The Crop Estimate Committee (CEC) estimates a total maize crop of 11,5 million tons for this season, marginally down on the final crop of 11,83 million tons for 2012. This is enough to supply local demand and allow for a certain quantity of exports.
However, since the crop estimate was published, it has been alleged that adverse weather conditions, especially in the western growing areas, has resulted in crop damage and a substantially lower expected yield than the CEC estimate. Even if one disregards the rumours about a failed maize crop to take into account maize producers’ interest in higher prices, it does seem as if the current crop will not equal that of 2012.
The market largely followed the CEC’s lead and South African Futures Exchange (Safex) prices remained at or, for short periods below, export parity. Until the end of April, prices did not really reflect the possibility of a lower local crop. Export parity sets the bottom limit for maize prices. If prices move below export parity, this is a clear sign that they might increase.
Export parity is based on the US CBOT price and current exchange rate. In the US a record area was planted to maize (+6% on 2011/12). However, the average yield is estimated at 16% down on 2011/12. The US Department of Agriculture expects prices to be within a range of US$240 to US$270/t. At the end of April, maize traded in the US at US$293/t. The USDA expects prices to decrease as the season proceeds. A US price of US$240 is equal to export parity of about R1 900.
But this is based on exports to the US markets. Importing countries pay import parity prices for grain and South African maize exporters probably achieve higher prices. The expected large local crop and possible downwards pressure on US prices may have a negative effect on Safex prices.
At the same time, though, various factors are present that may cause local prices to rise. The local crop is probably not as large as estimated. The R/$ exchange rate is highly volatile and may easily move nearer to R10 than R9. There is also uncertainty in the local market about the quantities of maize already contracted for export.
Managing price risks
There is currently much uncertainty in the maize market. Anyone who thinks he can outguess the market will surely get burnt. Futures markets were established initially to allow producers and users of products to hedge their prices. Hedging means insuring against an adverse price movement, and is done with options.
Maize users can fix the maximum price at which they’re prepared to buy maize, while maize producers can fix the lowest price at which they are prepared to sell. However, many farmers still see Safex as a place where one can speculate on maize prices. But not taking a position on Safex is actually more risky than doing so. A maize user who decides not to fix prices on Safex takes the position that prices will move to lower levels, while the opposite is true for a maize producer.
Saving transaction costs
When a maize producer sells his maize to a silo owner, the transport differential is subtracted from the price. When a maize user buys that same maize, he pays for transport. If maize producers and maize users can transact directly with each other, they can save money. This will also help maize users to ascertain the quality of the maize they buy. There are currently vast differences in the feed quality of different batches of maize, and being able to buy good quality maize can make a huge difference to feed efficiency.
In summary, global and local grain markets are highly volatile. The Safex futures exchange offers a way for farmers to limit their price risks. Those who ignore Safex take much larger risks than those who use it to hedge prices.
Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. Contact him at [email protected]. Please state “Global farming” in the subject line of your email.