Archive for the 'Commodities' Category
November 4th, 2012 by Tom Minney
South Africa’s JSE Ltd (www.jse.co.za) continues to expand its commodity derivatives range. It has added silver and platinum “quanto futures” to its existing gold, copper and Brent crude quanto futures launched earlier this year. It is also helping develop the South African grain market by allowing Safex silo receipts to complete a futures contract, so that producers and buyers can trade grain with a bid or offered premium depending on location, for instance if a buyer wants grain in a particular location.
The JSE has partnered with Rand Merchant Bank, which is the initial market maker. The commodities are referenced as part of the JSE’s existing licensing agreement with the CME Group.
Commodity gain, without currency pain
According to a JSE press release on 1 Nov, a quanto future is a derivative instrument which, on the JSE, is a ZAR-denominated commodity investment product which delivers the same payoff as a pure USD-denominated commodity investment. This lets investors gain exposure to the foreign underlying commodity without being exposed to the USD-ZAR exchange rate. It simplifies decisions and allows investors to focus only on the returns of the underlying commodity.
Chris Sturgess, Director of the JSE’s Commodities Division, says: “We have seen keen interest expressed in the new Quanto Futures we offer and by adding silver and platinum to the product offering, we continue to provide derivative market participates with opportunities to easily access the international commodities markets.”
Growing grain markets
Trading in grain silo receipts to settle grain futures contracts is likely to benefit both producers and buyers, according to another JSE press release. Producers can negotiate a better price for stock in the specific silo represented in the receipt by placing an “offer” onto the system for a premium over and above the Safex price. Buyers such as millers and processors will benefit through access to bid at all registered delivery points at a premium per ton, regardless of whether or not physical grain is on offer. Buyers will be able to bid for preferred delivery locations. Previously no bids were permitted without available stock on offer.
There are more than 200 registered delivery points. The silo owner continues to guarantee the quality and quantity of the physical stock on the Safex silo receipt. However, the JSE guarantees the cash-flow process and settlement, so there is no risk of counterparty default. Settlement will take place over a 2-day cycle, meaning a trade is settled the next business day after trade, eliminating the delayed payments generally associated with cash market transactions.
The price when making physical delivery is a function of Safex’s mark-to-market price on the day, less the location differential (indicative transport cost) to the registered delivery point. With this new functionality the value of grain at each delivery point can be negotiated transparently between buyer and seller and included in the final settlement price.
The JSE says it offers a first-world trading environment, with world-class technology, surveillance and settlement, in an emerging market context. It is among the world’s top 20 largest equities exchanges by market capitalisation.
October 5th, 2012 by Tom Minney
The World Bank has cut its growth forecast for sub-Saharan Africa. Earlier in the year it forecast 5.2% growth overall for SSA economies in 2012, but yesterday (4 Oct) it cut this to 4.8%. World Bank said in its bi-annual Africa’s Pulse report that Africa is still vulnerable to a fragile global economy and a slowdown in China, although high commodity prices and an increase in exports from countries that have made mineral discoveries are likely to underpin growth for the rest of 2012.
Africa achieved 4.9% growth in 2011. According to the study, excluding South Africa, the continent’s biggest economy, growth is likely to hit 6% in 2012. Strong performers are expected to include countries such as Mozambique, home to some of the world’s biggest untapped natural gas reserves, and Sierra Leone which has started exporting iron ore, according to a story on Reuters. Foreign direct investment (FDI) is projected to rise to $48.7 billion by 2014 from $31bn in 2012, as investor interest in Africa soars. African exports rebounded in the first quarter of 2012, growing at an annual pace of 32%, up from the -11% pace recorded in the last quarter of 2011.
World Bank Vice-President for Africa, Makhtar Diop, said in a press release: “A third of African countries will grow at or above 6%, with some of the fastest growing ones buoyed by new mineral exports and by factors such as the return to peace in Côte d’Ivoire, as well as strong growth in countries such as Ethiopia. An important indicator of how Africa is on the move is that investor interest in the region remains strong.. despite difficult global conditions.”
