Grain SA says more than R600 million in value could be at stake in the JSE’s decision on how soybean location differentials are calculated raising serious questions about who ultimately carries the cost of an inefficient system.
The Johannesburg Stock Exchange (JSE) has decided to oppose Grain SA’s interdict application challenging its decision to discontinue the soybean Multiple Reference Point (MRP) model and return to a Single Reference Point (SRP) methodology.
What is at stake for farmers and consumers?
Grain SA’s analysis shows that the average transport deduction under the MRP methodology is approximately R113 per ton, compared with about R333 per ton under the single-reference-point system.
That is a difference of approximately R220 per ton.
Across the relevant soybean volumes and silo points, Grain SA estimates the total difference at approximately R696 million.
This is money that disappears somewhere in the value chain.
For producers, a higher differential in the JSE futures contract increases the potential for higher deductions from the price they receive for their soybeans in the cash market. At the same time, unnecessary inefficiencies and additional costs in the movement of grain can affect the broader food value chain – from processors and manufacturers through to consumers.
“Farmers are being asked to accept a system that, on our calculations, adds significant costs to the value chain,” says Dr Tobias Doyer, CEO of Grain SA.
“The question South Africans should be asking is simple: if there is a more efficient way to move grain from where it is produced to where it is processed, why should the system allow hundreds of millions of rand in additional cost?”
The difference between the two approaches is straightforward.
The Multiple Reference Point model considers where soybeans are actually available, where processing demand exists and the most efficient route between the two.
A single reference point calculates the differential in relation to one central point, even when the soybeans may, in reality, move in a completely different direction to reach a processor or buyer.
In simple terms: one system tries to find the shortest and most efficient route to market; the other can price in transport that does not reflect how the grain actually moves.
“The principle behind the MRP model is actually very simple: match available grain with processing demand using the most economically efficient route,” says Dirk Strydom of Grain SA. “If soybeans are produced in one area and the natural buyer is significantly closer than the single reference point, it makes little economic sense to calculate the price as though that grain must first move towards the reference point and provide market power with the possibility to abuse prices given the published standard and no transparency regarding premiums in the physical market. That creates a theoretical transport cost that does not necessarily exist in the physical market.”
“When you apply that difference across the market, it becomes substantial. Grain SA’s calculations indicate a difference of approximately R696 million between the two methodologies. That is why this cannot simply be dismissed as a technical debate about a transport differential – it is about whether the pricing mechanism rewards efficient movement of grain or builds unnecessary cost into the system.”
Grain SA believes this creates an unnecessary inefficiency that should concern both farmers and the public.
A farmer already operating under tight margins cannot simply absorb hundreds of rand per ton in additional deductions without consequences. And an agricultural value chain carrying unnecessary costs is ultimately less competitive and less efficient.
“This is bigger than a technical disagreement between Grain SA and the JSE,” says Doyer. If an unnecessary cost is built into the system, somebody ultimately pays for it. The farmer may receive less, costs may move further through the value chain, or both. South Africa cannot afford inefficiency in a food system that must serve both sustainable farmers and consumers.”
Grain SA is therefore asking a straightforward question:
If the more efficient methodology can reduce the calculated differential by approximately R696 million, why should that additional cost remain in the system – and who ultimately benefits from it?
Grain SA remains concerned that the decision to reject the MRP model was not supported by sufficient quantitative evidence and that the agreed evaluation criteria were not adequately addressed.
The organisation believes a decision with such significant potential consequences for producers and the broader value chain requires full transparency and proper scrutiny.
Grain SA is calling for a pricing system that:
- reflects how grain actually moves;
- uses the most efficient route between supply and demand;
- avoids unnecessary costs;
- protects the integrity of price discovery; and
- supports an efficient food value chain for both farmers and consumers.
“Every unnecessary rand built into the system has to be carried by somebody,” says Doyer. “If farmers receive less, their sustainability is affected. If costs are passed further through the chain, consumers can ultimately feel the effect. Neither outcome is acceptable when a more efficient alternative is available.”
Grain SA will continue pursuing all appropriate processes to protect producer interests and promote a fair, transparent and efficient agricultural derivatives market.
Inefficiency costs money. Farmers and consumers deserve better.
