Grain farmers in South Africa are increasingly seeking protection against wild price fluctuations by taking hedging positions in the Johannesburg futures market, farmers and market players say.
Using futures contracts to guarantee growers a minimum price for their crop is already widespread in the United States, where farmers use the Chicago Board of Trade (CBOT).
However, it is relatively new in South Africa, where the government fixed grain prices until the mid-1990s, a legacy of the isolationist apartheid government.
Now, many banks demand that farmers hedge against the futures market if they want to borrow money against their crop. KwaZulu Natal farmer Francois Legrange is currently arranging to hedge his next maize crop against the futures market - the first time he has done so.
"The banks force you to do it now," he told Reuters at a meeting of grain growers at a farmer's union hall outside the mining and farming town of Dundee, a five-hour drive south-east of Johannesburg.
"You have to. Otherwise you just risk too many knocks."
Hedging allows farmers or their representatives to sell a futures contract stating they will sell their stock at a set price, locking in potentially higher prices and protecting against market fluctuations.
Fanie Brink, deputy general manager of producer body Grain South Africa, said probably less than half of South African commercial farmers were hedging, although the number was increasing.
"We were in a totally controlled grain market until 1997," he said outside the meeting. "Farmers have adapted quite well but they're still not using all the tools available to them."
At its most basic, hedging can mean simply taking a futures position with a sell-stop to guarantee a minimum price, Riaan Lazenby of grain portfolio management provider Quattrocon said, although his firm also offers more complex products to farmers and consumers.
Many farmers failed to understand how the market operated and could end up losing money instead of protecting themselves, he said.
"It's like boxing blind," he said. "The potential profit or loss on SAFEX (South African Futures Exchange) must be about five-fold compared to what it is for farming. If you don't lock in the higher prices, and so you sell at the bottom each year, then you'll be out of business in three years."
Over the past 12 months, first position white maize futures on SAFEX soared to a peak of 1,535 rand a tonne in February, but then dived to a low of 785 rand by July.
Yellow maize futures have been nearly as volatile, ranging from 835 rand to 1480 rand.
The price usually drops to its lowest level in July and August when the crop is harvested and delivered, so it is in farmers' interests to hedge months earlier.
"We basically look at white and yellow maize and wheat," Lazenby said. "It's only those commodities that are liquid enough to hedge properly."
Grain SA's Brink said his organisation was working to train farmers to use market tools more effectively. Emerging black farmers, some of whom have taken over grain farms under land reforms since the end of apartheid, were also being taught to use the system, he said.
But despite hedging, Grain SA says grain prices are too low and it is encouraging farmers to plant less.
"Commercial farmers are suffering," Brink said. "Government should create more profitable markets for grains through things like promoting production of ethanol from grain and bio diesel from soya."
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