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basis premiums on a transparent
and JSE guaranteed platform
T
here has been much published about the JSEs reference
to location differentials in order to accommodate physi-
cal delivery in completion of a futures contract, particularly
where a single point is referenced; as well as the need for
improved transparency around basis premiums.
The JSE Commodity Derivatives Market, previously operating un-
der the Safex brand, strives to provide market participants with
a price discovery mechanism and a price risk management facility
through which to manage exposure to adverse price movements in
the underlying cash market and where performance by both coun-
terparties to the contract is guaranteed.
As it is critical to ensure that the futures prices, particularly those
futures contracts approaching expiry, reflect the supply and de-
mand situation in the underlying cash market, the derivatives mar-
ket focuses on providing an efficient and readily accessible physical
delivery platform. The process thereby ensures price convergence
of the cash and futures markets at expiration.
As the South African agricultural derivatives market has matured,
so the exchange’s physical delivery processes have evolved. It
started out with a random allocation process that was tweaked later
with the introduction of a platform where product delivered via a
Safex silo receipt, now known as a JSE silo receipt, was then avail-
able for auction to all interested buyers in the market.
In 2012 there was a move to introduce functionality to allow for ba-
sis premium trading, as an alternative to the physical delivery pro-
cess in completion of a futures contract. Now in 2015, the JSE aims
to extend its reach by introducing Basis Futures contracts on
single delivery points thereby allowing sellers and buyers an oppor-
tunity to agree a premium at a specific delivery point for a future-
dated delivery.
It is important to distinguish between the current spot basis trad-
ing platform and the envisaged Basis Futures contract. The trading
of spot basis premiums referencing JSE silo receipts is an initia-
tive that is beginning to gain more and more traction among market
participants with an opportunity to trade grain at a JSE registered
delivery point as represented by JSE silo receipts at a price over
and above the futures price less the location differential.
Clients who have an interest in taking delivery during the futures
delivery month have an opportunity to bid on preferred locations.
At the same time, clients who have access to physical grain on JSE
silo receipts have an opportunity to offer the stock at a premium
to secure a better basis premium. This provides price discovery in
terms of the spot basis premium and transparency for the entire
grain market to benefit from. It is imperative to note that for efficient
price discovery there must be enough liquidity or trading activity
to ensure a fair representation of the basis premium.
Still not sure what a basis premium is all about? Consider that
grain stored in a silo, bag or bunker site has a different value across
grain of the same quality stored in other parts of the country. What
influences this difference in price is a factor of supply and demand
per delivery point or more commonly referred to as basis. So if you
have grain in an area where there is a high demand for the commod-
ity, this could either stem from a number of buyers competing for
the product or due to limited supply and for logistic reasons buyers
are prepared to pay a premium for the product and a basis premium
comes about for product at a specific delivery point. A basis premi-
um is also something that can vary significantly across the marketing
season as factors influencing supply and demand varies.
In terms of opportunities using the JSE Spot Basis Premium con-
tracts, clients no longer require an existing futures position to
participate. However, should the orders entered be successful, par-
ticipants will either be required to open a futures position during
the remainder of the trading session or alternatively be provided
with an equal short and long futures position when the physical
delivery is processed, that same afternoon after close of the agricul-
tural derivatives market.
Function
Now to explain how the much awaited Basis Futures contract is en-
visaged to function: The trading platform will be extended where
premiums could be transacted with a future-dated delivery obli-
ON FARM LEVEL
JSE / Basis Future contract / Hedges
Money matters
CHRIS STURGESS,
director: Commodities and Key Client Management, Capital Markets, JSE
“
No reference to a
location differential
will be included in
any of the basis
futures pricing.
“
– Basis Futures coming next