IDEAS home Printed from https://ideas.repec.org/a/ags/ajfand/340650.html
   My bibliography  Save this article

Testing A Profit Margin Hedging Model As A Price Riskmanagement Solution For Crop Farmers In South Africa

Author

Listed:
  • Graupner, DL
  • Graupner, LI

Abstract

Risks inherent in the agricultural environment are often complex and include a combination of risks such as production risk (weather), market risk (uncertain prices), technological risks (new production techniques), price risk (changes in input and output prices) and institutional risk (changes in policies). Also, farmers experience personal and financial risks, which relate to cash flow and the ability of the business to generate sufficient profit. Literature shows that crop farmers manage price risk to fulfil the end-values of security, feeling good and operating a viable and competitive business. A profit margin hedging approach could effectively be used as a price risk management strategy. Although certain other agricultural industries are using profit margin hedging as a risk management strategy, not much is known of the usage and success of this strategy in crop farming. A gap in research exists where an effective plan combines the various components into an effective crop risk management strategy. It is also evident that a gap in practice exists where all the components identified in the literature are not combined into a working model to do better price risk management on a daily basis. Consequently, this study aimed to test the performance of such a new profit margin hedging (PMH) model, with and without using put options as a pre-harvest strategy, against the performance of a control group. The study was conducted in the Free State Province in South Africa. Data for eight (8) seasons of a group of ten farmers were obtained from a bureau service. The data was analysed using the software suite Jamovi 1.0.7.0. Independent t-tests were used to compare the profitability of the new PMH model to the control group. Statistically, significant differences were reported between the groups. The study found both a significant improvement in profitability and a stabilising effect on profitability when using a profit margin hedging approach. This study proposes that crop farmers can operate more viable and secure businesses by utilising a profit margin hedging model.

Suggested Citation

  • Graupner, DL & Graupner, LI, 2023. "Testing A Profit Margin Hedging Model As A Price Riskmanagement Solution For Crop Farmers In South Africa," African Journal of Food, Agriculture, Nutrition and Development (AJFAND), African Journal of Food, Agriculture, Nutrition and Development (AJFAND), vol. 23(2), January.
    • Handle: RePEc:ags:ajfand:340650
    DOI: 10.22004/ag.econ.340650
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/340650/files/Ludwich.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.340650?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. 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, Agricultural Economics Association of South Africa (AEASA), vol. 38(3).
    2. Ueckermann, E.M. & Blignaut, J.N. & Gupta, Rangan & Raubenheimer, J., 2008. "Modelling South African grain farmers’ preferences to adopt derivative contracts using discrete choice models," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 47(2), pages 1-18, June.
    3. Andrea E. Woolverton & Michael E. Sykuta, 2009. "Do Income Support Programs Impact Producer Hedging Decisions? Evidence from a Cross-Country Comparative," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 31(4), pages 834-852.
    4. Sihlongonyane, L.N., 2021. "Evaluating the prospect to hedge maize price risk against the Johannesburg Stock Exchange Commodity Derivatives Market prices: The case of Eswatini," Research Theses 334770, Collaborative Masters Program in Agricultural and Applied Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mofokeng, Maine & Vink, Nick, 2013. "Factors Affecting the Hedging Decision of Maize Farmers in Gauteng Province," 2013 Fourth International Conference, September 22-25, 2013, Hammamet, Tunisia 161465, African Association of Agricultural Economists (AAAE).
    2. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2012. "The role of cash crop marketing contracts in the adoption of low-input practices in the presence of risk and income supports," 126th Seminar, June 27-29, 2012, Capri, Italy 126222, European Association of Agricultural Economists.
    3. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2016. "The Role of Marketing Contracts in the Adoption of Low-Input Production Practices in the Presence of Income Supports: An Application in Southwestern France," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(3), pages 1-29.
    4. Jordaan, Henry & Grove, Bennie, 2007. "Factors Affecting Maize Producers Adoption of Forward Pricing in Price Risk Management: The Case of Vaalharts," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 46(4), pages 1-18, December.
    5. Granoszewski, Karol & Spiller, Achim, 2013. "Langfristige Rohstoffsicherung in der Supply Chain Biogas: Status Quo und Potenziale vertraglicher Zusammenarbeit," DARE Discussion Papers 1303, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    6. Carrer, Marcelo José & Silveira, Rodrigo Lanna F. & Meirelles De Souza Filho, Hildo, 2017. "Citrus Producers' Choice of Price Risk Management Tools," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258352, Agricultural and Applied Economics Association.
    7. Aymeric Ricome & Arnaud Reynaud, 2022. "Marketing contract choices in agriculture: The role of price expectation and price risk management," Agricultural Economics, International Association of Agricultural Economists, vol. 53(1), pages 170-186, January.
    8. Jordaan, H. & Grové, B., 2007. "PR - Investigating Factors Affecting The Forward Pricing Behaviour Of Vaalharts Maize Producers: A Two-step Econometric Approach," 16th Congress, Cork, Ireland, July 15-20, 2007 345387, International Farm Management Association.
    9. Huseynov, Samir & Taylor, Mykel R. & Martinez, Charles, 2022. "Farmers and Bakers: The role of Optimism Bias in Price Expectations," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322599, Agricultural and Applied Economics Association.
    10. Ortmann, Gerald F., 2005. "Promoting the competitiveness of South African agriculture in a dynamic economic and political environment," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 44(3), pages 1-35, September.
    11. Jordaan, Henry & Grove, Bennie, 2008. "Factors affecting the use of forward pricing methods in price risk management with special reference to the influence of risk aversion," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 47(1), pages 1-14, March.

    More about this item

    Keywords

    Marketing; Risk and Uncertainty;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:ajfand:340650. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://www.ajfand.net/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.