Drought adds muscle to beef on JSE futures menu
THE JSE launched trading in beef carcass futures in December, which allows buyers and sellers in the industry to hedge their positions, and speculators to take a view on price movements in beef reared in South Africa.
When it designed the futures product, the JSE, in consultation with 77 interested parties from the beef industry, settled on underlying units of 1 000kg for each contract — about four chilled carcasses — of A2- and A3-grade beef.
This beef, most commonly used for human consumption, makes up roughly 70% of the consumer market.
Of the 460 red meat abattoirs in South Africa, 25 members of the Red Meat Abattoir Association currently report cashsettled prices to the JSE, with more abattoirs to contribute their sales prices in the future.
Raphael Karuaihe, commodities manager at the JSE, said: “Every week abattoirs join the contribution list, but it’s not about having a larger number. Many abattoirs are small, so it’s more about the throughput of cattle at the slaughter facility.
“The top 10 abattoirs easily slaughter the majority of cattle in the country.”
Mark-to-market daily pricing will be provided in the same way as the grains futures market, using actual activity or quotes.
Contracts expire four times a year, on the second Wednesday of March, June, September and December, with a two-day grace period before settlement to ensure that anomalies are picked up.
A future is a means of paying for an underlying commodity or asset before the time of delivery, which means the seller will not be exposed to the downside of a fall in price but will also not enjoy profit above that mark.
In an example provided by the JSE, if an abattoir sells a beef carcass contract at R35/kg, and at expiry the cash settlement value it gets for its physical product is R30/kg, its contracts will pay out R5/kg and make up the shortfall.
Similarly, if the price had been R37/kg at settlement, the abattoir would not receive the further R2/kg from its contract.
This is helpful for industry players who seek stability in financial planning, and speculators may also choose to buy contracts to take a position on expected price movements.
Karuaihe said the opening price for beef carcass contracts was R33/kg when the product made its debut in December, but it had spiked to R42 this week — above the spot price of R36/kg — as traders expressed their sentiments about the drought. “People are taking a view of the price in June and whether there will be enough supply of A2 and A3.”
Karuaihe said unusual soft commodity futures were demand driven and not simply added to the bourse as novelty products for speculators.
“We tested the market and found it added value for participants, so we added the product. It’s easy and doesn’t cost us to list a product, but if we didn’t do due diligence from day one the product could lie unused for months at a time.”
The JSE had spent 18 months designing the product with the help of the industry. “They could see the value of the idea.”
These futures contracts will allow beef producers to hedge against price falls by setting an effective price floor below which they will be paid out at contract expiry. In reverse the contracts can be used to protect food retailers who can use a long hedges to protect against sharp price spikes using the cash adjustments from settled contracts.
The minimum price movement in a contract is 5c/kg, with a daily limit of R2.50/kg. The initial margin or “initial deposit” on the contracts is just under 20% of the contract’s exposure.
Although the beef carcass futures product is local, Chris Sturgess, director of commodities at the JSE, said his division started listing cash-settled futures contracts that reference foreign markets in 2009.
“We have energy products like Brent and WTI crude oil, gold, platinum, silver. We also have a number of soft commodity products like US corn or wheat, soya beans and soya meal, so in essence our approach is if there is demand from the market we will consider introducing the product.
“The most recent was the French milling wheat contract traded in Paris, since we see more and more wheat imported into South Africa from Europe. Traders use the local contract to hedge their shipments. We traded 28 000 tons or 560 contracts in this specific product over the past few days.”