Redefine the way you look at wheat marketing.

My name is Hennie Visser, I am a wheat farmer (Piketberg, Western Cape) and an architect. I am mentioning my architectural background, because it taught me “to think out of the box”, which let me to develop a new grain marketing platform. This platform is a market instrument for physical grain and will be explained in the next issue of this magazine.

I am responding to an article in this magazine written by Mr. Derek Matthews about SAFEX.

I agree with Mr. Matthews where he said: “Know this, if the farmer doesn’t knows, the market will only give the farmer a price that is good for the market and if the farmer can’t contest it, it will be the price”. Although I think that Mr. Matthews meant well by writing this article, I think he is helping the cause of the buyers. Articles like this make farmers believe they do not have the ability to contest the prices offered to them.

I will support my statement, step by step, with references to Mr. Matthews’ article where he explains the workings of the grain market.

  1. No one can deny that there will always be a cost between the point where the grain is produced and the point it is consumed.” The important thing about this statement is to realize that grain is not consumed at the “market” (SAFEX), but at mills with specific locations. The buyers of physical grain are not located at the “market” and do not want the grain at the market but want it at their respective mills. They will do as much as possible to receive the grain closest to their mills with the least transport cost for them. Remember that imported wheat at the harbor also needs to be transported to their mills.

  2. That price (a fair price) will be determined by a number of factors of which supply and demand is the most important.” This concept of supply and demand has two very important elements which are totally neglected in the current grain market system. These are (a) the specific locations of supply and demand of physical grain and (b) the specific qualities of the physical grain supplied and demanded.

  3. The basis on which the price to farmer is determined depends on the needs of the buyer.” What are the needs of the buyer? He needs a specific quality and quantity of grain at a certain time at a specific location. A farmer must know what these needs are and what the alternatives for the buyer are to determine the value of his grain.

  4. Only when there is a shortage of grain and the buyer is in need will he go the extra mile to get the grain. Only in times of shortage will the buyer offer to pay the transport to his location.” SA has a huge shortage of wheat. SA millers need to import 50% of their consumption this year (2010). So, why do they get to buy the local wheat for less than equal quality imported wheat? GRAIN SA has announced that SA B3 wheat compares with imported German wheat on the bases of protein. If one takes into account that German wheat has inferior baking qualities to SA wheat, why does the B3 grade on SAFEX trades lower than imported German wheat at Randfontein? (refer to attached graph 1 by GRAIN SA).

  5. In South Africa our market (SAFEX) performs a function…” SAFEX is not the “market” for physical grain, less than 10% of all wheat change ownership (gets traded) on SAFEX. SAFEX trades futures contracts, not physical grain; SAFEX is an exchange for future contracts not the market for physical grain. The “market” for physical grain is where it gets consumed. Thus, the market for 450 000 tons wheat of the 750 000 tons in the Western Cape is in the Western Cape. Why are this 450 000 tons bought for less than equal quality imported German wheat? Why is most wheat of the Western Cape bought with a transport differential to Randfontein? (refer to attached graph 2 by GRAIN SA). I think it is because of this non-differentiation between the exchange for paper contracts and the market for physical grain that the grain market developed to reflect such values.

  6. If the mill only offers the price that the farmer would get at the market… he should refuse to sell to the mill and delivered it to the market … the mill would need to bid higher to avoid the cost of fetching the grain from the market.” Where do the millers buy their wheat? Up to now, 30% was imported, 10% was exchanged through SAFEX and 60% was bought on the cash market. Although almost all wheat in SA is bought at SAFEX delivery prices (SAFEX price minus location differential), only 10% are actually delivered and exchange hands thru SAFEX. The 60% bought in the cash market gets mostly done by closing futures positions before their delivery dates and then doing a cash market transaction at a specific location with the owner of the physical wheat ,“the agent”, who is also in charge of the futures positions. Currently, farmers are not aware of this because they usually loose ownership of their wheat when the futures positions are sold and they have no say on the handling of those futures positions that were sold for them. If a SAFEX delivery price gets offered to them, can they actually ask that those wheat are delivered on SAFEX? Ironically there is no easier way for Western Cape farmers to export their surplus wheat out of the Western Cape than to deliver it on SAFEX. This wheat gets allocated randomly to the buyers on SAFEX which results in transport cost for this physical grain to them. Delivery on SAFEX should happen more; this would counter the non transparency of the current cash market system!

  7. Most farmers are not involved with the transaction with the mill, and the agent or co-op does that transaction.” There is a difference between an agent and a buyer. An agent only acts as a go-between and earns his commission on every ton. Most agents in SA are in fact buyers, who use SAFEX as the instrument to buy the wheat from the farmers and then sell it at a profit to the mills. Their motivation therefore is not to get the best price for the farmer, but the highest profit margin for themselves.

  8. Using the published differential the estimated value of the grain in any silo can be calculated… This means that the farmer will need to take his grain to the market and deduct the location differential from the market price to get to a price the buyer will pay.” This assumption is the reason why SA wheat gets bought for less than imported comparable quality wheat and the value of wheat in the Western Cape gets calculated as if every ton is transported out of the Western Cape. (refer to graph 2) SAFEX can never reflect the supply and demand for physical grain at a specific location. SAFEX reflects the supply and demand for futures contracts at Randfontein. To make the assumption that to determine the value of physical wheat at a specific location, is to subtract the transport differential from the SAFEX price, is wrong. This assumption can only be made for those contracts that reaches their delivery dates and for the wheat actually delivered on SAFEX (10% of all physical wheat in SA).

  9. It is a fact that in South Africa some buyers have been exploiting the fact that farmers don’t know what the fair price is, based on local supply and demand and only bid at the market prices.” This is so true. I have tried to explain above how it came about that farmers don’t know what the fair price for them is. No one will ever convince me that our locally produced wheat can be of less value than imported German wheat anywhere in the country. Though, 40% of the wheat produced in SA gets bought for less than the value of imported German wheat. Farmers need to be aware that buyers have only two options for physical wheat: (1) buy the local excellent wheat or (2) import wheat of the quality they need. The local wheat can be bought either (a) on SAFEX or (b) in the cash- (loco-) market. SA Mills cannot bake good quality bread from only German wheat; they always require better quality wheat at any mill.

  10. Farmers should take control of their marketing decisions and the only way to do that is by having all the knowledge.” Knowledge is not the only way! 60% of the locally produced wheat is traded thru the cash market system of which farmers have little knowledge and where they have even less influence. Knowledge of SAFEX and the grain markets are not the only thing farmers need. I believe they need a new marketing instrument to empower them in the cash market environment and to unlock the true cash market value of their grain. A new cash market platform that is transparent and on which farmers can trade their grain at prices based on local supply and demand of physical grain with specific quality at specific locations.

This is what I hope to achieve with this new cash market instrument called FARMEX.

(Written by HW Visser for ADS & AGRI, August 2010.)

August 2010