versão On-line ISSN 2222-3436
versão impressa ISSN 1015-8812
S. Afr. j. econ. manag. sci. vol.13 no.2 Pretoria Jan. 2010
H Jordaan; B Grové
Department of Agricultural Economics, University of the Free State
Price risk associated with maize production became a reason for concern in South Africa only after the deregulation of the agricultural commodities markets in the mid-1990s, when farmers became responsible for marketing their own crops. Although farmers can use, inter alia, the cash forward contracting and/or the derivatives market to manage price risk, few farmers actually participate in forward pricing. A similar reluctance to use forward pricing methods is also found internationally. A number of different model specifications have been used in previous research to model forward pricing behaviour which is based on the assumption that the same variables influence both the adoption and the quantity decision. This study compares the results from a model specification which models forward pricing behaviour in a single-decision framework with the results from modelling the quantity decision conditional to the adoption decision in a two-step approach. The results suggest that substantially more information is obtained by modelling forward pricing behaviour as two separate decisions rather than a single decision. Such information may be valuable in educational material compiled to educate farmers in the effective use of forward pricing methods in price risk management. Modelling forward pricing behaviour as two separate decisions is thus a more effective means of modelling forward pricing behaviour than modelling it as a single decision.
“Full text available only in PDF format”
ASPLUND, N.M., FORSTER, D.L. & STOUT, TT 1989. Farmers' use of forward contracting and hedging. Review of Futures Markets, 8: 24-37. [ Links ]
BAYLEY, B. 2000. A revolution in the market: The deregulation of South African agriculture. Oxford Policy Management. [ Links ]
BOWN, A.N., ORTMANN, G.F. & DARROCH, M.A.G. 1999. Use of maize marketing alternatives and price risk management tools by commercial maize farmers in South Africa. Agrekon, 38(3): 275-301. [ Links ]
BOWN, A.N., ORTMANN, G.F. & DARROCH, M.A.G. 2000. Factors affecting the use of price risk management tools by large commercial maize producers in South Africa. South African Journal of Economic and Management Sciences NS 3(1): 75-96. [ Links ]
CRAGG, J.G. 1971. Some statistical models for limited dependent variables with application to the demand for durable goods. Econometrica, 39(5): 829-824. [ Links ]
DAVIS, T.D. 2005. Forward pricing behaviour of corn and soybean producers. Journal of Agricultural and Applied Economics, April. [ Links ]
GOODWIN, B.K. & SCHROEDER, T.C. 1994. Human capital, producer education programs, and adoption of forward pricing methods. American Journal of Agricultural Economics, 76: 936-947. [ Links ]
GREENE W.H. 2008. Econometric analysis. (6th ed.) Upper Saddle River: Prentice Hall. [ Links ]
GROENEWALD, J., GELDENHUYS, F., JOOSTE, A., BALYAMUJURA, H. & DOYER, T. 2003. Die bemarking van landbouprodukte in die nuwe millenium. Eerste Nasionale Bank Landboudivisie. [ Links ]
GUJARATI, D.N. 2003. Basic econometrics. (4th ed.) New York: McGraw-Hill Higher Education. [ Links ]
HEIJ, C., DE BOER, P., HANS-FRANSES, P., KLOEK, T. & VAN DIJK, H.K. 2004. Econometric methods with applications in business and economics, Oxford University Press: 463-474. [ Links ]
ISENGILDINA, O. & HUDSON, M.D. 2001. Factors affecting hedging decisions using evidence from the cotton industry. Paper presented at the NCR-134 Conference on Applied Price Analysis, Forecasting, and Market Risk Management. St. Louis, Missouri, April 23-24. [ Links ]
JORDAAN, H., GROVÉ, B., JOOSTE, A. & ALEMU, Z.G. 2007. Measuring the price volatility of certain field crops in South Africa using the ARCH/ GARCH approach. Agrekon, 46(3): 306-322. [ Links ]
JORDAAN, H. & GROVÉ, B. 2007. Factors affecting maize producers' adoption of forward pricing in price risk management: The case of Vaalharts. Agrekon, 46(4): 548-565. [ Links ]
JORDAAN, H. & GROVÉ, B. 2008. Factors affecting the use of forward pricing methods in price risk management with special reference to the influence of risk aversion. Agrekon, 47(1): 102-115. [ Links ]
KATCHOVA, A.L. & MIRANDA, M.J. 2004. Two- step econometric estimation of farm characteristics affecting marketing contract decisions. American Journal of Agricultural Economics, 86(1): 88-102. [ Links ]
LIN, T & SCHMIDT, P. 1984. A test of the Tobit specification against an alternative suggested by Cragg. The Review of Economics and Statistics, 66(1): 174-177. [ Links ]
MCNEW, K. & MUSSER, W. 2000. Evidence of farmers' forward pricing behaviour. Working Paper 00-02. Department of Agricultural and Resource Economics. University of Maryland. [ Links ]
MEYER, F. 2005. An alternative tariff dispensation for the South African wheat industry. Bureau for Food and Agricultural Policy Research, Department of Agricultural Economics, Extension, and Rural Development, University of Pretoria. [ Links ]
MUSSER, W.N., PATRICK, G.F. & ECKMAN, D.T. 1996. Risk and grain marketing behaviour of large-scale farmers. Review of Agricultural Economics, 18: 65-77. [ Links ]
SARTWELLE, J., O'BRIEN, D., TIENEY, W. & EGGERS, T. 2000. The effect of personal and farm characteristics upon grain marketing practices. Journal of Agricultural and Applied Economics, 32(1): 95-111. [ Links ]
SHAPIRO, B.I. & BRORSEN, B.W. 1998. Factors affecting farmers' hedging decisions. North Central Journal of Agricultural Economics, 10: 145-153. [ Links ]
STRYDOM, H., FOUCHÉ, C.B. & DELPORT, C.S.L. 2003. Research at grass roots for the social sciences and human services professionals. (2nd ed.) Van Schaik Publishers. [ Links ]
VAN ROOYEN, J. 1999. How relevant will the use of derivative instruments be for maize marketing in the future? Agrekon, 38(4): 659-669. [ Links ]
Accepted September 2009
1 Although Vaalharts has no SAFEX-certified silo, there is no reason why its absence should influence the adoption of hedging methods. At harvest, producers who hedged against price risk using a futures contract could sell their crops in the spot market, after which they could offset the futures position by buying back a similar futures contract prior to the delivery date.
2 The number of farmers initially drawn from the database was slightly higher than 78 to account for subject mortality (Strydom et al., 2003).
3 The fact that only 50 of the respondents actually did produce maize means that the number of respondents is lower than the suggested guidelines for sample size. By implication, the lower number of respondents may lead to possible bias in the results, which may have a negative influence on the ability to generalise the results obtained to the general population of irrigation farmers in Vaalharts. By implication, the results could also not be generalised to be representative of maize farmers in South Africa.
4 Initially the Tobit model specification was compared with a logit and OLS regression model specification. The observation by the editorial board that the Tobit model specification assumes an underlying Probit model led to the adoption of the Cragg model specification.
5 We are grateful to an anonymous reviewer for pointing out the importance of considering production finance requirements on the forward pricing behaviour of farmers.