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- The Johannesburg Stock Exchange or JSE-registered commercial storage operators in South Africa adhere to the JSE’s Commodity Derivative Market’s (JSE CDM) rules in respect of stock received via futures contracts. During Agbiz Grain’s annual symposium which will be held from 4 to 7 September this year, this is one of the issues that will be extensively debated by role-players in the grain storage and handling value chain.
- Agbiz Grain members have 333 silos, of which a total of 299 are registered JSE sites and of these, 37 sites can outload their full storage in 30 days or less.
- Storage costs represent a substantial source of income for commercial storage operators.
- Compliance is the gold standard for South African commercial grain storage operators with JSE-registered silos.
The Johannesburg Stock Exchange or JSE-registered commercial storage operators in South Africa adhere to the JSE’s Commodity Derivative Market’s (JSE CDM) rules in respect of stock received via futures contracts. Stumbling blocks beyond the control of commercial storage operators, such as load shedding, could however impede commercial storage operator’s ability to comply with these rules. Given the current situation of increased load shedding and its ripple effect, this is becoming a thorny issue indeed.
During Agbiz Grain’s annual symposium which will be held from 4 to 7 September this year, this is one of the issues that will be extensively debated by role-players in the grain storage and handling value chain. To set the table for those discussions, Agbiz Grain Quarterly asked some role-players for their comments on the issue.
Do note that the editorial committee of Agbiz Grain Quarterly does not necessarily support the views and statements made in this article. We believe that any such statements must be supported by qualified evidence, which an article of this limited extent does not make provision for. We hope to thoroughly debate these issues during the symposium. Also refer to the next article for Agbiz Grain’s position in this regard.
Background
Agbiz Grain members have 333 silos, of which a total of 299 are registered JSE sites and of these, 37 sites can outload their full storage in 30 days or less. There are 216 silos that can do this in 120 days or less, and one silo that will take 364 days to outload (source: JSE).
Silos were designed to store stock over a period of 12 months. The timeous requesting of outloading slots and well-maintained and operational outloading equipment depends on good management by the owner of the grain and the storage operator, respectively. This ensures sufficient access to stock. This begs the question: Is it fair to expect a single silo to outload its full capacity in 30 days?
The JSE facilitates around 20 to 25% of physical delivery of the total grain production in the country. In Agbiz Grain’s view, this is more than sufficient to ensure price convergence for futures contracts. The JSE contract specifications apply only to transactions undertaken through the JSE. Any other transactions undertaken in the spot market are not bound by these specifications.
Access to 25% of outloading slots at storage operators applies only to JSE deliveries and is specifically there to assist buyers taking delivery through the JSE. This ability to secure outloading slots in the next month is supported by Agbiz Grain members.
Grain storage in South Africa
Storage costs represent a substantial source of income for commercial storage operators. Grain trading is a US$120 billion (R2,211 trillion) global industry which is all about the movement of the commodity – a process of which containment and storage are but one step.
“Grain is more valuable outside a silo than inside it, which is why it is referred to as buying grain ex-silo,” says Johann Theron, a portfolio manager at PolarStar Management, a local and international agricultural commodities fund manager.
Hence, commercial storage operators with JSE-registered silos must be quick on the draw when it comes to unloading and outloading grain at silos.
Effective market functioning
“For the free market to function effectively, a buyer must receive stock when he or she presents valid documentation of ownership (such as a JSE silo certificate),” explains Theron. This includes honouring the rules of a commercial storage
operator regarding loading and booking systems.
Dr André van der Vyver, executive director of the South African Cereals and Oilseeds Trade Association, SACOTA, says timeous access to grain is crucial for traders and therefore commercial grain storage operators must be able to unload grain within a fair amount of time.
But what is fair? “In the case of SACOTA’s members, 21 working days could be considered fair; longer than that poses problems,” Van der Vyver says. “The trader may then be compelled to sell such stock (outright or often through re-delivery on the JSE) and buy the stock at a commercial storage operator with a JSE-approved and registered silo that is accessible. The trader must deliver stock to a processor whose mill cannot stand without stock, or an export vessel which cannot afford to wait.”
The reasoning behind timeous grain delivery is the fact that grain prices fluctuate following availability. At certain times of the year, the grain will be scarce (or scarce in premium locations) and therefore buyers plan and buy grain accordingly. “If you are purchasing more expensive grain, you would want to do that while the grain is still in high demand. If you have to wait until grain levels have increased again, the commodity will lose its value.” The owner of the grain will also suffer a loss because the stock cannot be accessed.
While most grain buyers ensure that they have three or four silos from which they can obtain their grain, commercial storage operators with JSE-registered silos have to honour the stipulations of their JSE contracts so that the JSE CDM’s efficiency isn’t undermined, and the value of a JSE silo certificate is not diminished, says Van der Vyver.
A commercial storage operator’s ability to up- and outload grain also impacts producers, says Corné Louw, Grain SA’s applied economics and member services lead. “Any downtime or standing time is a concern.”
When it comes to the JSE’s CDM grain futures contracts, one could argue that grain producers who deliver to JSE registered silos are not affected directly, but it is not that simple, says Louw. “If a commercial storage operator with a JSE registered silo struggles to outload grain on time at that silo, there is the possibility that buyers will ignore the product stored at that silo. This could diminish the value of grain stored in that silo, with a resulting impact on the producers who store their grain there.”
