South African grain and oilseed producers are operating under severe financial pressure with narrow margins, rising input costs and substantial production risk, and can therefore not afford additional inefficiencies resulting from a location differential methodology that may not adequately reflect the geographic distribution of soybean production and consumption.

Industry body Grain SA says, in this regard, that the JSE's intention to return to a single reference point can create artificial transport assumptions and expose producers in certain production regions to deductions that do not correspond with actual commercial stock movements.

It may also create opportunities for value chain roleplayers to abuse market powers for their own benefit. These distortions become particularly concerning where concentrated market power and access to information could influence physical delivery patterns and basis formation to their advantage.

"These distortions become particularly concerning in a market characterised by concentrated processing capacity and unequal access to commercial information.

"The JSE has announced its intention to return to a single reference point and has proposed replacing Randfontein with Driefontein from the marketing season starting on March 1, 2027. Market participants have been invited to comment on this proposal by August 14," Grain SA states.

For context, the JSE has traditionally used Randfontein as the single reference point for pricing and physical delivery of soybean futures contracts. This predefined location is used to calculate location differentials across registered silos in the country. For the upcoming marketing season, however, the JSE proposed shifting the single reference point to Driefontein.

Grain SA, which supports a multi reference point (MRP) model for the soybean industry, cannot support the proposed return to a single reference point, nor the relocation of that reference point, without a comprehensive and transparent assessment of the potential financial consequences for producers across all soybean-producing regions.

Grain SA will submit detailed comments on the proposal and will continue to advocate for a location differential methodology that is transparent, evidence-based and equitable to all market participants.

REJECTED PROPOSAL

Grain SA did, in fact, propose a MRP model to the JSE for calculating soybean location differentials, but this was rejected by the stock exchange.

For years the JSE called on industry stakeholders to propose credible alternatives to the existing single reference point methodology, which Grain SA says does not account for the geographic variation in soybean demand.

Grain SA, together with independent scientists and technical specialists, then invested time and resources in developing and testing an alternative methodology "supported by independent scientific research, market data and practical analysis".

The organisation explains this methodology sought to achieve a more equitable and accurate matching of demand to supply, with the MRP model having been piloted on the deliverable soybean futures contract over two marketing seasons.

At the time, the JSE confirmed that the model would be assessed against five predetermined criteria and that a technical committee nominated by industry role-players would review the model based on trading activity, including volumes and open interest; the number of active market participants; the management and accumulation of stock in zero-differential areas; the redelivery of JSE silo receipts; and stakeholder feedback and market experience.

Grain SA is convinced that the recommendations of this technical committee were not adequately reflected in the JSE's final decision-making process. The organisation is concerned that the JSE's final decision [to revert to a single reference point] does not provide sufficient and transparent, criterion-by-criterion reasoning against the agreed evaluation framework.

While JSE acknowledged that trading volumes, open interest and physical deliveries improved during the MRP pilot period, it said the improvements resulted from external market conditions and that no causal relationship with the MRP model could be demonstrated.

To this, Grain SA says the available quantitative evidence must be assessed fully and should not be obscured by recent changes to the contract size or dismissed solely because causality could not be conclusively isolated.

Grain SA explains the final notice instead places significant emphasis on challenges relating to the availability of accurate soybean crushing data, differences between crushing facilities, the use of historical information, transparency and divergent views among stakeholders.

While these considerations may warrant further investigation, Grain SA believes they do not constitute a sufficiently detailed or factual explanation of how the model performed against all five of the JSE’s original success criteria.

"The concentration of soybean processing capacity and the resulting imbalance in market power also contribute to information asymmetry. Where critical market information is held by a limited number of participants, producers are placed at a disadvantage and the transparency  and competitiveness of the market may be compromised," Grain SA states.

Grain SA argues that the JSE's decision appears to have been disproportionately influenced by qualitative opinion - with stakeholder feedback having been but one of the five criteria established for the MRP pilot.

The organisation argues that a methodology should not be rejected merely because it is more sophisticated than the existing system. Rather, the appropriate test should be whether it is scientifically sound, objectively measurable, operationally implementable and capable of producing a more equitable market outcome - which Grain SA believes the MRP does.

One reason for possible unbalanced assessments of available evidence of the MRP pilot could be the inability to obtain information necessary for the accurate and effective calculation of soybean location differentials.

Grain SA says confidential information is already used in several regulated market processes and that information asymmetry is a major concern. "More information could have been accessed in an appropriately aggregated and confidential form, to support a more comprehensive assessment, under the Marketing of Agricultural Products Act," Grain SA adds.

The JSE said confidential supply-and-demand information could not be disclosed owing to commercial sensitivity and Protection of Personal Information Act-related considerations. The stock exchange therefore used dated information, Grain SA says, lamenting that appropriate mechanisms could have been considered through which independently verified information could be submitted confidentially to the JSE without disclosing commercially sensitive company-level data.

Grain SA is concerned that when essential market information is concentrated among a small number of value chain participants, producers cannot independently assess whether location differentials accurately reflect commercial market conditions.