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July2014
the physical market throughout most of the year. The supposition
that can be made is that they do not need a formal Safex hedging
strategy. Their pricingmethods strive toobtain an average seasonal
price. The other half are more inclined to focus on certain time
periods, hoping to cherry-pick somebetter prices.
Producers hedgingdirectly onSafex
This sectiondealtwith the coreof the survey. Theproducerwas first
askedwhether he currently has or whether he has ever had a Safex
account.
37% of the producer respondents indicated that they had (or still
have) a Safex account. Their viewwas not quite supported by the
traders and agri-businesses if factored in over all of the Western
Cape. If the viewof the producers and those of the traders and agri-
businesses are combined, an estimated 10% - 20% of producers
across the grain producing areas of the Western Cape had Safex
accounts.
The survey then endeavoured to determine the trading activity of
the37%of respondents (that indicated that theyhadopenedaSafex
account). This was done by establishing if there was an increase,
decrease or no change in the active participation.
Graph 1
depicts
the response. 79% of once active Safex account holders said that
their activities decreased. Of these account holders, 91% stopped
trading altogether.
This was entirely supported by the traders and agri-businesses.
A trader active in the Southern Cape stated that “there are only
five producers on their books that hedge” and according to an
agri-business, the number was “less than 5% in total”. Another
institutional respondent estimated current producer participation in
theWesternCapeat 5%ofwhichalmost all arespeculative innature.
A trader and an agri-business active in the Swartland, estimate
participation (limited to a specific area) at “one producer” and “5%
of whichonlyoneproducer hedges”.
Cognisance should be taken of the fact that all traders and agri-
businesses stated that they themselves have activeSafex accounts.
Reasons for the decline indirect Safex
participationby producers
Having determined that producer participation has declined steeply
over time, the survey then strived to identify the reasons for this
trend. Respondents were asked to identify the reasons why their
participationdeclined.
They indicated cash flow requirements as the single biggest reason
why producers have reduced (and completely stopped) their
participationonSafex. The initial andvariationmarginswere the first
and thirdmost important reasons given, respectively.
The secondmost important reason that producers picked, was that
a producer could achieve the samebenefits andmore than couldbe
obtainedby tradingdirectlyonSafex, bymakinguseof the services
offered by the grain traders and agri-businesses. Although not
included in the survey questionnaire completed by producers, the
interviewswith tradersandagri-businesses identified theseservices
as follows:
Hedging on the trader’s account makes it unnecessary for the
producer toopenhis own account.
The traderwouldpay the initialmargin.
The traderwouldpay the variationmargin, if applicable.
The trader offered various types of contracts, including fixed
price, minimum price, minimum/maximum price and sell now/
price later.
Financingof grain.
Option strategies similar to those that could be achieved on
Safex.
Access tomarket reports that analyse events andprice trends.
The opportunity for one-on-one discussions/consultations with
the trader/agri-business todetermine a strategy.
Other aspects that were highlighted by producers as reasons to
rather work through traders or brokers, were the exposure to high
price volatility on Safex, which goes hand in hand with short term
cash requirements. Skills required to trade on Safex was rated
second last,whilebroker commissionsdonot seem tobean issueat
all, since it was rated last.
Graph 1: Change in trading activity.
SAGrain/
Sasol Nitrophoto competition
