During negotiations – whether it concerns grain or cattle – the buyer and seller must be on the same page before they can reach an agreement. As far as grain is concerned, it often happens that the buyer focusses on the Safex price, while the seller is stuck on deductions and that can lead to confusion.

To clarify, we will use yellow maize as an example of the Safex market and the physical market.

Safex market:

Firstly, a few macro-economic factors such as parities and the CBOT should be taken into consideration.

Furthermore, the Safex part of grain marketing is to a certain extent separate from the physical market. Since other elements such as speculators and funds also participate in the Safex arena. Funds and speculators will very seldom take positions in the delivery month or the nearby months.

These role players do however create liquidity, to the benefit of everyone in the further months.

If the farmer therefore wants to hedge his prices, the first important factor is the period within which hedging is sought. The delivery month is very important, since it determined from where the Safex hedging will be done.

Let’s take yellow maize as an example, and assume that the seller receives + R 40 more on Safex for a May delivery than for a July delivery (since less maize is expected in May than in July).

This could have as much as a 5% effect on the price and it is therefore important to obtain the correct information about parities, the CBOT and more.

The physical market:

The physical market refers to the physical distribution of grain across South Africa, Africa and the rest of the world.

Let’s suppose the intention this year is to export mainly to the East via Durban. As mentioned, the expectation (according to Safex) is that maize will be more scarce in May than in July and therefor the basis for the exports, namely Durban, should be slightly better for May than July.

What should be considered is whether the pricing month from which the maize is sold (which at first glance appears better in basis terms) was perhaps done from a lower pricing month.

If sold ex-farm, the transportation component is another major factor playing a role in the physical market, since demand is at a peak during harvesting period. Transport cost can increase by up to 10% during this time due to the increased demand for trucks. This can ultimately result in as much as a 1,5% difference in the total price.

If  the grain is however sold from silos, the administrative costs and ability to pay will most likely be the major determining factors.

 In conclusion:

It is often the case that grain sellers do not compare apples with apples during a negotiation, and what is more, they often leave negotiations until harvesting time when all parties are extremely busy. The seller frequently only looks at the basis and not the entire picture, which includes Safex as well as the basis.

The bases of various buyer should trade within a narrow band.

The value of a well-informed Safex decision should not be underestimated: it can easily make a 5% difference to the realised price. It is however often overlooked.

It is therefore advisable that sellers should familiarise themselves with the factors playing a role in the physical market as well as the factors affecting Safex. Take a holistic look at your business to determine which factors have the biggest impact and what the possible value is.

Do attend Rand Agri’s training session and make sure that you compare like with alike when it comes to the marketing of your grain and the comparison of various buyers.

Contact Rand Agri today to book a training session – call 013 243 1166 send an email to info@randagri.co.za.

Article by Johan Gouws, Rand Agri Oilseed Trader