Most of SSA “middle income” by 2025
The majority of sub-Saharan Africa’s 48 countries could also achieve middle-income status by 2025 though their dependency on natural resources is likely to continue in the medium term, it added. Shantayanan Devarajan, the World Bank’s chief Africa economist, said that this highlights the need for governments to spend their resource wealth wisely and focus on public investment: “Resource-rich African countries have to make the conscious choice to invest in better health, education and jobs, and less poverty for their people because it will not happen automatically when countries strike it rich,” he said.
Diop said there was an opportunity for “strengthening economic transparency and financial controls around the new discoveries, to leverage their full potential through development policies that increase economic growth, create jobs, reduce poverty, and improve health and education especially for young people and future generations, while balancing the immediate needs.”
The World Bank said that after 10 years of economic advancement, 22 of Africa’s 48 countries have officially achieved middle-income status and another 10 could reach middle-income status by 2025 if current growth trends continue. It warned that recent soaring prices for wheat and corn were a concern, after the worst U.S. drought in 50 years. Africa’s Sahel region is already suffering from higher food prices, high rates of malnutrition and recurring crisis and insecurity. Furthermore, swarms of desert locusts and the ongoing conflict in The Sahel also undermine the region’s food security, including Mali and Niger.
Development gains – poverty and child mortality down
Child mortality has also been declining. Between 2005 and 2008, for the first time the absolute number of people living on $1.25 a day fell, as poverty rates on the continent have been falling faster than one percentage point a year. With fast population growth Africa is urbanizing rapidly and 41% of Africans live in cities, with an additional 1% every 2 years. By 2033, Africa – like the rest of the world – will be a majority urban continent. The bank says this has deep implications for social and economic opportunities as urbanization and development go together and it claims that no country has ever reached high income with low urbanization.
April 24th, 2012 by Tom Minney
A new securities exchange in Lusaka (Zambia) is installing tried-and-tested bond and derivative trading software and says it will be ready to launch operations next month, May 2012. BaDEx has trading platforms that include spot and derivative trading in bonds, currency, commodities (such as derivatives on metals and silo certificates on the spot market) and a variety of other derivatives including agricultural commodities, precious metals, equity and energy.
There is also a central scrip depository system (CSD) with a separate core management, risk solution, surveillance and settlement systems and platforms. The CSD will apparently link to CSDs in South Africa, Europe and the US and with the central Bank of Zambia’s real-time gross settlement system.
BaDEx, also known as Bond and Derivatives Exchange, reports that it was licensed by Zambia’s Securities and Exchange Commission on 1 January 2012 and the licence covers all securities under the Securities Act – bonds, equity, derivatives and commodities. It has signed a contract effective 12 March with South Africa’s STT (www.sttsoftware.co.za, which has also provided the JSE’s bond trading software for many years), for STT to immediately deploy trading, clearing, settlement and surveillance systems, and systems for auctioning government securities that will be suitable for the central bank, among others.
Dominic Kabanje, CEO of BaDEx, told AfricanCapitalMarketsNews that the exchange is a public-liability company owned by “banks, pension funds and private companies including the major securities dealers in Zambia”. He says they started with 6 local stockbroking members (approach stockbrokers Madison Asset, Integral Initiatives, Intermarket Securities, Laurence Paul Investment Services, Pangaea Renaissance, African Alliance Securities for more information) but are also looking for remote members, working with a South African merchant bank.
Mr Kabanje said they are now doing primary listings. BaDEx will start secondary trading using an online, Internet-based platform when the systems go live and are also seeking to partner with an international clearing house. In a press release he said they had been excited for 18 months: “We are glad to have finally concluded and signed the contract with our software systems vendors. STT applications have been tried and tested in the South African financial markets at the Johannesburg Stock Exchange (JSE), who have used this software for the past 18 years.
“We are currently setting up a network of domestic and foreign-based settlement banks, local and remote foreign members and dealers, institutional underwriters, a clearing house as well as primary panels of domestic, regional and international investors. We plan to link up all willing domestic and regional banks, institutional investors, pension funds, treasury departments, the local central bank, the government debt management office and the local member brokers to our system by providing interfaces and online access to our platforms.
