Determining the viability of the beef carcass commodity derivatives on the Johannesburg Stock Exchange

Abstract

In the agricultural sector price risk is closely assorted with the climate conditions. In the South African beef market this was very evident in the harsh drought experience in the 2014 to 2015 seasons. The beef price rose with 30 % as the national herds' size declined due to producers having to cull breeding cows. This price volatility led to losses and role players struggled to mitigate risk. The beef carcass future contract was re-enlisted in 2015 by the JSE in hopes that the new cash-settled method will ensure liquidity of the contract. The contract provides role players a way to hedge against price risk. The focus was on the abattoirs and retailers/wholesalers in the beef market. On 19 July 2017 the JSE released a notice where it was confirmed that the trading volume was less than optimal and providing some reasons for this. The solution they proposed was to change the settlement price of the contract to include feedlots. This study aims to understand the South African beef market and why the re-enlisted beef carcass future contract is not trading. The study considers the beef market and prerequisite of a commodity to be successfully traded on a derivative market. The first objective was to investigate the beef commodity and determine whether it can be standardised into a homogenous product. Using the correlation between the beef grades, it was found that it could be. Secondly it was determined by using correlation between price and demand that the beef market operated as a free market. A literature review found that the cash settlement method of the contract did overcome the physical delivery problems. Standard deviation on prices concluded that there is ample risk in the market and therefore a need for a future contract. Lastly, the objectives and the beef market and the newly proposed change to the future contract were tested using semi-structured interviews. In the study the beef market were analysed. The study also found that there is a need for a future beef carcass contract and that the commodity can be traded on a derivative market. The interviews confirmed that the JSE had focussed on the wrong role players when re-enlisting and the change to the contract should include feedlots that indicated that they are going to use the contract. The biggest recommendation was that training should be provided to new users. A limitation of this study is that commercial feedlot owners were not interviewed.