The Johannesburg Stock Exchange (JSE) has been working closely with ZAMACE to prepare the market participants as well as trading and settlement systems to accommodate the trading of futures contract on Zambian white maize, wheat and soya beans.

It has been most encouraging to see the positive commitments from the Zambian Government to allow for the Zambian grain markets to be more freely traded and public commitments to ensure the borders remain open for the flow of commodity will only strengthen the Zambian agricultural sector. The commitments to ensure the involvement of the Food Reserve Agency remains within their mandate to buy up only 500 000 tons is also a huge comfort to the wider market and with consistent Government Policy this will allow for more certainty from the private sector regards future planning and investment into the agricultural grain sector.

ZAMACE continues to play an instrumental role in terms of executing the Agricultural Credits Act of 2010, by authorising warehouses to be able to issue warehouse receipts that will confirm that physical grain is held in the warehouse and can then also be accepted as collateral by the financing institutions. Since the pressure of a large surplus maize and soya crop, the ZAMACE registered storage capacity has also increased substantially and so we trust more and more market participants will also consider placing their stock on warehouse receipts going forward. Contact ZAMACE directly if you have any questions around this process on or want to trade your grains via the spot market.

For the Zambian futures contracts, the JSE is relying on its world class trading and settlement systems to extend these to include the Zambian grains. This also includes the JSE Clearing House that will ultimately guarantee all derivative transactions. This will provide farmers, millers, traders and financier’s access to price risk management instruments like futures and options. Initially the JSE will only introduce futures contracts until such time there is sufficient trading activity (liquidity) to allow options contracts to be introduced.

In essence a futures contract is a standardised contract traded via an exchange that allows a buyer and seller to negotiate a price for a future dated contract. In other words through willing buyer and willing seller, should they agree to trade 1 Zambian white maize contract, they agree the price based on a standardised set of terms, 1 futures contract is equal to 10 metric tons of grain for a specific expiry month, based on a single reference point which will be Lusaka. So if the traded white maize price is $180 per ton, the total contract exposure will be equivalent to 180 X10 = $1800 per contract for grade 1 white maize.  The standard expiry months that clients can select from are March, May, July, September and December. If the buyer and seller agree to trade in the December expiry, that implies they are committed to honour the obligations during the month of December. They will not be able to at freely switch to a September or March expiry unless they trade out of their December contract and into a new expiry month.  So to summarise the futures contract represents a standardised agreement between the buyer and seller who have agreed on the price of a contract that only has a specific future expiry date.

The other concept to appreciate is the underlying reason for using futures contracts. At the outset of the article we spoke about price risk management instruments and it is with these futures contract that buyers and sellers are able to trade and secure a specific price. By locking in the futures price, both participants are then protected from any further price volatility. We appreciate there is the risk that prices may go further up and the seller could have sold at a higher price, but since no one knows exactly what is going to happen to the price down the line, the seller should be comfortable that at the time of sale they were comfortable to protect against any further decline in grain prices. In the same way buyers may argue after trading a futures contract, if the price falls lower they could have benefitted from the lower price if they had not entered into the futures contract, but in the same way buyers using futures contract were concerned about grain price increases and so were willing to commit to the price level at which they traded the futures contract.

I have briefly described to role of the futures contract to ensure price risk management is achieved. It is also important that market participants when considering to use the futures market understand if they going to be hedging or speculating. The difference should be easy to identify, the participant who hedges is able to link back their futures position to their exposure of the underlying physical grain, eg a farmer that produces 60tons of maize and has 2 futures contracts is hedging 20 tons of his crop. A speculator is a participant who does not have any link back to the underlining physical product and rather takes a position to either benefit financially from the upward or downward movement of prices. Again use the example of a farmer that only produces 60 tons, if the farmer sells 10 futures contracts that is the equivalent of 100 tons but since they only produce 60 tons, the farmer is speculating with 40 tons. Speculating comes with a different risk profile and so clients actively speculating should be aware of the risks.

Finally, how can Zambian clients access these futures contract, it is imperative they sign up with a JSE approved commodities broker as soon as possible. With a registered client account open, they will then be protected by the rules and regulations of the JSE. For more details around the list of JSE brokers and also the proposed contract specifications, please visit our webpage or email,za. Don’t hold back, register and open up your JSE Commodities trading account today!