WARMING: Parched earth stretches almost to the horizon in a field near Gujarath, western India, in 2001. Picture: BLOOMBERG
Parched earth stretches almost to the horizon in a field near Gujarath, western India, in 2001. Picture: BLOOMBERG

AGRICULTURE futures on the JSE are likely to reach record heights in the year ahead as the El Niño global weather pattern inverts to La Niña, which is likely to be the opposite of the long, dry, hot spell that tormented the southern hemisphere in the past year.

La Niña is expected to bring cooler wet weather to summer crop areas in the southern hemisphere, but with it also comes uncertainty. Predicting market conditions — as with the weather — can be exceptionally difficult. Investors, however, have the choice to invest in options over futures, giving them some room to manoeuvre in the unpredictable waters.

The drought brought about by El Niño pushed the JSE’s agriculture futures and options market to new heights as many traders attempted hedging strategies. The total value of agriculture futures traded on the JSE in 2015 was close to R731bn, but by June 2016, the number was at about R536bn.

The global supply of yellow maize could be affected if La Niña hits the US summer crop areas and pushes up the price, according to Chris Sturgess, director of commodity derivatives at the JSE.

He says the exchange may sneak past the 2015 record, although he needs a few more months to be certain. Investors are increasingly investing in options over futures as they seek more leeway after being caught off guard by the severity of the 2015 drought.

The more uncertainty in the market, the more likely investors are to pay an option premium and manage the choice, as opposed to committing to a futures price, says Sturgess.

The volume split between futures and options for commodities is 8% higher for futures, Sturgess says, while options are up 14% in June.

The demand for meat has seen South African farmers focus more on the production of yellow maize and soya beans.

Soya bean production has increased from 100,000 tonnes 15 years ago to about 1-million tonnes in 2015, Sturgess says.

The price of white maize for the July 2016 contract stands at R4,4598 a tonne and increases to R4,649.80 for the September 2016 contract. White maize for delivery in December stands at R4,682 a tonne.

For yellow maize, the July 2016 contract is at R3,372 per tonne, while yellow maize for delivery in September is valued at R3,430 a tonne and that for delivery in December is at R3,463. Future and options contracts guarantee that a certain price is set, ensuring that the risks of production are transferred from the hands of the producer to the investor, along with the opportunity to make a profit.

The July 2017 price for white maize has dropped to R3,370 a tonne, which Agricultural Business Chamber CEO John Purchase says reflects the expected average yield for that season.

The price will be near or just below parity, but it will still be an incentive for producers to lock in their crop — or at least a part of it, says Purchase.

The 2015 drought caused a lot of market anxiety, he says. The high prices are a signal to producers to lock in the price, and if they are locked in at the July 2017 price, the price is close to import parity.

La Niña is the term for a natural cooling of parts of the Pacific Ocean, which affects global weather.

It generally brings normal, or greater-than-normal rainfall to southern Africa, according to the SA Weather Service. Purchase says the risk associated with a La Niña pattern and the resultant superb crop is a price for maize of less than R2,400 a tonne.

Purchase says that he expected to see more contracts, particularly for the next season targeting the July 2017 price.

"Financiers are going to put a lot of pressure on farmers to lock in that price. "

Piet Faure, a trader at CJS Securities, says the country needs to import 1-million tonnes of white maize and 2.4-million tonnes of yellow in 2016.

Wandile Sihlobo, the head economist at Agricultural Business Chamber, says the country could fail to achieve its import target for white maize, according to a Bloomberg report.

The effects of La Niña vary across the world. The American National Oceanic and Atmospheric Administration has predicted a 75% chance of the weather pattern taking place. In the US, it is usually characterised by dry and hot weather, which has led to below-average harvests in the past.

In SA, the effects of La Niña are expected to bring rain. Because of that, says Faure, the domestic harvest could jump from 7-million tonnes of white and yellow maize to about 13-million tonnes. Too much rain, however, could affect the yield negatively, he says.

The increase in yield could lead to SA turning from a net importer to a net exporter, shipping yellow maize to Asia and white to Mexico, depending on harvests there, says Faure.

Christo van der Rheede, the deputy executive director of AgriSA, says many farms suffered damage from the effects of El Niño, but La Niña could save a lot of them. Van der Rheede says some farmers became beneficiaries of higher prices by selling supplies they kept from previous harvests.

The AgriSA representative says small-scale and subsistence farmers have been hit the hardest.