How the maize market functions
This article is the third of a four-part series that attempts to explore the fundamental factors that have an impact on the maize market. It will focus on spot price determination and the role of a location differential.
The spot price refers to the price paid for a commodity at Randfontein (ex-silo prices). The spot price is determined by deducting transport costs from the Safex price at every registered silo. For maize, there are multiple contracts listed on Safex. The only difference is the date of expiry. One of the contracts traded on Safex will always have an expiry date equal to the current month. For example, a May 2021 contract expires on 24 May 2021. The contracts trade at different price levels, with the closest expiry date trading at the highest price. However, this applies only to current crops. With the new season commencing, contract prices for the new season crop might differ completely.
To standardise the “place” from where the contract is priced or traded, Safex operations use the location differential, with the predetermined point as Randfontein. Since all Safex prices are Randfontein-based, this means that if a producer can deliver or a miller can accept delivery at Randfontein, they will receive or pay the Safex price for the delivery month contract (the spot price).
Since delivery occurs at points across the different producing regions, spot prices are based on a Safex adjusted price. For example, if the transport costs between Randfontein and the silo of choice for the producer is R90/ton, the delivery price for the producer will be equal to the Randfontein price (contract price for the delivery month) minus the R90/ton transport cost. The buyer will now collect the maize from that particular silo at Safex price minus the R90/ton. These transport cost differentials are calculated yearly and found on the JSE website. The area differential is determined based on a weighted average transport cost by road and rail. The areas that make more use of road transport will have a larger proportion of road transport in the calculation.
The basis (transport differential cost and handling fees) is an indication of spot price levels at the different registered Safex silos. The farmer can use it in his attempts to sell his maize. He is not forced to sell his maize for a price under Safex less basis. If he cannot find a buyer willing to buy at that price level, he can deliver his maize to the registered Safex silo, obtain a silo certificate and present it to Safex for payment. The problem with basis trading is farmer’s access to this level of information. The local co-operatives or local maize buyers can fulfil this important function. Safex provides farmers with an opportunity to hedge their crop as well as an opportunity to bargain for a guaranteed minimum price in the local market.
Farmers are encouraged to familiarise themselves with the supply and demand situation in their production area to get additional premiums for their product. These premiums are not standardised and are negotiated between the seller and buyer on each transaction. The differentials simply standardise the pricing of a futures contract to one reference point. In cases where local demand exceeds local supply, due to either a crop shortfall or a nearby processing plant, the difference between the basis and the Safex price may be less than the transport margin or even exceed the futures market price. If local supply exceeds local demand, the basis gives farmers a clear indication of what a representative spot price of maize at a specific location should be.
Publication: May 2021