Senwes Scenario June/July 2018 - Page 57

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