Maize production in South Africa has seen a steady growth since the introduction of maize futures and options on the then SA Futures Exchange, now JSE Commodity Derivatives.

Prior to 1994, maize (both white and yellow) production was on average about 5,9 million metric tons in a typical year, with yields of about 1,34 tons/ha. Fast forward to 2017/18 and production is about 12,9 million metric tons with yields of about 5,13 tons/ha. There is clearly a structural break in the production of maize since the introduction of derivative instruments in the South African market.

Could it be that the advent of derivative instruments in the local market led to increased production of maize? Apart from advancement in biotechnology over time, perhaps the answer lies both in the history of the development of the SA agricultural sector, as well as in the basic definition of the role of a derivatives market.

A short history of maize marketing

Prior to 1994 the marketing of maize, like all the major grains and oilseeds in the country, was done through the control boards, in this case the Maize Board. Before the beginning of every marketing season, the Maize Board would normally set the price. Because of international isolation at the time, the country had to secure strategic food reserves and this led to the establishment of grain storage facilities across the grain growing belt of the country.

Being the buyer of last resort, the government would typically also guarantee farmgate prices. Such an exercise came at a cost, as the government had to source sufficient funds to honour its obligations at all times.

At the dawn of democracy in 1994, the new government had its own priorities and so decided to deregulate the grain boards. For the first time the South African farmer didn’t know where to market his produce and at what price – things he didn’t have to worry about under the old dispensation. These conditions led to the establishment of the agricultural derivatives market in the country.

Thus the agricultural derivatives market in South Africa was born out of necessity to address a need and fill a void left behind by the deregulated agricultural sector. What this means is that South Africa went from a regulated environment, straight into a derivatives market without having a properly established spot market for grains. No wonder that we have a unique situation in South Africa where the futures price has become the benchmark reference price for the grain cash market. In the rest of the world, futures prices are derived from cash prices.

The role of a derivatives market

Simply put, a derivatives market is a platform where market participants converge for price risk management as well as price discovery. It provides an opportunity for hedgers with inherent interest in the physical underlying commodity, to offlay their risk of volatile commodity prices, while at the same time discovering the fair value of the commodity at any given time.

It is therefore no coincidence that the maize derivatives market has seen exponential growth since the instruments were introduced. Once market participants started to appreciate the role of the derivatives market and the factors that influence their respective domestic prices, they never looked back.

Today we cannot imagine an efficient maize market in South Africa without the use of derivative instruments. It goes without saying that the market makers in the early days provided liquidity that was a necessary condition for the market to kick off and grow to where we are today.

So, can the maize market still grow on the JSE? To provide context to the question at hand, let’s take a look at the graphs below:

Figure 1: Maize contracts traded.


Figure 2: White maize: Times traded.


Figure 3: Yellow maize: Times traded.


Potential for growth

From the graphs we see that the record number of 2,15 million maize contracts traded was in 2015 when we experienced the first year of drought. This represents 63% of all commodity contracts traded that year. It is also clear that the total white maize crop traded a whopping 33 times in 2016, the second year of drought, although the long-term average is around 15 times. This is possible because the JSE storage certificate would change hands multiple times before ultimate outloading of grain from the silos.

This kind of liquidity compares very well with similar markets around the world. The only unknown in this equation is weather conditions going forward. If predictions from agrometeorologists are anything to go by, we can expect increased uncertainty and hence increased trading activity on our platform.

Also, due the fact that the JSE is the only exchange in the world trading white maize, there is more and more interest from international traders wanting to access our market. Add to that the possibility of the JSE creating a commodity index in future, then the possibility of increased trading activity on our platform is almost surely guaranteed.

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