Grain producers taking a stand — now the JSE faces new competition

The ball is rolling in the grain and oilseeds industry to find a more financially viable solution for everyone following the JSE’s “location differential” announcement, which industry players say will limit the expansion of soybean production and the extended industry.

The differential has been contentious for some time now. But what is a location differential and what is the rationale behind it? 

The JSE operates the local derivatives market for commodities. Some of these are cash-settled at expiration while others are physically settled. All locally produced grains and oilseeds are physically settled, with the current exception of soya instruments. 

For these physically settled contracts, the JSE requires a single reference point of delivery. This is in Randfontein where all the millers were situated 30 years ago.

The JSE uses a standard model they use to determine location differentials and this model takes as inputs: transporter rates, rail rates, rail-road splits, return load factor and payload of the truck to ultimately produce the differential rate.

“This is necessary because standardisation of listed derivative securities is the cornerstone of any futures market”, says Raphael Karuaihe, head of commodities: capital markets at the JSE. “This means the rights and obligations of parties to these listed instruments are the same for all market participants. We standardise quantity, quality, date of delivery and location.”

The “cost” of underlying transport elements to ensure delivery is thus deducted from the final quoted grain price, per ton, which the producer agreed to deliver at a set date.

For example, a Schweizer-Reneke seed farmer is subject to a location differential of around R400/ton in his area (based on the distance from Randfontein).  

The JSE introduced the new location differential, effective 1 March 2021, for listed derivative securities with soya as the underlying commodity, a couple of weeks ago. “This followed an extensive consultative process with the industry to ensure an orderly implication process,” says  Karuaihe.

He says that soybeans have been included since volumes produced have quadrupled over the last 18 years. 

“When we started trading these soya instruments in 2002, soya production in the country was about 130,000 metric tons and only concentrated in the Mpumalanga province. It was then decided to allow the physical market to grow to a sizeable level before considering the differential system,” he says. 

As of today, soya production has grown exponentially to an estimated 1.3 million metric tons, with geographically dispersed silos as delivery points across the whole country. This prompted the need to start introducing the differentials for soya instruments as well,” he adds. 

Most of the local farmers’ input costs are based in US dollars with equipment like tractors (think John Deere), and other material like fertiliser (think Kynoch and Profert), being imported from America. South Africa imports about 80% of its fertiliser requirements per annum. 

“If soy producers are forced to make other choices because soy production becomes too expensive, it reduces the market for other crops and harms everyone’s profitability because prices are forced.”