“We will also shortly join the international community of CSDs in South Africa, Europe and the United States initially to facilitate faster and smoother clearing of international securities transactions. The applications from STT and others will enable us to do this and in addition will allow us to compete internationally for bond and derivatives business”.
“I do not see any obstacles from the Zambian side for companies wishing to list. Even SA companies can list on BaDEx. We want Zambian companies to dual list on JSE and BaDEx. At BaDEx we are implementing SADC protocols on the free-trade area as well as enhancing intra-regional trade. An exchange is one such conduit for regional trade. We will, however, have to deal with the problem of exchange controls in SA.”
Michelle Janke, STT’s Managing Director, said the company was happy to reach further into SADC: “We have worked closely with the executives of BaDEx for more than a year, and the closely formed relationship will stand us in good stead over the coming months whilst we deliver all the software applications and prepare the new securities market in Zambia to go live. We hope that in due course through an ongoing cooperation between BaDEx and regional merchant banks we can assist in transforming Lusaka into a key financial hub within the SADC region. We will be there to make this happen operationally.”
Products to be traded include: corporate bonds, municipal bonds, currency futures and options, interest-rate derivatives (including swaps), equity derivatives and commodity derivatives on underlying copper, cobalt, gold, oil, wheat, soya and maize spot markets, bond derivatives market, spot bond market, spot and currency derivatives market, commodities derivatives (including metals) and the commodities spot markets (with silo certificates), agricultural derivatives market, spot equity and equity derivatives markets, precious metals derivatives market and energy derivatives market.
April 6th, 2012 by Tom Minney
The making of the market – this article by Dr Eleni Gabre-Madhin, CEO of the Ethiopian Commodities Exchange (www.ecx.com.et) gives a fascinating, self-critical and revealing account of the creation of the exchange and the sometimes breakneck pace at which the market grew and took on new commodities such as coffee. It’s very good, and well worth reading in full, http://www.ifpri.org/sites/default/files/publications/oc70.pdf.
Particularly important is the idea that a commodity exchange will only have traction in Africa if it improves the lives of smaller rural farmers and traders. Eleni puts focus on “the market institutions needed for quality grades and standards, warehouse receipts, market information, coordinated trading, payment systems, and contract enforcement. All of these, I argued, should be established in a holistic and integrated fashion, rather than in the piecemeal approach observed all over Africa in different donor interventions. I pushed further, presenting for the first time the idea that a commodity exchange was precisely the holistic platform that would integrate all of these elements.”
These were the aims of the ECX, according to a 2005 concept paper: “a commodity exchange would build the needed institutions from the ground up for grading and certifying quality, issuing warehouse receipts, trading, relaying market information to all actors, enforcing contracts, and ensuring payment and delivery. But that was not all. Ethiopia’s commodity exchange would be designed to serve smallholder farmers and small traders, it would not exclude those with less education or less capital, and it would balance the interests of all actors and of the public and private sectors. A commodity exchange would not aim to eliminate traditional markets around the country, but rather to build up these informal markets by adding technology and systems to bring more transparent, more efficient, and more reliable trading to all concerned.”
Later she details the achievements, including: “The value of ECX trades has risen by 368% to reach US$1.1 billion in 2010–11 (NB the Ethiopian fiscal year-end is in July, its calendar year in September, due to a different calendar). Our storage operations have grown from one warehouse in Addis Ababa to 55 warehouses in 17 regional locations, and from 5,000 tons to a total capacity of 250,000 tons. In 2010–11, we graded, weighed, stored, handled, and delivered 4.7 million bags without a single delivery default.
“Membership is at 243, and our clients, who trade through our members, number about 7,800. Farmer cooperatives representing 2.4 million smallholder farmers make up 12% of our membership. We have electronically linked our clearinghouse to 10 partner commercial banks, and we settle US$20m or more daily on a “T + 1” basis (that is, the day after trade)— the only stock or commodity exchange in Africa to do so. In other words, anyone can sell to anyone in Ethiopia and be assured of payment the next morning. We have not had a single payment default, shortfall, or delay since our start. This is a financial revolution in itself.
