Why producers and traders use it
Harvest is when production loans fall due, and it is often when prices are at their weakest. Selling outright pays the loan but locks in the harvest price. Storing and waiting keeps the price open but leaves no cash. Financing the grain on its silo certificate (also called a silo receipt; in Afrikaans, a silosertifikaat) does both: cash now, and the grain still working for you. Traders use the same tool to carry stock they have already sold forward to a miller or crusher.
One structure, two ways to use it
Both are a repo: a sale and buy-back of the silo certificate. You sell the certificate to Applied Derivatives today and buy it back later, paying back the advance with the interest actually incurred and our fees. What differs is who carries the price. Lock the price with a short SAFEX position and the grain can be financed at close to its full value. Leave it open and the advance is capped at 70% of the grain's value, with the other 30% as a buffer against a fall: the 70/30.
| Hedged repo | 70/30 | |
|---|---|---|
| Paid now | Close to the full value | 70% of the value |
| Price | Locked with a SAFEX short | Open: yours until you sell |
| If prices move | Margin on the short runs through your loan account | Advance kept within 70% of value: top up in cash or grain |
| Getting out | Buy back, or let it deliver against the short | Buy back, or have the grain sold |
| Suits | Stock sold forward, or carried for a spread | A producer who wants the upside |
Between the two sit partly hedged deals, where hedging part of the price lets the advance run above 70%.
The hedged repo: close to full value, price locked
- Hand over the certificate and a short. You sell Applied Derivatives the silo certificate and book a short SAFEX position in a later month over to us, December for example. The short locks in the price.
- Get paid today. You receive the December price less the location differential, storage to the end of the December contract, booking and handling fees, any grade discount and a provision for interest. In effect it is the December price brought back to today's value, which is close to the full value of the grain.
- Margin runs through your loan account. We carry the short. When the market falls, the margin it earns is credited to your loan account; when the market rises, the margin it costs is debited.
- Buy back when you need it. When you want the grain, for example to deliver against a forward sale, you buy it back by handing over a long position to close the short. The buy-back price is worked out the same way as the purchase, with the actual interest in place of the provision and an admin fee added.
- Or let it deliver. If you do not buy it back, the grain is delivered against the short.
Traders use the same structure to carry a spread: take delivery on a near month and finance the grain against a short in a later one.
The 70/30: the same repo, price left open
- Deliver. You deliver grain into a registered silo and receive a silo certificate for it.
- Sell the certificate, keep the right to buy it back. You sell the certificate to Applied Derivatives. No short is booked, so the price stays open: the upside and the downside remain yours.
- Receive 70% now. You are paid 70% of the grain's value, to settle production credit and run the farm.
- Keep the 30% buffer. The grain is revalued as the market moves, and the advance has to stay within 70% of its value throughout.
- Sell when the price suits you. Buy the grain back and sell it, or have it sold from the certificate. You receive the sale price less the advance, the interest actually incurred, and storage, handling and fees. Any margin you paid in along the way counts towards it.
Keeping the 30% buffer
The buffer is not simply used up as the price falls. If a fall pushes the advance above 70% of the grain's current value, you bring it back to 70% in one of two ways: pay in margin, or put more grain on certificate behind the advance. The same rule works in your favour on the way up, because a rally adds to the value the advance sits against.
A worked example: the 70/30
A producer delivers 100 tons of white maize at harvest, valued at R4,000 a ton on delivery, and finances it on a 70/30.
| On delivery | Per ton | 100 tons |
|---|---|---|
| Value on delivery | R4,000 | R400,000 |
| Paid now (70%) | R2,800 | R280,000 |
| Held as buffer (30%) | R1,200 | R120,000 |
A top-up. Say the grain's value falls to R3,700 a ton. 70% of R3,700 is R2,590 a ton, which is R210 below the R2,800 advanced. On 100 tons that is R21,000 to make up: paid in as margin, or covered by putting about 8 more tons on certificate.
Selling. Some months later the producer sells. By then interest on the advance, storage, handling and fees come to R200 a ton.
| When the grain is sold | Price rises | Price falls |
|---|---|---|
| Grain sold at | R4,600 | R3,700 |
| Less the 70% advance | −R2,800 | −R2,800 |
| Less interest, storage, handling and fees | −R200 | −R200 |
| Final payment per ton | R1,600 | R700 |
| Total received per ton | R4,400 | R3,500 |
| Against selling outright at R4,000 | +R400 | −R500 |
| On 100 tons | +R40,000 | −R50,000 |
Round figures chosen to show the mechanics; they are not a quote. In the falling case, the R210 a ton topped up earlier is part of the R700 final payment rather than an extra cost. A real deal is priced for your grain, your silo and your costs, which the desk confirms deal by deal.
The break-even sits at R4,200 a ton: the delivery value plus the carrying costs. The 70/30 beats selling outright only if the grain is sold above that level.
Which structure, which year
No one structure suits every season. Some years favour holding the price open on a 70/30, some favour locking it in with a hedged repo, and some favour an outright sale. The desk reads that from its supply-and-demand, parity and regional-flow work before recommending one. Depending on the deal, the funding comes from Applied Derivatives directly or through a financing partner we arrange. Either way, you deal with us, on the same terms.
The risks
- On a 70/30, the price can fall. You carry the downside rand for rand, just as you carry the upside, and a fall has to be topped up in cash or grain to keep the advance within 70%.
- On a hedged repo, the price is locked. The short protects you from a fall and gives up a rally in the same measure.
- Carrying costs. Interest and storage run until you buy the grain back or it is sold. On a 70/30, the price has to rise by more than those costs before the deal beats selling at delivery.
The rest of the desk
Grain is our specialisation, and financing grain in store sits alongside the hedging we do for producers, mills and feed manufacturers. One Applied Derivatives account reaches all three markets.
Commodities
White maize, yellow maize, wheat, sunflower and soya futures and options on SAFEX. See the SAFEX contract specifications.
Currency derivatives
Ten listed rand pairs, cash settled in rand, with standard and any-day expiries. See the currency derivatives specifications.
Equity derivatives
Index futures on the Top 40, single stock futures and dividend futures. See the equity derivatives specifications.
Common questions
What is a silo-certificate repo?
A sale and buy-back of grain on silo certificate. You sell the certificate to Applied Derivatives today and buy it back when you need the grain. Hedged with a short SAFEX position in a later month, the repo pays close to the full value today: the futures price brought back to today's value after the location differential, storage, fees and an interest provision. If you do not buy it back, the grain is delivered against the short.
What is a 70/30 contract?
The same repo without the hedge. You sell the silo certificate to Applied Derivatives with the right to buy it back and receive 70% of the grain's value now. The price stays open, so the upside and the downside remain yours, and the advance is kept within 70% of the grain's value as prices move. When you are ready, you buy the grain back or have it sold, and receive the price less the advance, the interest and the costs.
What happens if the price falls during a 70/30?
The grain is revalued as the market moves, and the advance has to stay within 70% of its value. If the price falls, you bring it back to 70% either by paying in margin or by putting more grain on certificate behind the advance. Any margin paid in counts towards your final settlement.
Do I still own the grain?
Not while it is financed. Under both structures you sell the certificate to Applied Derivatives and hold the right to buy it back. Under a 70/30 the price risk stays with you; under a hedged repo the short locks the price in.
Which grains can be financed on silo certificate?
White maize, yellow maize, wheat, sunflower seed and soybeans held on certificate in a registered silo, under either structure. Depending on the deal, the funding comes from Applied Derivatives directly or through a financing partner the desk arranges; either way you deal with Applied Derivatives, on the same terms.