously the market was immature and farmers didn’t understand how Safex worked. Now they would like to see the differential completely removed so that the contract quotes only the price of the wheat.

Farmers could then negotiate transport costs based on the destination. Kirsten, however, pointed out that the Chicago Board of Trade is currently investigating introducing a transport differential because of dissatisfaction over the fact that farmers currently have to negotiate their own transport cost. He said that in theory it serves as a good benchmark for transport negotiations and it would be difficult to find another price indicator if it was removed. he NAMC report identified a lack of information as one of Safex’s main weaknesses and suggested the Johannesburg Stock Exchange (JSE) consider publishing a daily market commentary report with information about which companies were trading, their trading positions, as well as the volumes being traded and at what price. F urther, better information on factors influencing market prices is needed, such as estimated local and international volumes, the volumes companies are planning to import and when, as well as grain-area specific production and climate reports. he report suggested the removal of trading names from the highly liquid futures contract depth screens.

Kirsten said other companies might be influenced if they see a large or well-established company buy or sell huge volumes. “Other companies might follow suit reasoning that the well-established companies might know something they are unaware of,” he explained. study was also suggested to determine the moving-average price limits to ensure that the price limits imposed on the market represent a fair percentage of the underlying price. he price limit on the maize price on 26 August was R50/t.

This means the market closes if prices move up or down by more than R50 and then only re-open when the movement is within the limit, or the next day. Kirsten proposed that the limit is substantial if the maize price is at only R600/t, but hardly significant if the price is at R2 000/t. He added that the small limits would result in the market closing if the rand strengthened or rose by only two points. he NAMC further recommended that the JSE consider the introduction of mini contracts. These could soften the impact of increased initial margins on wheat, sunflower seed and soya beans due to the increases in price limits. – Glenneis Erasmus