Bennie Grove

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

Abstract 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.

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

Abstract 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.

Stochastic efficiency analysis of alternative water conservation strategies

Abstract Stochastic efficiency with respect to an exponential utility function was used to determine utility-efficient water-conserving irrigation schedules for wheat and maize based on certainty equivalents. 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 increasing production variability with increasing levels of deficit irrigation, especially when rainfall has significant potential to contribute to the production process. Risk-averse decision makers are more willingly to adopt deficit irrigation schedules for maize due to increased effective rainfall. The conclusion is that the potential to use rainfall more effectively through deficit irrigation is a key variable determining adoption of deficit irrigation strategies by risk-averse decision makers. Localized weather forecasts may improve acceptance of deficit irrigation by risk-averse decision makers. The value of information for weather forecast might be low because of high risk premiums placed on full irrigation by risk-averse decision makers.

Conceptual framework for value chain analysis for poverty alleviation among smallholder farmers

ABSTRACT Despite volumes of research and substantial investments by government, the financial performance of smallholder farmers in South Africa remains poor. The past decade saw little change in the general behaviour of smallholder farmers, and the stumbling blocks faced by smallholder farmers who want to participate in commercial agri-food chains. A possible reason may be that researchers tend to focus on the current behaviour and performance of the farmers while neglecting the influence of the incentive structure on their behaviour. The aim of this paper is to develop a conceptual framework that allows for a more holistic analysis of farmers and their value chains to better understand the reasons underlying current behaviour, and to identify potential solutions to change the behaviour of the farmers and relevant role-players to better match the requirements for successfully participating in competitive agri-food chains. The integrated value chain, New Institutional Economics – Structure-Conduct-Performance framework, does allow for a comprehensive analysis of the incentive structure embedded in the social, physical and institutional environment within which the farmers operate. Special attention is also awarded to the relationship between the farmers and their buyers to identify the appropriate coordination strategy that will minimise transaction costs.

Stochastic efficiency optimisation of alternative agricultural water use strategies

Abstract 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.

Exploring social capital of emerging farmers from Eksteenskuil, South Africa

The objective of this paper was to quantify the levels of social capital of emerging raisin producers from Eksteenskuil, and to explore the relationship between the socio-economic characteristics of the farmers and their social capital levels. The respondents prove to have high levels of social capital. Interestingly, they tend to trust and get along with each other more than they actively participate in organised group activities in the community. Their social capital thus can be said to be more cognitive than structural. Higher levels of social capital were also found to be associated with higher age, experience and education levels of the respondents. Ultimately it was concluded that the complexity of social capital makes it difficult to implement initiatives that will contribute to developing the social capital levels of these farmers. Efforts to stimulate collective action and farmer-to-farmer skills transfer should take cognisance of the role of social dynamics in the behaviour of emerging farmers.

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

Abstract 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 farms 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.

The role of agriculture in welfare, income distribution and economic development of the Free State Province of South Africa: A CGE approach

ABSTRACT This article researches quantitatively two distinctive roles of agriculture in the Free State provincial economy: a buffer role and the role of poverty alleviation using a Computable General Equilibrium model. To examine the capacity of the agriculture sector to act as a “buffer” in the presence of a negative external shock to the Free State provincial economy, two different shocks are considered: an increase in the international oil price together with a decrease in the international gold price and a devaluation of South African currency. In these simulations, the agricultural sector does not play a buffer role of absorbing labour displaced from other sectors. Our hypothesis was that in the presence of a negative external shock, the agricultural sector would be able to absorb, to some extent, the negative impact, especially labour. The argument is that when the rest of the economy suffers a slowdown, people will “migrate” back to agriculture and therefore the agricultural sector will grow and increase its labour demand, alleviating the impacts of the crisis. To analyse the impact of the agriculture sector on welfare and income distribution, an increase in agricultural production, industrial production and other sectors is simulated through increased labour productivity. The results suggest that the agricultural sector plays a significant role in reducing poverty and improving income distribution, but considering poverty the results suggest that the manufacturing sector increases income more than other sectors. Our hypothesis is that growth based on agriculture has a greater impact on poor income households than industrial-based growth. The assumption behind this is that more poor households rely on agriculture than on other sectors.

Factors affecting the price volatility of July futures contracts for white maize in South Africa

Abstract Price volatility in agriculture is important because of the part it plays in the overall variability in profits. South African farmers have to contend with low profit margins, and price volatility therefore affects agricultural producers in South Africa to a considerable degree. The autoregressive conditional heteroscedasticity/generalised autoregressive conditional heteroscedasticity (ARCH/GARCH) approach is used to quantify the volatility in the price of the July white maize futures contracts that trade on the South African Futures Exchange (SAFEX). Volatility tends to increase from December through the early part of May, which makes the timing of marketing decisions important. As a second sub-objective, linear regression is used to identify the factors that cause changes in volatility over time. The release of new information on local and international growing conditions is found to increase the level of volatility in the price of the July white maize contract. Maize producers should therefore take the release of important information into account when developing their marketing plans for the coming marketing season. The usefulness of put options as a price risk management tool is highlighted by the results of this research.

Stochastic efficiency analysis of alternative basic grain marketing strategies

ABSTRACT The use of modern routine marketing strategies to minimize risk exposure is not a widely adopted practice among grain producers. The producers tend to use high risk strategies which include the selling of the crop on the cash market after harvest; while the high market risks require innovative strategies including the use of futures and options as traded on South African Futures Exchange (SAFEX). This is mostly due to a lack of interest and knowledge of the market. The purpose of the study is to examine whether the adoption of basic routine strategies is better than adopting no strategy at all. The study illustrates that by using a Stochastic Efficiency with Respect to a Function (SERF) and Cumulative Distribution Function (CDF) that the use of three basic strategies for each crop type, namely, a Put (plant time)-, (Three-segment-), (Critical Moment in production/marketing process) and Sell after pollination 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 illustrate that each strategy is different for each crop. It also indicates that no strategy is worse than a specific strategy and that the choice between strategies depends on the risk aversion level of the producer. It is imperative to note that the use of hedging strategies is better than no strategy at all.