“Our market data reach far and wide. We ‘push’ price data in real time, in less than 2 seconds, to outdoor electronic ticker boards in 32 rural sites; to our website, which attracts visitors from more than 107 countries daily; to 256,000 mobile subscribers through instant messaging; and to the radio, TV, and print media. Users can also “pull” market data through our toll-free phone-in service, which received more than 1m calls in September 2011. That’s 61,000 calls each trading day, of which 70% were from rural users. This is nothing short of an information explosion in Ethiopia, and we are pushing further still.”
She adds that farmers are now getting 70% of the end price, compared to 38% before the ECX, and this means more investment in production and quality, with volumes in some grades tripling. A new financing system means farmers can use warehouse receipts as collateral for bank loans, bringing new financing to rural areas.
Many are interested in potential for commodity exchanges in Africa as a way of increasing agricultural productivity and combating poverty but it is worth recalling that the ECX only launched after nearly 15 years of studies and research both in Ethiopia and other African markets. It shows that big development success stories are not achieved overnight, or without deep thinking and strategy, coordination and hard work, as well as determination to keep going through mistakes, hostility and downturns.
It also shows the a major contribution markets will play in Africa’s coming development.
March 22nd, 2012 by Tom Minney
JOHANNESBURG – The JSE (www.jse.co.za) says it will introduce its third wheat futures contract, with a cash-settled contract based on hard red winter wheat, referencing the Kansas City Board of Trade’s (www.kcbt.com) benchmark settlement prices. The new contract will be introduced on 28 March with expiry dates in July, September, and December 2012 and March 2013.
KCBT President & CEO Jeff Borchardt said: “The Kansas City Board of Trade is proud to be partnering with the Johannesburg Stock Exchange to provide their market users access to our Hard Red Winter wheat futures contract, the global benchmark for bread wheat pricing. JSE’s respected position in global commodities trade made the idea of working with JSE quite appealing. This is KCBT’s first such license agreement with an overseas exchange.”
Chris Sturgess, Director: Commodities at the JSE, commented: “We are very pleased to be working with the Kansas City Board of Trade, which celebrates its 156th anniversary this year. Not only do they have a wealth of experience, we also share their commitment to integrity and service for the market we serve. This also represents a further step toward globalizing South Africa’s commodity markets.” Hard red winter wheat is similar in type and milling quality to South African-produced wheat, which means local market participants can consider this alternative product for price-risk management purposes specific to their wheat exposure.
This is the JSE’s third wheat futures contract and the second international wheat contract, all traded on contract sizes of 50 metric tons. The JSE’s local wheat contract is its second most liquid agricultural product. The JSE listed its first international wheat contract under license from the CME Group in July 2011.
According to Sturgess: “Offering 3 wheat contracts enables traders not only the choice on which product to hedge their wheat-price risk but also through our electronic trading system the functionality to trade the spread between the various markets. This should complement volumes across all 3 product types.”
South African local traders have had access to global commodity markets since 2009, when the JSE signed the first licensing agreement with the CME Group for a corn futures contract. It currently offers contracts on corn, wheat, soybean, soybean meal and oil.
As with other foreign-referenced commodities, Rand Merchant Bank and Nedbank Capital will be market-makers, ensuring active price quoting off the liquidity of the international market. Individual investors and corporate entities are able to invest with no limits. Pension fund managers and long-term insurance funds are subject to their 25% foreign allocation limits. And asset managers and collective investment schemes will be subject to their 35% foreign allocation limits.
Why invest in or trade wheat futures?
Wheat futures provide a way for South Africans to:
- Effectively manage the price risk with a view either on the domestic market or to more easily access the international market via the contract, which will be traded in the local currency
- Hedge or gain exposure based on expectations of directional price, spread movement or volatility in wheat either as an outright position or versus the domestic market
- Realise arbitrage and spread opportunities between the CBOT contract, KCBT contract and the local contract
- More effectively evaluate both the current and future world supply and demand for wheat and the various qualities
- Identify short- and long-term cyclical price and volatility patterns for wheat.
