Factors Affecting Maize Producers Adoption of Forward Pricing in Price Risk Management: The Case of Vaalharts

Logistic regression is employed to analyse the factors which influence the decision of whether or not the respondent used forward pricing methods during the 2004/05 maize production season. Forward pricing methods include cash forward contracting and hedging with futures contracts and/or options, through the South African Futures Exchange (SAFEX). Based on the results, the use of forward pricing is associated with lower levels of risk aversion and higher levels of human capital. Factor analysis is employed to reduce the dimensionality of the personal reasons which help to interpret the underlying, common factor of the personal reasons why farmers are reluctant to use forward pricing methods. Three factors were extracted and were labelled “Lack of capacityâ€, “Distrust of the marketâ€, and “Bad experiencesâ€. The results from the factor analysis confirm the finding that farmers need higher levels of human capital to use forward pricing methods and that farmers do not believe that the forward pricing market is effective. Education should furthermore, focus more on the practical application of alternative forward pricing methods and not purely on the benefits of the use of forward pricing methods.Forward pricing, Logit, Factor analysis, Agricultural Finance, Risk and Uncertainty,

Impact of capital on the growth process of a sugarcane farm in Mpumalanga

The research was conducted for a representative 50 ha farm in the Onderberg region in Mpumalanga province, where farmers use a combination of centre-pivot, drip, and dragline systems of different sizes to grow sugarcane. The main intention was to establish a multi-period linear programming model capable of economically evaluating a farm's expansion decision-making process for farmers faced with investment decisions in alternative irrigation systems, taking into account the available initial capital of the farm. A linear programming (LP) model was used to assign a mainline for a total of twelve irrigation system combinations based on the assumption that the farmer wishes to start with a 30 ha centre-pivot investment. The Generalized Algebraic Modelling System (GAMS) was used to formulate the farm growth model as mixed integer dynamic linear programming (MIDLP) for a 15-year planning horizon. Based on the results, farmers are initially forced to invest in lower-cost irrigation systems when they lack capital to start a farm business due to the time value of money. They only consider lowering operating costs by investing in capital intensive irrigation systems when they have more own capital or borrowing capacity.Agricultural Finance,

IMPACT OF CAPITAL ON THE GROWTH PROCESS OF A SUGARCANE FARM IN MPUMALANGA

The research was conducted for a representative 50 ha farm in the Onderberg region in Mpumalanga province, where farmers use a combination of centre-pivot, drip, and dragline systems of different sizes to grow sugarcane. The main intention was to establish a multi-period linear programming model capable of economically evaluating a farm expansion decision making process for farmers faced with investment decisions in alternative irrigation systems, taking in to account the available initial capital of the farm. A linear programming (LP) model was used to assign a mainline for a total of twelve irrigation system combinations based on the assumption that the farmer wishes to start with a 30 ha centre-pivot investment. Generalized Algebraic Modelling System (GAMS) was used to formulate the farm growth model as mixed integer dynamic linear programming (MIDLP) for a 15 year planning horizon. Based on the results, farmers are initially forced to invest in lower cost irrigation systems when they lack capital to start a farm business due to the time value of money. They only consider lowering operating costs by investing in expensive irrigation systems when they have more own capital or borrowing capacity.Crop Production/Industries, Land Economics/Use, Research Methods/ Statistical Methods,

A Dynamic Risk Optimization Model for Evaluating Profitable and Feasible Water Management Plans

Currently the South African government is advocating the cultivation of high valued crops and more efficient use of available water resources through the adoption o f more efficient irrigation technology and irrigation scheduling. A requirement of the National Water Act (Act 36 of 1998) is the compilation of water management plans. The main objective of this paper is to develop a multiperiod mathematical risk programming model able of assisting water user associations with the compilation of water management plans that are both profitable and feasible. Special care was taken to represent canal capacities and irrigation system application rates in the model. Risk simulation procedures are used to generate an appropriately correlated inter- and intra-temporal risk matrix for the programming model. A combination of subjectively elicited distributions of crop yield and objective data on crop prices were used to characterize risk. The model was applied to a representative flood irrigation farm in the Vaalharts irrigation scheme South Africa to demonstrate the capability of the model to optimize water use over a 15 year planning horizon. Model results clearly indicated the potential of high value crops and more efficient irrigation technology to soften the impact of water shortages. Furthermore infrastructure, the financial position of the farmer and the level of risk averseness have significantly impacted on the results. Policy makers and government authorities should take cognizance of these factors when evaluating water use efficiency and water management plans of different water user associations. Improvements in the adopted modeling procedure are also made.Dynamic Linear Programming, risk, irrigation, feasibility, South Africa, Resource /Energy Economics and Policy, C6, Q15, Q12,

A Stochastic Budgeting Analysis of Three Alternative Scenarios to Convert from Beef-Cattle Farming to Game Ranching

The main objective of this paper is to evaluate the profitability and financial feasibility of three alternative scenarios to convert from beef-cattle farming to game ranching. The analyses acknowledge the importance of quantifying the probability of failure or success when making investment decisions. Risk is incorporated into a standard net present value analysis using risk simulation. De-trended historical auction prices of live game and on-the-hoof prices of weaner cattle were used to quantify price variability. The stochastic net present value analyses indicate that game ranching is more profitable than cattle farming. Although an investment in a limited number of common game species is financially feasible, the cash flow analysis indicates a decreasing probability of making more money with game when annual cash flows are compared to those generated by means of cattle farming. Both the high-value game species scenarios are financially unfeasible during the first five years. These infeasibilities stem from a high probability of not covering instalments to finance game purchases, the extent to which these instalments are not covered, and the high probability of shortfalls in consecutive years.Game ranching, profitability, financial feasibility, risk simulation, Agricultural Finance, Farm Management, Livestock Production/Industries,

