GRAIN BROKERS
52 | Market efficiency
to the producer, thereby generating cash flow, despite the
option costs relating to such a strategy.
➌ Call options
The producer sells his tons and replaces it with call options.
These options are subject to a cost (option premiums), but the
advantage is that such costs are also the maximum loss that
can be suffered, should the market go into a declining phase.
Maize
A relatively sideways market is expected in respect of maize pric-
es, which may be supported during periods of good exports, but
pressure could also be experienced should the demand for maize
decline at times. (See Graph 1 for seasonal movement). It is there-
fore important to consider the cost of strategies. Possible options
which can be used are:
➊ Future contracts
These types of contracts are mostly used in an own broker
account. A producer uses some of the returns on grain sales
to deposit into his broker account and to buy back futures. The
advantage is that margins can be managed more effectively
and positions can be taken and liquidated in order to benefit
from expected price increases and decreases.
➋ 3-way strategies
These strategies are also done in an own broker account. The
strategy is set up in a manner which ensures low costs, which
means that a relatively small price increase can still result in a
profit. This strategy can generate a set maximum income and
should the market decrease drastically, it would bring additional
risk. The strategy is suitable for sideways markets, but the risk
involved should be well understood.
SUMMARY
There are opportunities to add income, despite low prices, which
can be implemented after physical delivery. This income can make
a significant contribution to your profitability, particularly in the cur-
rent season. You are invited to use the skills and knowledge of the
Senwes grain marketing advisors and brokers.
2003. Both studies determined that it would not be possible to
realise an above average return on capital in these markets,
particularly when the cost of trading was taken into account.
A more recent study by McCullough (2010) did a more com-
prehensive re-evaluation of the white maize market efficiency
with more data at their disposal. Results confirmed that market
prices formed independently from previous market prices and
were accordingly influenced by market participants' interpreta-
tion of new market information.
The question is whether these results can simply be
accepted. The first counter-argument would certainly be that it
is a reality that all available market information is not known by
all at all times. An example is that local information regarding
imports and exports is only reported when it realises, while
such information could have been available to the specific role
players in the market who could have used the information to
their advantage. The second argument would be that resourc-
es such as technical analysis, which make use of historic data
in order to determine trend s, would be of no value. Literature
over time investigates these aspects by means of, inter alia,
a wealth of research which found proof against and in favour
of market efficiency. It would then seem as if there is no deci-
sive answer on the theoretic aspects of price formation or the
impact of inefficient markets on price formation.
However, the reality is that both supporters and opponents
of market efficiency had to take a step back over time and
consider the other's point of view. A midway conclusion can
be formulated as follows: Markets which are mostly liquid,
such as the JSE agri-products market, and which respond
according to new information, as found in specific research,
offer an effective platform to role players to apply price man-
agement. The market can move through phases of lower effi-
ciency levels at times, which can be adjusted by the market
mechanism. The faster the adjustment takes place, the more
efficient the market will be. The following logical step would
be to determine what the best or more optimal price approach
should be when price management is applied in a market
which can move through phases of lower efficiency.
In a future article we will be looking at possible hedging strat-
egies, as well as certain principles of hedging which can be
borne in mind at all times.
SENWES SCENARIO | WINTER 2018
55