Full product specs can be found at: www.jse.co.za/commodities. The JSE is among the world’s top 20 largest equities exchanges in terms of market capitalisation. It is currently ranked the 20th largest exchange by the Futures Industry Association (FIA) for derivatives
July 25th, 2011 by Tom Minney
Tullow Oil plc (www.tullowoil.com) is expected to start trading on the Ghana Stock Exchange (www.gse.com.gh) from 27 July after allocating 3,531,546 ordinary shares of 10p each in a successful offer of up to 4,000,000 shares. The company says this is the largest primary share offer completed on the GSE and will more than double the market capitalisation.
The offer was open between 13 June and 4 July and shares were offered at 31 Ghana Cedis. During this period, 10,147 valid applications were received for 3,531,546 shares, representing 109.5 million Ghana Cedis ($72.3m). Everyone who submitted a valid application is to receive their shares in full, applicants are to have their GSE Securities Depository Accounts credited with their allotted shares today (25 July) and can start trading the shares on 27 July.
Tullow is also applying to the UK Listing Authority (www.fsa.gov.uk/pages/doing/ukla) to admit the extra shares to the Official List (they rank pari passu with previous shares) and to the London Stock Exchange plc (www.londonstockexchange.com) for the shares to be admitted to trading, also expected for 27 July. The same would apply to the Irish Stock Exchange (www.ise.ie).
Aidan Heavey, chief executive, said in a company announcement: “I am delighted by the success of our offer on the Ghana Stock Exchange, the largest primary share offer ever completed in Ghana. Ghana remains at the heart of Tullow’s investment decisions and underpins our long-term future in Africa.
“I would like to welcome all new shareholders, including Ghana’s National Basic Pension Scheme, to Tullow and thank them for their investment in the company. I look forward to updating all our shareholders with news of our progress, both in Ghana and beyond, over the coming years.”
BLOG PREDICTION: Look out for the rise of African financial institutions such as pension funds and life assurance. What do you think?
June 14th, 2011 by Tom Minney
The Egyptian Exchange (www.egyptse.com) is to introduce new products and trading innovations, including remote orders placed abroad, exchange-traded funds (ETFs), intraday trades and short selling. Mohamed Abdel Salam, chairman of the Exchange, told Reuters that transparency was up and political uncertainty was down in Egypt since the political uprising that overthrew former president Hosni Mubarak and this is bringing more investor confidence.
The trading changes had been delayed as the political mandate of the old government decreased. Some innovations could be introduced in July and talks on remote orders are to resume with the London Stock Exchange (www.londonstockexchange.com) on 20 June.
Mohamed Abdel Salam told Reuters in an interview on 13 June: “There are indicators that show the market is improving because of the revolution. First, it reduced political risk. In the past, things were vague. If the president were to die, would his son take over, or would the army? Many people have started trusting us now, and we are also trying to reduce transaction costs on foreign investors … so I think we will now introduce short-selling and intraday trade in the first days of July.”
He said that companies had been on time in publishing quarterly results, indicating the effects of the revolution on their earnings, and this improved the country’s credibility. In addition, since the changes institutional investors had become more prominent: “The market is becoming more stable, because institutional investors have begun to outnumber individual investors, who used to cause sharp market moves by their emotional trading.” Egypt is one of the African exchanges with very many active local individual shareholders.
He said the aim of the changes is to bring new energy into the exchange: “Egypt’s market is in need of new blood to be pumped in; it needs new products … It is unarguable that this is a main way to increase liquidity and volume.” Previously there had been moves to introduce short selling in 2008 but this had not been introduced in 2010 as scheduled.
Remote orders with FIX
The Egyptian Exchange aims to allow investors to place orders from abroad although trading would still have to be executed through a local broker. Investors could use the Financial Information eXchange (FIX) protocol (www.fixprotocol.org) to place orders and secure the details until the transaction was completed by the broker. The first link was due to be introduced via London in mid-2010, reports the agency, followed by links to centres in the Gulf. The Chairman said the delays had been caused by technical problems at the LSE and talks would resume this week on 20 June.
