MARKETS
Planning
for new season marketing
Spring is in the air and producers are busy planning with regard to the crops to be planted
in the new season. Decisions are based on the profitability of the different crops.
By Hansie Swanepoel
Senwes Market Analist
W
hen deciding on what to
plant, it is important to
remember that the current
prices during planting time
are not necessarily the prices which will
apply during the harvest time. It is there-
fore important for a producer to take the
necessary action in order to protect the
price expected for the product in question
when making a planting decision.
INPUT COSTS AS TRIGGER
FOR HEDGING
The most important principle of hedging
is that a product can only be sold in the
future if it is profitable to do so. Should
hedging already ensure a loss, it is of no
use to do hedging. The profitability of a
hedging decision has to start with deter-
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SENWES SCENARIO | SPRING 2018
mining a direct cost per ton for the pro-
duction of a specific crop. Due to the fact
that there is production uncertainty at the
beginning of a season, any hedging costs
must be taken into account as well
An example of such a calculation in
respect of maize production is reflected
below:
Input costs
LAY
7,500
R/ha (Direct
input costs)
4.5 ton/ha
Break-even 1,667 R/ton
Basis
(Differential) 250 R/ton
250 R/ton
Put-option
Safex
2,167
Safex Jul 2019 R2,300
R/ton Jul 2019
required
(R133/t left
after direct)
In terms of the above example, a hedg-
ing decision would be one which, taking
option costs into account, would cover
at least the direct input costs. Should the
market in the above example be below
R2,167 per ton, it would not be profitable
to produce maize. A decision must then
be taken not to plant maize, or to wait with
hedging until prices increase.
In the past the Safex market provided
the opportunity for hedging to be done in
order to at least cover direct input costs
(see Graph 1).
The market makes sure that prices
are good enough during planting time for
producers to be able to plant. It must be
remembered, however, that prices may
not be the same at harvest time.
HEDGING STRATEGIES
There is no production certainty at the
beginning of a production season and
for this reason hedging strategies are
proposed which are based on minimum
prices. Although there are costs involved
in this type of hedging, no more than