JSE introduces new wheat contract

7 July 2011

The Johannesburg Stock Exchange (JSE) has added a foreign-referenced wheat contract to the portfolio of commodities it offers under licence from the CME Group.

The new contract, based on soft red winter wheat of the Chicago Board of Trade, a different quality standard to the South African produced wheat, provides local market participants with an alternative product should they see trading opportunities arising on this international benchmark.

The contract was introduced for trading on 5 July, with the following expiries: September 2011, December 2011 and March 2012.

“Wheat is appealing as an investable asset for several reasons: as a staple crop it is an important component of everyday life across the globe and used in a variety of foodstuffs,” JSE senior general manager for commodities Rod Gravelet-Blondin said in a statement this week.

“Our existing wheat contract is the JSE’s second most liquid agricultural product, so it not surprising that we received several requests to include an internationally referenced, rand-settled contract on wheat.”

Managing commodity and currency risk

The ongoing relationship with the CME Group, one of the world’s leading and most diverse derivatives exchange, has meant that local traders have had access to global commodity markets since 2008.

“It’s important for global market participants to be able to manage both commodity and currency risk,” said Tim Andriesen, MD of agricultural products and alternative investments for the CME Group.

“Supporting the JSE’s work to develop rand-denominated products indexed to our benchmark futures provides an extremely effective hedging tool for producers, storage and shipping companies, and others in the agricultural supply chain.”

Concerns on global output

The current range of foreign-referenced soft commodity contracts under license from the CME Group includes corn and a soybean complex. The product will reference pricing from the Chicago Board of Trade, which is operated by the CME Group.

With a contract size of 50 metric tons, the product mirrors the existing local wheat contract including the same set of expiry months.

“A recent trend indicates an uptake in wheat futures based on concerns that dry weather could reduce global output,” said Gravelet-Blondin, adding that further demand from emerging markets could also drive the price of wheat higher.

“With these increasingly volatile commodity prices, access to reliable risk management tools is essential.”

Easier access to investment

For those who wish to include in their investment portfolios an international wheat position, the locally listed contract will make it easier for them to gain access.

Similar to the other foreign referenced commodities already active, market makers namely ABSA Capital, Nedbank Capital and Rand Merchant Bank will ensure active price quoting off the liquidity of the international market.

Individual investors and corporate entities are able to invest with no position limits. Pension fund managers and long term insurance funds are subject to their 25% foreign allocation limits. And asset managers and collective investment schemes will be subject to their 35% foreign allocation limits.

CME Group and the JSE also have an existing license agreement for gold, platinum, copper, silver and WTI crude oil.

SAinfo reporter

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