Another plan is for dual-listings with exchanges such as Qatar, Dubai, Abu Dhabi and Kuwait. Abdel Salam said: “There are Gulf companies that expressed a desire to enrol in the Egyptian stock exchange but I cannot disclose names now.” Several exchanges have been vying to form the centre of Arab trading.
Commodity trading in gold could be established through a fund and talks are on with Egypt’s Chamber of Metallurgical Industries. The Chairman said: “We want to introduce a new way to trade gold called ETC, standing for Exchange Traded Commodities; this should facilitate trading of raw gold, and Egypt is a strategic gold producer, so we should make use of it.”
The Egyptian Exchange was closed from 27 January to 23 March after the popular uprising and it faced turbulence and pent-up demand when it did open. The benchmark EGX 30 Index closed on 13 June at 5,550.22, down 17.5% since the revolution although the trend has been positive since a low of 4,850.41 on 8 May.
February 1st, 2011 by Tom Minney
Cote d’Ivoire has formally reneged on $2.3 billion of Eurobonds, becoming the first nation to default since Jamaica in January 2010. The default comes after the strife-torn West African nation could not pay $29 million of interest which had become due on 31 December, and after a 30-day grace period had expired. However, the market appears to have faith the crisis will eventually end.
The problem stems from a stand-off following an election which all international and African observers say was won by Alassane Ouattara. However, the previous president Laurent Gbagbo has refused to step down and got an internal ruling to disallow hundreds of thousands of votes, meanwhile using the military to blockage Ouattara in a hotel where he is protected by 700 UN peacekeepers.
African states had earlier threatened force to remove Gbagbo, but more recently seem to be settling onto the usual compromise of a shared administration as demonstrated in Zimbabwe and Kenya. This is what Gbagbo seems to have been gambling on from the start, according to his early statements. Meanwhile Cote d’Ivoire hangs on the brink of renewed civil war, hundreds have died and thousands have fled into neighbouring countries.
According to a report on Bloomberg, Alcide Djedje, foreign affairs “minister” in Gbagbo’s administration, said in Addis Ababa, at the African Union summit: “We will be making the payment. We do have the money of course. We have been paying civil servants. I don’t have a date yet but we will definitely pay.”
Bloomberg cites an email from Thierry Desjardins, the Paris-based chairman of the London Club group of commercial bank creditors and vice-president of sovereign debt restructuring at BNP Paribas SA, which said they had not received the debt and this was an “event of default”. The trustee for the bond is Robert Rywkin, the New-York based trustee at Law Debenture Trust Co., and Bloomberg says he said his firm would send out a notice of an event of default “not more than a couple of days later,” once it has assessed the situation.
Surprising price bounce
Meanwhile the bonds price bounced back up. They were 36.25 cents for each $1 of nominal value in trading on Monday (31 January) but up to 40 cents by 4pm today (Tue 1 Feb), according to bid prices quoted on Bloomberg. This may be because the bonds will now trade including any interest that has been accumulated which the buyer can claim, according to Stephen Monks of London stockbroker Exotix Ltd. Bloomberg quotes Aviva Werner, general counsel at the New York Emerging Markets Traders Association said the bonds should, unless otherwise agreed, trade “flat”, which means the buyer doesn’t pay for accrued interest separately from the purchase price of the bonds: “It takes into account they might pay in the next week, month, year, so it’s an all-in price; the buyer is due to all past interest.”
Central bank closed
The region’s central bank, also known by its French acronym BCEAO, said it shut its offices on 27 January in the Cote d’Ivoire’s commercial capital, Abidjan. The Finacne Ministers of the West African Economic and Monetary Union had ordered it not to give Gbagbo access to national funds.
If the situation eases and a new government have access, then Cote d’Ivoire, which exports a third of the world’s cocoa, has sufficient reserves there to pay the interest. Most investors believe there will be funds to repay the bond.
