Written by Anelisa Matutu, Manager Commodity Derivatives, JSE

Anelisa Matutu

The lamb carcass futures contract was launched on the JSE’s commodity derivatives market in 2017 in response to a need by livestock investors to manage their price risk. The lamb carcass contract is the second livestock product to list on the JSE, the first being the beef futures contract which was listed on the JSE in 2016.

The JSE provides a transparent electronic trading platform which is used for price discovery and efficient price risk management by investors. All derivatives transactions are guaranteed by the JSE’s derivatives clearing house, which is the central counterparty for all derivatives transactions, which means there is no counterparty risk to the investor.

The lamb carcass futures contract enables farmers and abattoirs to (hedge) protect themselves against adverse changes in the lamb price, this means farmers and abattoirs can determine the income they will receive for the meat they produce with certainty.

The lamb contract unpacked

The underlying commodity of the lamb contract is chilled lamb carcasses graded A2 and A3, with a contract size of 1 000kg. Only four main hedging months namely March, June, September and December are available for trading. The derivatives future contract does not allow for physical delivery – it is cash settled with the mark to market price being derived from price data of the underlying physical market.

The JSE has partnered with the Red Meat Abattoir Association (RMAA) to provide spot price information on a weekly basis. These prices are used to determine the final cash settlement price for the futures contract. This ensures the derivative contract settlement price reflects the spot-market price of lamb.

Participation in the futures contract is not limited to hedgers (farmers and abattoirs). The contract is also open to speculators who are interested in benefiting from the price movement of lamb and do not have a link to the physical market. Speculators play a crucial role in the market as they provide liquidity, which allows participants the ability to trade in and out of the market effectively.

Interested investors can get access to the Lamb contract by signing up with a JSE approved commodity broker. With a registered client account open, clients will be protected by the rules and regulations of the JSE. For more details on the list of JSE brokers and their contact details, click here or email commodities@jse.co.za.

Trading system code LAMB
Trading hours 09:00 to 12:00 Central African Time
Contract size 1 contract = 1 000kg
Expiry dates & times (last trading day) Second Wednesday of the expiry month at 12h00.
Quotations Rand/kg
Min price movement Five cents per kg
Daily limits R2,50/kg above or below previous day’s mtm price. Extended to R3,50/kg as per JSE rules.
Initial margin As determined by JSE Risk from time to time referencing the current margining methodology.
Maximum position limits No participant (defined as a member or registered client) or associated group of participants may hold in excess of 835 contracts as a net position across all listed expiries. This position limit may be adjusted from time to time
JSE booking fees R15,13/contract (VAT incl.)

Case study
As an example, the price of lamb is currently R71/kg (as at 18 June 2018). Should a wholesaler believe that the price of lamb will increase, they will protect themselves by buying a futures contract. This is called a long hedge.
When the futures contract expires at a future date in December, the price of lamb has increased to R100/kg. The wholesaler can sell the futures contract they had initially bought at the prevailing market price of R100/kg, making a profit of R29 per kg. Since the derivatives contract is cash settled, the wholesaler will buy lamb in the over the counter (OTC) – unregulated – market at the prevailing market price of R100/kg and use his profits from the futures market to cover the higher price. In essence, the input costs of the wholesaler are left unchanged.

For more information on this and other contracts, phone +2711 520 7675 or visit www.jse.co.za