Start your trac­tors

Finweek English Edition - - Communication & Technology - Al­most time to start plough­ing and plant­ing – or buy­ing Om­nia’s shares

THE FIRST thun­der­storms have ap­peared over South Africa’s sum­mer rain­fall area. The farm­ers are ready to fire up their trac­tors and start plough­ing and plant­ing. They just don’t know yet what it will be. The price for both yel­low and white maize for de­liv­ery in July next year – that’s when the cur­rent plant­ing will be har­vested – is around R2 000/t. That’s a lot bet­ter than the for­ward price of around R1 500 to R1 700/t that farm­ers were looking at last year.

But the costs are much higher, the farm­ers com­plain – as usual. They’re right. The cost of es­pe­cially fer­tiliser and fuel is higher, com­pared with a few months ago, when the price of crude oil was still around US$150/bar­rel. Now it’s fallen to be­low $70/bar­rel; but that’s too late for this year’s in­put costs.

Luck­ily, there’s no fu­tures mar­ket in SA on which con­sumers can hedge the fu­ture price of diesel. Oth­er­wise there would have been many red faces now, with fixed prices of R12 or more per litre. The or­di­nary in­di­ca­tions on the mar­ket are that the diesel price could fall by a few more cents per litre to around R9,50, even though the rand is cur­rently dis­turbingly weak.

How­ever, the price of fer­tiliser and even pes­ti­cide will fall too late this year, even though the fall in the price of crude oil should spill over to the in­put costs of es­pe­cially the man­u­fac­tur­ers of fer­tiliser. Keep an eye on their prof­its.

Yel­low maize is now trad­ing at 411c (US)/bushel in Chicago. Mul­ti­ply that by 40 for tons with an ex­change rate of US$1/R10,80 and that gives a gross rand price of R1 775/t. Add at least R400 in han­dling and trans­port costs and it doesn’t look as if im­ported maize will worry SA’s pro­duc­ers too much.

But maize can’t be pro­duced prof­itably at R2 000/t: that’s the firm view of the farmer. And that’s not all. The banks are be­com­ing less keen to ad­vance enough credit per hectare. Es­pe­cially ir­ri­ga­tion farm­ers feel that they must use the lit­tle bit of credit to plant soya beans (for which the in­put costs are con­sid­er­ably lower) rather than maize.

Two prob­lems with soya beans: in the same favourable cir­cum­stances as ir­ri­ga­tion, the po­ten­tial yield of 3t/ha com­pares badly with that of maize. And there’s an­other prob­lem in the cur­rent price of soya in SA. The nutri­tion value of soya is dou­ble that of maize and the price should there­fore also be dou­ble. For ex­am­ple, the cash price of soya in Chicago is now 915c (US)/bushel, com­pared with the 411c for the same quan­tity of maize.

On Safex, the cash price of soya is R3 450/t, as against the R1 793/t for maize – also al­most dou­ble.

How­ever, looking for­ward things don’t seem so good. Maize for de­liv­ery in July next year is fetch­ing R2 000/t and soya beans R3 334/t. The price of soya for fu­ture de­liv­ery is a good R600 to R700/t less than the twoto-one ra­tio that maize re­quires.

That’s a good op­por­tu­nity for the farmer who doesn’t have a trac­tor. It looks like a good trans­ac­tion to sell white or yel­low maize for de­liv­ery in July next year short and then buy half as many tons of soya beans, also for de­liv­ery in July next year.

Those kinds of de­vi­a­tions or dis­crep­an­cies tend to cor­rect them­selves within the sea­son. Even though farm­ers are mak­ing a fuss, say­ing they’re go­ing to plant much more soya this year and less maize, they usu­ally don’t go any fur­ther than just mak­ing a fuss. SA isn’t a good re­gion for plant­ing soya, at least not as good as Brazil or even the US.

The dis­crep­ancy will be partly cor­rected over the next few months and the trac­tor-less farmer may per­haps earn a profit of R200/t on the maize that he’s not go­ing to plant or R400/t on the smaller soya crop that has to be bought on Safex. The ini­tial profit mar­gins nec­es­sary to sell 1 000 t of maize short on Safex and to buy 500 t of soya will be less than R200 000 – just a frac­tion of the pro­duc­tion cost to plant one of those two crops. And then you still earn good in­ter­est of more than 11%/year on the profit mar­gin de­posit.

If you aren’t in­ter­ested in farm­ing or in the dif­fi­cul­ties of Safex there are of course Om­nia’s or­di­nary shares, SA’s only listed fer­tiliser pro­ducer. Om­nia doesn’t only sup­ply prod­ucts for agri­cul­ture, it has three branches: min­ing, in­dus­try and agri-

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