Felix Domaus, of Erste Sparinvest KAG in Vienna which holds the debt in its portfolio fo developing market assets, is reported by Bloomberg: “This coupon is a small payment, it shouldn’t be any trouble to Ivory Coast’s cash flow in a normal situation. Investors will give Ivory Coast the benefit of the doubt, professional Ivory Coast investors are used to the necessity of being patient with this country.” However, he warned that patience could run out: “There will be some point in time when we investors will do something, accelerate payment or whatever.”
Standard Bank Plc in London noted “After some further downside, we believe Côte d’Ivoire 32s will be the best-performing sovereign Eurobond in 2011,” in its African Markets Revealed report on 17 Jan.
Origins of the debt
In 2000, Cote d’Ivoire reneged on $3.5 billion of “Brady bonds”, which were fixed income securities created as part of a debt restructuring plan for developing countries and named after former U.S. Treasury Secretary Nicholas Brady. It issued Eurobonds last April as part of its debt restructuring at a yield of 10.181%, according to Desjardins and data compiled by Bloomberg.
The European Cocoa Association and Federation of Cocoa Commerce Ltd. said there is a “significant slowdown” in flows from the country. World cocoa prices have hit one-year highs.
The previous sovereign debt default was in January 2010 when Jamaica defaulted on its domestic bonds, citing falling tourism and remittances because of the global recession.
January 18th, 2011 by Tom Minney
South Africa’s JSE Ltd (www.jse.co.za) traded 2.1 million commodity derivative contracts in 2010, up 12% on the previous year but still below the record 2.5 mn contracts traded in 2008. The JSE’s Commodity Derivatives market offers grain trading in white and yellow maize, soya, sorghum, wheat and sunflower seed. It also trades metals including gold, platinum, silver and copper and a crude-oil based derivative called the Western Texas Intermediate (WTI), reportedly the world’s most traded commodity.
White maize accounted for 46% of all grains traded on the JSE, wheat accounted for 27% and yellow maize 16%.
The JSE’s head of commodity derivatives, Rod Gravelet-Blondin, said in a press release today (18 Jan) that the local commodity derivatives market continues to attract new participants who aim to eliminate price risks in an increasingly volatile trading environment: “There is far greater understanding among farmers and millers of the uses of agricultural commodity derivatives as a tool to reduce price risk. Because we are a physical delivery market, farmers can lock in prices at the start of a growing season by taking out agricultural commodity derivatives, so that no matter what happens in the course of the year, they will be able to get their Safex price provided they deliver grain to the quantity and quality specified.”
In 2011, the JSE’s Commodity Derivatives market plans to consolidate and build. Gravelet-Blondin says: “That means encouraging new market participants, and continuing to educate people in the benefits and advantages of commodity derivatives.”
Farm productivity soaring in southern Africa
Production is soaring in South Africa and in neighbouring Zambia. South Africa’s maize crop was over 12 million tons in 2010, near a record and helped by relatively strong prices at the start of the growing season, above-average rainfall and better farming practices. Prices are down by about 30% from a year ago, with white maize for delivery in July 2011 now trading at about R1,400 a ton, unusually R80 less than yellow maize, traditionally lower priced and used for animal feed.
Gravelet-Blondin says this is due to: “..a large carry-over of white maize from the previous season, and export demand for South African maize is less buoyant due to improved yields coming out of countries like Zambia. Another factor contributing to the increase in size of the maize crop is the fact that we are now seeing yields of close to five tons per hectare, which is virtually double what we were seeing 10 or 15 years ago. This is due in part to biotechnology, but also to improved farming practices. South African commercial farmers are far more business-minded and professional than was the case 20 or 30 years ago.”
How commodity exchanges reduce risk
Safex was launched in 1995 to provide agricultural commodity derivatives trading as a mechanism to address price risk for producers and users. It started out offering grain futures contracts, but has since expanded its range of traded instruments. It is part of the evolution of risk control. Initially the government used to manage price risks for farmers and millers through price controls. When the market deregulated in the 1990s the price risk moved to farmers and users.
