Trends in SAFEX trading of Western Cape wheat producers

Abstract

When the South African Futures Exchange (SAFEX) Agricultural Products Division (APD) was formed in the early 1990s after the demise of the Marketing Boards, the support and direct participation of producers on the exchange was core to its long term success. A tremendous amount of energy and cost was invested by SAFEX and brokers to educate and sign up primary producers. Most agribusinesses (excooperatives) also had broking divisions. This campaign was very successful and a large percentage of producers, particular of maize and wheat, opened SAFEX accounts through brokers. It was not unusual for many of them to open more than one account with different brokers. Collectively, they had a very important impact on the market. Fifteen years after the launch of the wheat contract (in 1998), this is no longer the case. Industry sources have it that many, if not most, producers have either closed their accounts, have an inactive account, or have scaled down their trading activities. This leads to the hypothesis that direct participation by producers on the JSE/SAFEX Commodity Division is declining. The questions that arise from this observation are:  Are producers distancing themselves from SAFEX (or the other way around)? or,  Has the industry matured and progressed into a new era? This research had the objectives to:  Determine the estimated percentage of producers that directly traded on SAFEX during the initial years and compare the data to present numbers. Based on the outcome of the primary data collected, to determine if there is indeed a trend.  If correct, to determine what the reasons for this could be. Has there been a shift in hedging practices? Are brokers offering additional services which make it unnecessary for producers to operate directly on the exchange? Wheat producers in the Western Cape were selected as the target group for various reasons, including the province’s geographical isolation, its importance as a wheat production area and the importance of wheat in the gross income generated by producers. The survey firstly established the importance of wheat in the Western Cape grain production areas. No doubt, income derived through wheat production is still very important throughout the Western Cape, but in certain areas it is absolutely crucial. Next, the survey attempted to determine how and when producers ‘price’ (sell) wheat. The survey then aimed to establish what the most important factors are that influence producers’ pricing strategy. Producers ranked growing conditions as the number one factor in taking a pricing decision, followed by production costs. Furthermore, producers do adjust their marketing strategy but there seems to be a difference of opinion as to whether it is on their own accord or on advice of their brokers. The survey not only depended on producer data but cross-referenced with brokers (traders and agribusinesses). Based on overall feedback, the analysis determined vi that on average in the Western Cape 10 – 20% of wheat producers had SAFEX accounts, while in selected areas it was as high as 37 – 50%. It was also important to determine to what extent SAFEX trading activity had decreased, if at all. This question only applied to those respondents that said they did have a SAFEX account and their activities had decreased. The answer revealed that 91% of respondents had stopped trading altogether. Having now established that a fairly large number of producers had accounts on which most had ceased their activities, the question is why. Cash flow requirements are the single biggest reason why producers have reduced (or completely stopped) their participation on SAFEX. The second reason was that a producer could achieve the same benefits and more through the services offered by the grain traders and agribusinesses, compared to trading directly on SAFEX. It should not be forgotten that the trader could only offer these service if he or she does a deal, back-to-back, on SAFEX. This is part of the reason why all traders and agribusinesses have a SAFEX account. The survey concluded with what might be singled out as one of the most important questions (given what had been determined up to this point): Do producers believe brokers offer all of the marketing options that could be achieved by trading direct on SAFEX? With the benefit of already having analysed the response to the earlier questions, the answer might have been expected. However, the response was overwhelming: 97% of respondents said that brokers offer all of the marketing options they were interested in. It could therefore be said that the decline in direct SAFEX participation by Cape wheat producers is the direct result of the all-inclusive services offered by traders and agribusinesses. Producers sign a forward contract with their brokers while the brokers would offset their risk on SAFEX. An element of caution, however, needs to be expressed. Given the importance of wheat in the Western Cape, and particularly in the Swartland, producers should not relinquish their responsibility to acquire or maintain a minimum amount of knowledge on the functioning of SAFEX. Irrespective of whether producers deal directly on SAFEX or through their brokers, knowledge now and in the future will hold the key to their marketing performance and should not be replaced by using brokers.