Location Differentials Remains The Preferred System For Facilitating Physical Deliveries In Completion Of SAFEX Futures Contracts On The JSE

Following two extensive meetings of the JSE Agricultural Advisory Committee which consists of various agricultural market organisations and commodity derivative members, the majority of participants confirmed their support for the trading of futures contracts referencing the price in a single delivery point which implies the use of location differentials to each registered delivery point.
 
The reason the system of location differentials was discussed was primarily due to all the feedback received following the publishing of the recent maize location differentials.  The system was part of a detailed investigation in 2009 sponsored by the NAMC where Dr Matt Roberts confirmed the following “It is the opinion of this report that elimination of the location differential system will, at best, provide very few benefits to farmers, silos, or millers in South Africa, and may in fact cause significant harm to farmers, especially those in low differential areas, by reducing their ability to obtain input financing. Therefore, the current location differential system should be maintained for wheat and maize, and if the JSE believes it necessary, introduced for soya. “
 
Following the initial meeting of the Advisory Committee, the JSE proposed doing away with location differentials as a result of the challenges in determining the differentials and requested all the advisory committee participants and their constituents to diligently apply their minds to consequences that could arise in the of trading the maize, wheat and sunflower seed futures contracts without a single reference point which is currently Randfontein.
 
Rod Gravelet-Blondin, Senior General Manager for the Commodity Division stated “The real question that needed to be addressed is what would be in the best interests of a sustainable agricultural sector in South Africa going forward” and requested participants, “to carefully consider the positive and negative consequences of doing away with the system of location differentials on the grain sector as an whole.”  “The decision should not be based on emotion or a lack of understanding of the system, but on economic realities,” he added.
 
Many of the representatives on the Advisory Committee have been keen participants since the agricultural derivative market was established and with this collective knowledge the request was made to provide guidance on the way forward. The discussion highlighted the fact that doing away with the location differential system could increase risk in the market place which could well lead to a lowering of finance available to the sector. No representative was able to illustrate that doing away with the location differential system would actually lead to the betterment of the grain sector in South Africa and thus it was agreed that the system should remain in place.
 
The JSE together with the NAMC and Agricultural Advisory Committee did resolve to further investigate any improvements that can be made to the process of determining the location differentials, particularly regarding the transparency thereof, on an annual basis.
 
In line with the recommendations of the NAMC report, the JSE also committed to investigate concerns in the “Roberts Report”, including the introduction of a spot basis trading system that will allow both sellers and buyers to transact physical grain held on a Safex silo receipt down to individual silo level. Included would be the settlement guarantees currently provided by trading on the exchange in addition to improving price transparency to the spot basis market.
 
Mr Gravelet-Blondin stated that, “There is no doubt the system of location differentials remains the preferred system for the trading of agricultural futures contracts in South Africa.  Our challenge is to improve the process surrounding the calculation of the differentials; however with the support of the market this will be achieved.” He concluded by stating, “The next few months will also be exciting as we work towards the introduction of a spot basis trading system to complement our existing trading and clearing solution.”