Start your tractors
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-