Therefore, standing time has an indirect effect on producers as well. A mature free market that functions effectively is important for all value chain role-players and that implies that sufficient volumes
of grain and oilseeds must be available, should the market require it at any given moment or location. This is especially important in terms of grain and oilseed exports.
Guardrails to grain liquidity
Van der Vyver says the grain value chain comprises various role-players with diverse needs. “For SACOTA’s members, for instance, it is important that grain should be accessible within a reasonable timeframe, as explained previously.”
This is where the rules set out by the JSE’s CDM, formerly Safex or the South African Futures Exchange, come into play, he says. Its role is to ensure a fair market for all involved while facilitating price discovery through transparency, an important characteristic of a mature free market.
One such rule is that a commercial storage operator with a JSE registered silo must be able to unload 500 tons of grain from its JSE-registered silos on any workday. However, it does not specifically refer to stock on JSE silo certificates.
Anelisa Matutu, head of commodities in the Capital Markets Division of the JSE, says all JSE-approved commercial storage operators are audited regularly to ensure their adherence to the rules set out on the JSE’s website (www.jse.co.za/sites/default/files/media/documents/detailed-agricultural-contract-specifications/Detailed%20Agricultural%20Contract%20Specifications.pdf under appendix C and D).
“These rules allow for structure and prevents things from going haywire,” Matutu says. “The JSE knows the integrity of the JSE’s CDM is based on the integrity of the JSE silo receipt. Therefore, the JSE has increased its monthly reporting obligations as well as compliance visits to commercial storage operators with JSE-registered and approved silos. This is all aimed at ensuring that when JSE silo receipts are issued, the required stock quality and quantity is in fact in the silo.”
Consequences of non-compliance
Compliance is the gold standard for South African commercial grain storage operators with JSE-registered silos. However, says Jerry Maritz, managing director at AFGRI Grain Management, there are some problems facing silos, such as Transnet’s infrastructure problems – silos were designed to offload onto railway networks and roads, but due to problems with poor Transnet infrastructure, roads now have to bear 90% of loads.
“Load shedding can limit access to stock in JSE-registered silos,” says Matutu, adding that there is no specific JSE requirement for specific alternative energy capacity per silo. This has an impact on product receiving or dispatching. “This means that commercial storage operators will fall short of the 500-ton-per-day minimum outload requirement. We do, however, appreciate that some, if not all, commercial storage operators are investing in alternative energy supply to assist during load-shedding.”
Matutu says there is a hefty penalty if a commercial storage operator with a JSE-approved silo is unable to meet its obligations as set out in the JSE’s rules. “If an approved silo fails to comply with the JSE requirements for approved silos for any reason whatsoever, the JSE will deregister the silo of the
commercial storage operator with immediate effect.
“In 2021 the JSE added to its contract specifications that buyers taking delivery from the JSE during the main hedging months, have preferential access to 25% of the outloading capacity at commercial storage operators with JSE-approved silos. This was supported by commercial storage operators with JSE-approved silos to enable buyers more certainty when accessing stock delivered per a JSE silo certificate.”
Not all silos are equal
“We need to keep in mind that not all silos are equal. Some are very efficient, and others less so,” says Van der Vyver. “While some commercial storage operators have gone the extra mile to upgrade their JSE approved and registered silos and improve efficiencies, others still need to do renovations.”
In addition, not all silos can necessarily be JSE-approved and registered silos. “JSE registered silos are supposed to set a premium benchmark in the market. This will inter alia include outloading requirements. However, it does not mean all silos should adhere or strive to fulfil such requirements. There is room in the market for everybody,” Van der Vyver says, adding that there is no law stating that a silo of a commercial storage operator must be JSE-registered.
“A commercial storage operator responsible for a specific silo’s management needs to evaluate its unique situation and decide what would be the best option going forward. What we do ask for is a greater degree of standardisation on the outloading side. For example, despite the 500 ton per day outloading JSE CDM rule, there is no requirement as to how quickly
a JSE CDM silo certificate should be outloaded.”
The inclusion of a standardised timeframe within which a buyer can expect to out load his/her grain will assist greatly in re-establishing confidence in the JSE delivery and pricing mechanism.
“While this is an individual issue,” adds Theron, “it might be something to take into account when the JSE storage fees for the next season are determined by the JSE.”
“Issues such as load shedding do have a broad impact on the cost of doing business in South Africa. It is important that these additional costs be addressed for the sake of the entire economic system,” Theron concludes.
The timeous requesting of outloading slots and well-maintained and operational outloading equipment depends on good management by the owner of the grain and the storage operator, respectively.
Van der Vyver lists several other practical issues that could impede a JSE registered silo’s ability to comply in respect of out loading, which include:
- Loadshedding.
- Fumigation.
- Blocked access roads due to flooding, etc.
- Broken equipment (such as bucket elevators).
- Municipal service delivery issues, such as power outages outside of load-shedding schedules.
- Trucks not showing up despite having reserved an outloading slot.
- Delays at off-loading points (processers or harbours) result in slow turnaround times for trucks.
For more information, contact the participants at the following email addresses: Jerry Maritz at jerry.maritz@afgri.co.za, Johan Theron at
Johann@polarstarfunds.com, Anelisa Matutu at anelisam@jse.co.za, André van der Vyver at andre.vandervyver@sacota.co.za and Corné Louw at corne@grainsa.co.za.