STOCHASTIC EFFICIENCY ANALYSIS OF ALTERNATIVE BASIC MAIZE MARKETING STRATEGIES

The use of modern marketing strategies to minimize risk exposure is not a widely adopted practice under maize producers. The producers tend to use high risk strategies which include the selling of the crop on the cash market after harvested; while the current market requires innovative strategies including the use of Futures and Options as traded on SAFEX. However, due to a lack of interest and knowledge of producers understanding of modern, complicated strategies the study illustrates by using a SERF and CDF that the use of three basic strategies namely a Put-, Twelve-segment-, Three-segment- can be more rewarding. These strategies can be adopted by farmers without an in-depth understanding of the market and market-signals. The results obtained from the study illustrates that producers who tend to be more risk neutral would prefer using the Twelve-segment- or Spot-strategy while a risk averse producer would prefer the Three-segment-, or Put-strategy. It also indicates that no strategy can be labelled as the all-time best and that the choice between strategies depends on risk adverse characteristics of the producer. The purpose of the study is to prove that the adoption of a basic strategy is better than adopting no strategy at all and to convince producers to reconsider the adoption of modern marketing strategies.Marketing strategies, futures, options, SERF, Crop Production/Industries, Marketing,

Measuring the Price Volatility of Certain Field Crops in South Africa using the ARCH/GARCH Approach

The conditional volatility in the daily spot prices of the crops traded on the South African Futures Exchange (yellow maize, white maize, wheat, sunflower seed and soybeans) is determined. The volatility in the prices of white maize, yellow maize and sunflower seed have been found to vary over time, suggesting the use of the GARCH approach in these cases. Using the GARCH approach, the conditional standard deviation is the measure of volatility, and distinguishes between the predictable and unpredictable elements in the price process. This leaves only the stochastic component and is hence a more accurate measure of the actual risk associated with the price of the crop. The volatility in the prices of wheat and soybeans was found to be constant over time; hence the standard error of the ARIMA process was used as the measure of volatility in the prices of these two crops. When comparing the medians of the conditional standard deviations in the prices of white maize, yellow maize and sunflower seed to the constant volatilities of wheat and soybeans, the price of white maize was found to be the most volatile, followed by yellow maize, sunflower seed, soybeans, and wheat respectively. These results suggest that the more risk-averse farmers will more likely produce wheat, sunflower seed and to a lesser extent soybeans, while maize producers are expected to utilise forward pricing methods, especially put options, at a high level to manage the higher volatility.Price volatility, field crops, SAFEX, time series analysis, ARCH/GARCH, Demand and Price Analysis,

Stochastic efficiency optimisation of alternative agricultural water use strategies

Mathematical programming was used to optimise utility efficient deficit irrigation schedules for maize in Vaalharts, based on certainty equivalence assuming an exponential utility function. Total gross margin risk resulting from production risk of alternative deficit irrigation practices was quantified using an irrigation simulation model and stochastic budgeting procedures. Results showed that the portfolio of irrigation schedules for a risk averse farmer may include schedules with high production risk, due to the interaction of resource use between alternatives when water is limited. Owing to the difficulty of implementing the best portfolio of irrigation schedules, the optimised schedules may best be used to benchmark the efficiency of second best alternatives that are easier to implement. Ignoring risk may underestimate the value decision-makers attach to the security of water supply and policy-makers should take cognisance of this result

Stochastic efficiency optimisation of alternative agricultural water use strategies

Mathematical programming was used to optimise utility efficient deficit irrigation schedules for maize in Vaalharts, based on certainty equivalence assuming an exponential utility function. Total gross margin risk resulting from production risk of alternative deficit irrigation practices was quantified using an irrigation simulation model and stochastic budgeting procedures. Results showed that the portfolio of irrigation schedules for a risk averse farmer may include schedules with high production risk, due to the interaction of resource use between alternatives when water is limited. Owing to the difficulty of implementing the best portfolio of irrigation schedules, the optimised schedules may best be used to benchmark the efficiency of second best alternatives that are easier to implement. Ignoring risk may underestimate the value decision-makers attach to the security of water supply and policy-makers should take cognisance of this result.Resource /Energy Economics and Policy,

Factors affecting the use of forward pricing methods in price risk management with special reference to the influence of risk aversion

Risk aversion is the primary reason for farmers to use forward pricing methods to hedge against price risk. Previous international research on farmers’ forward pricing behaviour found inconsistent results with respect to the relationship between risk aversion and the use of forward pricing methods. Ordinary Least Squares (OLS) regression is used in this research to investigate the relationship between the proportion of maize Vaalharts maize producers are willing to forward price and risk aversion. The quantity decision is modelled conditional on the adoption decision to ensure that the modelling procedure does not force the same variables to influence the two decisions in the same way. Regression results showed that more risk averse farmers are forward pricing a larger proportion of their crop produce. The main conclusion from this research is that the relationship between farmers’ risk aversion and the quantity of maize forward priced is consistent with expected utility theory in spite of the fact that farmers needs to be less risk averse to adopt forward pricing. Future emphases should be placed on the factors affecting the adoption of forward pricing as risk management tool in order to promote risk management. Especially research that will change farmers’ perception about forward pricing is necessary