GRAIN BROKERS
Factors which influence
price risk decisions
The primary functions of any agricultural commodity market are to facilitate price forma-
tion and to offer a platform for effective price risk management. These functions and the
efficiency thereof are, however, questioned by role players in the industry.
By Frans Dreyer
T
his distrust affects the willingness
of producers to make use of the
price risk management market
mechanism at their disposal.
However, various other reasons or factors
which influence the decision process of
producers have been identified over time.
International and local research in this
regard can be divided into two cate-
gories. The first category relates to the
characteristics of the producer, as well as
the production environment. A producer's
age, experience, level of training, financial
position as well as the location and size
of his farm play a role in every hedging
decision. The second category includes
alternative risk management factors such
as diversification, insurance, income sup-
port programmes and alternative sources
of income. The factors should, however,
not be evaluated in isolation since they
affect one another on a continuous basis.
A producer's risk profile will probably be
influenced by his financial position to a
large extent.
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SENWES SCENARIO | AUTUMN 2018
A comparative evaluation was done
between South African and, inter alia,
American producers, who have gov-
ernment income support programmes.
Government income support programmes
do not play a role in the South African
context, but it became evident that South
African producers are inclined to hedge
a larger percentage of expected produc-
tion compared to their American peers. A
South African producer is also inclined to
make hedging and production decisions
at the same time, while American pro-
ducers tend to plant first and only decide
about a price risk management strategy
as the season progresses.
Research also determined the require-
ments which a marketing plan or hedg-
ing strategy has to comply with to make
producers more inclined to make use of
available market mechanisms. One of the
most important aspects which was high-
lighted in the research results is that the
producer's perception that price risk man-
agement has to change from the ability of
hedging to increase income to the ability
of hedging to minimise income variation
over time. The perception can also be
changed or addressed if a hedging strate
gy is linked to measurable production
profitability, the ability to share in upward
market movements and the minimisation of
hedging costs. Such a strategy will have
to be adaptable and dynamic in order to
accommodate continuous and unpredict-
able changes in market conditions.
The reality is that there will not be
one specific strategy which will render
the best results year after year. Senwes
Market Access grain marketers and
Senwes Graanmakelaars can assist with
various pre-season marketing contracts
and hedging alternatives which will fit the
risk profiles of the individual producers.
Plans will be put in place in due course
which will change the role of a producer
grain marketer significantly. A comprehen-
sive report on the planned new structure
within Market Access to change client
service and hedging decisions will be
published in the next edition.
For real time market information
please contact the Manager: Senwes
Graanmakelaars on 018 464 7786 or via
email to [email protected].