Safex: less investigation, more education needed

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‘In the absence of a controlled market, farmers are responsible for their own marketing decisions.’

A recent press report states that Grain chairperson Neels Ferreira has asked the National Agricultural Marketing Council (NAMC) and the Competition Commission to investigate the working of the agricultural futures market,

At the beginning and end of last year maize prices remained relatively low while it became clear that the 2007 harvest will be smaller, world prices increased substantially and world stocks reached long-term low levels.

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Even experienced grain traders said that they did not understand the market. S ince then prices have moved upwards, and both white maize and yellow maize July futures now trade at or very near to import parity (Fig 1).


A few years ago, government appointed a commission of enquiry into food prices. In its report, this commission, led by Johan Kirsten and Nick Vink, gave a lot of attention to the working of Safex and the impact of on grain prices. They found no evidence of price manipulation. A latter empirical study by one of Kirsten’s BYEs (bright young economists), Michaela Cutts, proved empirically that fundamental factors such as world processes, exchange rates and the local supply/demand balance were the main factors that influenced prices on Safex. At the end of 2006 and beginning of 2007, Safex prices remained relatively low, while the fundamental factors actually pointed towards a sharper increase – world stocks were at a very low level, world prices were bolstered by ethanol production in the US, and the rand was 16% weaker than a year ago.

In spite of this, prices remained below import parity and only moved up from mid-February. Over the last couple of weeks, prices moved up quickly. The stagnant prices at the beginning of this year seemed out of step with market factors. This is one of the main reasons for Grain SA’s request to the NAMC for an investigation into the working of Safex.
Other problems are that buyers and sellers make large offers on Safex and then withdraw these before anyone can react to them, thereby influencing the market.
There are also problems with the way in which grain dealers handle stored grain where farmers hold silo certificates. The geographical difference also remains a problem for farmers. purpose of this differential is to take distance out of the Safex futures prices.
However, grain traders use this to derive contract prices to farmers, and while it leads to lower producer prices, this benefit disappears quickly when livestock farmers buy grain from these silos. At the beginning of November it was already clear that Safex prices were too low and would increase in future. At that stage it was possible to fix a price of below R1 500 for the July 2007 contract. Livestock producers are now bemoaning the R2 000-plus maize price – they could have insured against it.

Livestock producers who did not use to limit maize prices have only themselves to blame. is not only for grain producers, but also provides a tool for livestock producers to limit price increases. C learly there are aspects of Safex that need attention. However, this should not discourage farmers from using it. In fact Grain SA and the livestock producer organisations would do their members a favour if they spent more time on educating on – and not just as a price indicator for fixed-price contracts. T he feed manufacturers also seriously need training in the use of Safex.

They have a 100% record of “getting it wrong” When maize prices decrease they tell the farmers that they unfortunately bought all their stocks at the higher prices. This year they tell farmers that they hold no stocks and have to buy at the higher prices. These higher prices are then faithfully passed on to the farmers.

In the absence of a controlled market, farmers are responsible for their own marketing decisions and price formation. They have two choices – ignore and let others determine their prices, or use and insure against too-low prices in the case of the grain producer and too-high prices in the case of the livestock producer. However, grain trading is complicated, and farmers will probably need the advice of reliable grain traders.

Traders are by nature risk-takers – they must be prevented from using a farmer’s money to speculate. Get a firm commitment from them that they will only hedge prices and will not try to beat the market. • Dr Koos Coetzee is an agricultural economist at the Milk Producers’ Organisation. All opinions expressed are his own. |fw