Is the meat industry ready for the derivatives market?

Windhoek: Following numerous consultations between Namibian meat industry stakeholders and representatives from the Johannesburg Stock Exchange (JSE), local producers may benefit from the beef carcass and feeder calve contracts that will be concluded soon, Meatco has announced.

In its latest E-News newsletter, Meatco states that after a recent workshop held by the Johannesburg Stock Exchange (JSE) in South Africa, Raphael Karuaihe: Manager – Commodity Derivatives (JSE), said the event was part of ongoing consultations with players in the beef industry.

“We have since continued to engage industry participants in smaller groups or in one-on-one consultations, and the more we discussed this, the more we got reservations on the proposal to move from carcass contracts to quarters contracts. One of the main concerns is that not all abattoirs will be in a position to provide the quarters’ price information and this may lead to a limited number of participants. Secondly, there was also a general feeling that there is no clearly articulated definition of a ‘forequarter’ or ‘hindquarter’ and so price dissemination may differ markedly from abattoir to abattoir, thereby rendering the whole system vulnerable to market abuse.”

“Given the above and considering the time we have left, the JSE has resolved to go ahead with the original proposal of listing a beef carcass contract for now. In the event where quarter prices are available, it should be used to compile a more accurate carcass price, i.e. use quarter prices to incorporate the deboned carcasses in determining the price.

“Meatco is a major buyer of livestock and processor of beef, and may use the beef carcass contract listed on the JSE for price risk management purposes. The historical prices for A2 and A3 grade carcasses for South Africa (SA) and Namibia have shown a very high correlation. Therefore, even though the beef carcass contract listed on the JSE uses SA carcass prices, Namibian producers and processors like Meatco, can make use of these products or instruments to lock in favourable prices, thereby managing their exposure to fluctuating prices. Just like grains are listed on the JSE for price risk management, our intention is to list beef contracts to help stakeholders manage their price risk,” Karuaihe says.

The Namibian Stock Exchange (NSX) does not have a derivatives market, only an equities market. The beef instruments being proposed here are derivative instruments which are provided by the listing on the JSE.

Meatco can only make use of beef instruments/products listed on the JSE with the main purpose of managing price risk in a drought-prone country such as Namibia with fluctuating prices. This allows for planning and to lock in a good buying price before prices increase.