Factors influencing farmers' choice amongst various marketing alternatives for maize in South Africa.

Abstract

A postal survey was conducted in 1998 amongst a sample of 800 National Maize Producers' Organisation (NAMPO) members in the major maize producing regions of South Africa, namely the Northwest Province, Mpumalanga and the Free State. Study objectives were (1) to measure the extent to which large-scale commercial maize farmers were using, and intended to use, alternative maize marketing strategies which have evolved since the abolition of the Maize Board in 1996, and (2) to identify the business and personal factors influencing their use of price risk management tools (forward contracts, futures contracts, and options). The average age of respondents was 47 years. Respondents had a mean of 24 years farming experience and 14 years of formal education. They grew an average of 918 ha of maize annually, whilst mean annual turnover per farm was R 2.9 million, of which 68 percent was derived from maize. Seventy-two percent of respondents reported owning a personal computer for use in the farm business, and of these, 37 percent had Internet access. Farmers generally rated their skills in marketing management lowest relative to other aspects of management. Respondents had a better understanding of forward contracting than the more complex concepts of Futures contract and Options trading on the South African Futures Exchange (SAFEX). Most respondents used a portfolio of maize marketing channels in order to spread price risk in accordance with a sequential marketing strategy. Results indicate that sample maize farmers are making increased use of the forward contracting market relative to the spot market, while on-farm use of maize is also increasing. Both the percentage of respondents using SAFEX and the percentage of the value of the annual maize crop in the sample regions that was hedged on SAFEX increased markedly over the three-year study period. The hedging ratio - defined as the ratio of the crop hedged to that unhedged - rose from 27 percent in 1997/98 to 49 percent for 1998/99 and a projected 50 percent in 1999/2000. Amongst maize marketing intermediaries, elevators (eg. cooperatives and former cooperatives) handled approximately half the value of the annual maize crop in the study areas, and commercial users (eg. Millers) directly bought 15 percent of respondents' maize. Small traders/agents handled roughly 10 percent, and large traders (eg. Louis Dreyfus) another 10 percent of study farmers' annual maize crops. No users of currently operating Internet-based maize trading systems were identified. Survey respondents were classified as lower- and higher- level users of price risk management tools, based on their scores for an index of price risk management use. The index took into account three aspects of price risk management behaviour exhibited by sample respondents: the use of forward pricing mechanisms, the number of different marketing channels used, and the relative proportions of the producer's annual crop passing through these channels. Higher-level users of price risk management tools tended to operate larger farms, and be younger, less experienced, but more educated, computer adopters who were less likely to individually own their operations. Ordinary Least Squares (OLS) regression was used to estimate the effects of respondents' business and personal characteristics on their scores for the index of price risk management. The use of maize storage facilities, off-farm employment, use of formal crop insurance, operators' number of years of formal education and the proportion of farm turnover arising from maize all positively influence sample farmers' use of price risk management tools. Both the scale-dependent benefits and fixed transaction costs associated with using price risk management tools can be spread over a larger volume of output as the volume of maize marketed increases. The Operators' self-rated score of marketing management ability was negatively related to the use of price risk management tools, in contrast to the findings of previous studies in the USA. Many respondents indicated concern about a lack of competitiveness in the local spot market, and perceived that large maize buyers were manipulating maize prices. Farmers should use SAFEX Agricultural Marketing Division (AMD) Futures prices as guidelines in "discovering" prices when negotiating with maize handlers and millers about cash maize sales. Producers should also monitor their local basis (the difference between the local spot price and the nearby Futures price) to identify opportunities for the profitable transportation and/or storage of maize. A need was identified for further education of maize farmers regarding the use, costs and benefits of available maize marketing alternatives. Weekly agricultural magazines and maize marketing seminars may be the most effective mediums through which to inform maize farmers about prices and marketing services. Further research opportunities were identified in the monitoring of farmers' maize marketing activities as the South African maize market matures, and in establishing recommended hedging ratios for South African maize farmers.