JSE launches lamb carcass futures contract
Johannesburg, 18 May 2017: This week the JSE listed lamb carcass futures contracts on its Commodity Derivatives Market. The purpose of the contract is to allow farmers and abbatoirs to protect themselves against the risk created through movements in the price of mutton.
The creation of the lamb carcass contract comes after the creation of the JSE’s beef carcass contracts, launched in December 2015. The size of the lamb carcass contracts are also 1000kg of A2 and A3 graded carcasses and they are also cash-settled. The settlement price of the contracts are determined by the JSE and information from Red Meat Abattoirs Association (RMAA). This partnership ensures that the cash-settled price of the contract accurately reflects the spot-market price of lamb.
“Over the past two decades the JSE has proven the value the commodity market can provide by helping farmers to protect themselves against price volatility. We have buildt a strong relationship with the agricultural community and are privileged to now be able to respond to the needs of the livestock sector in managing their price risks,” says Chris Sturgess, JSE Director: Commodity Derivatives.
The price of lamb can be very sensitive to consumer sentiment as mutton remains the most expensive meat consumed in South Africa. Consumers are more likely to spend money on meat during certain parts of the year and this can lead to price fluctuations. Factors like the recent drought also impact the number of sheep slaughtered, which also influences prices. The lamb carcass contracts will allow farmers to hedge against the risk created by such price movements.
Wandile Sihlobo, Head of Agribusiness research at the Agricultural Business Chamber (Agbiz), expects prices in the red meat market to remain solid. He says the tougher economic environment should not have an immediate effect on the red meat market, but could start weighing on prices later in the year. “The consumer and economic conditions will become very important within the red meat market this year, because as consumers become more squeezed they tend to shift away from anything that is more expensive.”
Sihlobo says farmers are making use of lower feed costs to rebuild their herds after last year’s drought and farmers slaughtered 11,5% less sheep in March 2017 compared to March 2016. “The drought increased the cost of feed and also forced farmers to slaughter more because they couldn’t afford to keep more of their stock. This means that farmers have been slaughtering less this year.”
“Futures contracts can help to provide farmers and abattoirs with greater certainty about the income they will receive for the meat they produce. This can help to support the mutton industry, which is well-positioned over the medium term to benefit from South Africa’s growing middle class,” says Sturgess.
To focus the liquidity of the contract, only main hedging months of March, June, September and December will be available for listing. The contracts was launched with June and September 2017 expiries available.
ABOUT THE JSE
The Johannesburg Stock Exchange is based in South Africa where it has operated as a market place for the trading of financial products for 130 years. It connects buyers and sellers in equity, derivative and debt markets. The JSE is one of the top 20 exchanges in the world in terms of market capitalisation and is a member of the World Federation of Exchanges (WFE) and holds the chairmanship of the Association of Futures Markets (AFM). The JSE offers a fully electronic, efficient, secure market with world class regulation, trading and clearing systems, settlement assurance and risk management.
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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 lamb is currently at R100 per 1000kg, but a wholesaler who buys lamb 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 lamb has risen to R120. The wholesale buyer 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 lamb at the now higher market price of R120. This means that the higher price of lamb does not affect his input costs.