Grains trade on the basis of physical delivery meaning that any contract traded can result in physical delivery to a grain silo in South Africa. However, recently the JSE introduced cash-traded corn contracts, for which physical delivery is not required, which are based on prices set by the Chicago Board of Trade, part of the largest commodities trading market in the world. US corn contracts currently trade at a R450 premium to South African white maize, according to the JSE. These contracts are pure financial instruments which makes them appealing to a broader range of market participants.
Chris Sturgess, general manager at the JSE’s Commodity Derivatives market, says: “The price of South African maize is often correlated to the international prices set in Chicago. But South Africa maize prices fluctuate between import and export parity depending on whether there is a surplus or shortfall of maize. Many traders keep an eye on the spread between US corn prices and South African white maize and look for opportunities to profit from a widening or narrowing of this spread.”
The WTI oil contract can also help companies reduce their fossil fuel costs by buying WTI futures when prices are low. Should oil prices rise, companies will be able to offset higher fuel prices paid at the pump with profits made on the oil futures. WTI contracts on the JSE are traded in rand rather than US dollars, providing greater price transparency for local companies. Sturgess says: “This is something we are encouraging local companies with high fuel bills to explore… Companies can also reduce currency exposure through the JSE’s range of currency derivatives.”
Gravelet-Blondin says there is a greater level of sophistication among commodity derivatives traders seeking opportunities for hedging or profit. For example, it is possible to trade the difference between gold and platinum prices, on the basis that the two prices are correlated and any divergence in the spread provides an opportunity for profit.
January 18th, 2011 by Tom Minney
The new Commodities Exchange of Zimbabwe (COMEZ) is open, but no date is yet set for the start of trading. At the launch on 14 January, Industry and Commerce Minister Welshman Ncube said the exchange would be managed by the State, banks and farmers’ unions, according to a report in Bloomberg’s Business Week.
Zimbabwe previously had a thriving Commodity Exchange, which was closed in 2001 when the Government gave the monopoly on corn and wheat trading to the Grain Marketing Board. COMEZ will end the GMB monopoly, although the State will continue to play a strong role.
Bloomberg quotes Ncube saying: “We should create a transparent, open and accessible commodities market where both buyers and sellers can participate knowing the prevailing prices.”
To start with the new commodities exchange will trade only grains, cereals and oil seeds. The chairman of Comez, Wilson Nyabonda (the previous president of the Zimbabwe Commercial Farmers Union) said that private investors would be able to acquire shares in COMEZ.
Zimbabwe needs 2.09 million metric tons of corn (maize) the staple food according to the UN World Food Programme and the Food and Agriculture Organization, but the last harvest was 1.35 mn mt and 1.68 mn Zimbabweans depend on food aid. The winter wheat requirement is stated at 410,000-450,000 according to some sources, and the harvest was reported at 10,000 mt.
According to a recent report in the businessdigest of the Zimbabwe Independent, agriculture in Zimbabwe is recovering well, particularly tobacco, partly aided by subsidized fertilizer. However, there is a huge need for financing to rehabilitate irrigation schemes and improving farms, as well as supporting the recently settled “A2 farmers”.
There is a trend to set up commodity exchanges, with strong backing from donors. The leader in Africa is SAFEX, the commodities and futures arm of South Africa’s JSE Ltd (www.safex.co.za). Next is the new and fast-growing Ethiopia Commodity Exchange (www.ecx.com.et, trading started in April 2008). There is an Agricultural Commodity Exchange for Africa (www.Aceafrica.org, based in Malawi but serving smaller farmers in 5 countries) and Nigeria has Abuja Securities and Commodities Exchange. ZamACE in Zambia is active (www.zamace.com), followed by Uganda Commodity Exchange (www.uce.co.ug). Malawi and Kenya ACEs (www.kacekenya.co.ke) for the domestic market appear to have run out of donor funding, according to web reports and the Kenyan Government and the East Africa Grain Council are considering a replacement in Kenya. Projects and studies are underway in Ghana and Tanzania and Sudan is watching developments with interest.
Commodity exchanges are part of a move to try to revitalize agricultural productivity in Africa and should be seen as part of a holistic solution, including agricultural extension, support infrastructure for small farmers including quality warehousing, and finance as well as market price information.