Grain Price Discovery and Location Differentials in South Africa

Abstract

This paper investigates the price discovery process between white and yellow maize spot prices and their respective futures prices in South Africa's SAFEX market, aiming to understand how futures prices inform spot markets. Building on previous South African studies, it employs the Toda and Yamamoto VAR Granger Causality method to analyze daily time series data for white and yellow maize from July 15, 2009, to March 23, 2023, revealing causal relationships between spot and futures prices. Results show white maize spot prices are Granger-caused by white maize futures prices, suggesting short-run causality and demonstrating price discovery in the spot market. A similar pattern is observed for yellow maize. However, mixed results emerge when futures prices are tested as the dependent variable, showing both bidirectional and unidirectional relationships between spot and futures prices. These findings emphasize the importance of futures prices in shaping spot prices for both maize types; while spot prices reflect fundamentals like supply and demand, futures prices capture market sentiment and external influences, valuable for traders and policymakers. This study adds insights into price discovery dynamics in the South African maize market, with implications for agricultural commodity traders and market analysts through its robust econometric approach.