The viability of re-enlisting potato commodity derivatives on the Johannesburg Stock Exchange
Hayward, Julie Christy
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A possible technique for all participants within the potato value chain to minimise their exposure to price risk is to use future contracts. The potato contract was enlisted on the South African Futures Exchange (SAFEX) in 1995 however due to market participants not trading the contract frequently enough the contract was removed within a year. The potato industry has changed over the years with the processing industry having expanded and producers facing new challenges. The main objective of this study was therefore to determine if the potato commodity derivative should be relisted on the JSE CDM. In order to determine the viability of reenlisting the potato contract on the JSE CDM an industry analysis was first completed. The industry analysis highlighted the various sections in the industry and the factors that influence the potato industry. An important result was that only a third of the total potatoes produced are sold on the fresh produce market. Following the industry analysis five objectives were outlined to determine whether or not it would be feasible to reelist potatoes were investigated. The first objective was to determine if the potato can be standardised into a homogeneous product. The second objective was to establish whether or not potatoes can be transported and stored for a certain period of time. The third objective was to determine whether or not the potato is a free well-functioning market. The fourth objective was to determine the volatility of the potato price in the four main markets over the last 20 years. The last objective was to determine whether or not the potato contract would be traded by the role players within the industry. The results concluded that the potato is a standardised homogeneous product and potatoes can be stored however the temperatures must not be extreme, the humidity should be around 90 to 95% and the potatoes should not be exposed to direct sunlight. There are numerous storage option avaliable for potatoes such as soil, brown bags and crates. Potatoes can therefore be stored for extended periods of time under the optimal conditions. When the potatoes are being transported and handled they are prone to mechanical damage therefore care must be taken at all times. In Johannesburg, Durban and Cape Town there was a strong negative correlation between price and volume and Johannesburg had a weak negative correlation. Price and vloume were negatively correlated which implied that the conditions of supply and demand influence the market movements. In Pretoria the market did not show a relationship between price and volume, therefore further investigation needs to be done. These result indicated that the majority of the markets are influenced by supply and demand and that the fresh produce market moves freely in most of the markets. The medium potato price fluctuated in the markets of Johannesburg, Durban and Pretoria over time where Cape Town’s volatility remianed constant over time. Therefore in the majority of the markets there was varying volatility. In the interviews it was evident that numerous players said no without having a full understanding of fundamentals of futures contracts. In conclusion it was found that there is a need for the potato contract to be reenlisted on SAFEX however a measure to shirk the informal market needs to be investigated. Role players within the industry need to attend workshops on the concept of JSE CDM and its benefits in managing price risk.