Growing market participation for new JSE agri product
JSE introduces Soya Bean Crush futures contract
Johannesburg, 04 May 2017: The JSE recently launched a Soya Bean Crush futures contract which provides simultaneous exposure to soya beans as well as its processed by-products.
Chris Sturgess, JSE Director: Commodity Derivatives, says the JSE added the new contract to its agricultural market offering earlier this year, following interest from both soya bean processors and commodity traders. He says, “Our clients wanted to be able to trade the entire soya bean crush complex in a single product and so we created an index. The product is showing encouraging levels of market interest, with trades starting to gain momentum and R800 000 in value already traded in April.”
Soya beans are processed into two by-products, soya bean meal and soya bean oil, through a process known as ‘crushing’. The difference between the combined value of these products and the value of the soya beans is called the crush spread and is a measurement of the profit margin for soya bean processors.
The Soya Bean Crush futures complex consists of JSE Soya Bean futures contracts, CME Soybean Meal futures contracts and CME Soybean Oil futures contracts. Sturgess clarifies, “The crush value is traded based on expectations of the future price movement of soya beans compared to the other components of the contract. It allows soya bean processors to hedge against price fluctuations in the value of the crush index to improve sustainability of their business..”
Craig Robinson, MD of Russell Stone International (RSI), which has recently executed the transactions, says the new contract has made hedging much easier. “Before the introduction of this contract you had to trade in South African and American beans and oil, and Argentinean meal in order to hedge meal, oil or the crush spread. This became very expensive. The JSE’s Soya Bean Crush Contract now gives you the ability to hedge your crush by trading in one contract, which makes hedging much easier. It also makes the process more cost-effective for both sides of the market, both buying and selling, by removing a lot of red tape. It also removes the necessity for actual delivery.”
“Soya beans, or soybeans as they are known in the United States, are one of the most important food crops globally today, with applications for both human and livestock consumption. The JSE is proud to roll out this specialised futures contract in the commodities sector in response to demand from our clients,” concludes Sturgess.
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What is hedging?
Hedging means to use an investment instrument to protect yourself against a rise or fall in the price of something – like a currency, share or commodity – you need to buy or sell. Traders make use of futures and options contracts to hedge against these price movements.
Futures derive their value from an underlying asset like a share, gold, maize or soya beans. This is because these contracts represent a legally binding agreement to buy or sell an asset at a fixed price at a future date. This means that the price or value of a future or option moves up and down with the price of the underlying asset. Options give investors the right, but not the obligation, to buy or sell the underlying asset they represent.
To protect themselves against price movements investors do not need to buy a commodity itself. They can simply buy a future tracking it. For example, the price of soya beans is currently at R100 per ton, but a soya bean processor may believe that is going to increase. To protect himself against this increase he buys a futures contract at this price. Three months later, when the future expires, the price of soya beans has risen to R120. The soya bean processor can now sell his futures contract at this price, making a profit of R20. He can use this profit to cover the cost of buying soya beans at the now higher market price of R120. This means that the higher price of soya beans does not affect his input costs.