Agri Value Chain Virtual Discussion Series - The SAFEX differential

Frans Dreyer gives a background of the free market system. “It is important to know where we come from to understand why certain decisions were taken and why market structures evolved the way they did.” Frans gives a brief history lesson dating as far back as 1937 when the single-channel market system was established. He details different key events that took place and the change experienced in the agricultural market that led to the current market systems operating as they do today. “I believe that the main aim was always to ensure that the free market price-setting mechanism can function effectively.”

Chris Strugess talks about the evolution of the free market and its purpose to provide the market with important price management mechanisms. “The main focus was to establish a platform where willing buyers and willing sellers can trade.” He says that the market evolving over the years has enabled us to see increased liquidity. “The JSE where it is now has been fortunate to be recognised globally as a market that has sufficient liquidity.” He states that it is important to understand the difference between a derivatives exchange and a physical market. The SAFEX market is registered as a derivatives exchange. He goes on to clear up the differences in detail.

Luan van der Walt speaking from a Grain SA’s point of view, talks about how the market system changed over time is a notable issue. “In 2017, we saw that the processing capacity of maize and wheat has changed drastically over time. They are now more widely distributed.” He says that this information helps to compartmentalise this information and see how it can be used to get to a better market system. The formula of calculating the location differential was also a hotly contested issue and Grain SA was invested in trying to get this calculation to be as accurate as possible. “The function of the JSE is to establish the price forming and the risk management part of the market. We are thankful for that.” Picking up from what Chris said, he highlights the problems with the spot price and how it can negatively affect the market.

Stephan Kruger joins in the discussion on behalf of producers and talks about the imperativeness of food security and how it cannot be maintained at the cost of profitable production on the side of the producers. He comments on the differences between road and rail transport and the pitfalls facing each mode of transportation. “Liquidity cannot survive without profitable production. These go hand in hand. We should have a combined outlook in identifying the issues at hand.”

The success of the South African agricultural industry is built of the competitiveness of the value chain and Dr John Purchase reiterates the importance of including and listening to farmers in conversations such as Stephan. From the milling procurement side, Tjaart Kruger tells viewers about the problems faced in the transportation of the product from producers to millers to consumers. “What we do understand is that the structure that we have come up with over the last 20 years serves us best. However, wherever we can fine-tune the system we should.” He talks about the economic value of location as a factor in setting the price and calculating the location differential. He agrees with farmers that differentials are not properly calculated with the correct amount of logic. “I do think that the system works. Could it work better? Probably.”

Johan Strauss unpacks the issues in the system and offers insight on how we can improve the mechanism within the system. “When I started my research on this I realised that everybody had opinions on location differentials, but no one had facts. It was really important for me to quantify any results and not just making broad statements.” He lets viewers in on his research and the various findings. “Our results show that re-delivery differentials are by far the best system for South African maize.”

Francois gives the last word on the insightful discussion. He states that the aim of these conversations is for people to listen to each other. He stresses the importance of being analytical and making sure that any changes that are made, must be changed for the better.