IDEAS home Printed from https://ideas.repec.org/p/ags/cmpart/334770.html
   My bibliography  Save this paper

Evaluating the prospect to hedge maize price risk against the Johannesburg Stock Exchange Commodity Derivatives Market prices: The case of Eswatini

Author

Listed:
  • Sihlongonyane, L.N.

Abstract

Maize production remains low in Eswatini. The small country is still unable to meet the local demand through local production. Maize1 is Eswatini’s staple food but the country has not yet reached self-sufficiency. This deficiency or shortfall in local maize production has been a persistent problem since the country’s independence. To fight this shortfall and reach selfsufficiency, the National Maize Corporation (NMC) was formed in 1985. The main purpose of the NMC is to keep the local demand satisfied. The NMC, as the only importer of white maize into Eswatini, does this by importing the deficit demand from South Africa. Stability of the local white maize price is also one of the responsibilities of the NMC. This study’s overarching aim was to determine whether or not a significant relationship exists between the maize prices as quoted on SAFEX2 and the local maize price in Eswatini. This is done to see if the importer of maize in Eswatini, the NMC, can hedge the price risk on SAFEX. The study also maps the Eswatini imported and local maize value-chain through the current price discovery mechanism. Secondary data offered by the NMC and data from the Ministry of Agriculture in Eswatini and educational journals were used in the study. Econometric time series methods were used along with monthly data from 2008 to 2019. Two hypotheses were tested during the study. The first hypothesis tested for the existence of a significant relationship between maize prices as quoted on SAFEX and the local maize price in Eswatini. The second hypothesis follows the first, determining whether or not hedging on SAFEX could be used as a tool to minimise price risk on the domestic price market in Eswatini. The study confirms that a long-run relationship exists between the South African maize market and the Eswatini maize market. The study showed that a 1% increase in the South African price led to a 0.67% increase in the local Eswatini prices. This indicates a slow rate shift in prices. Short-run dynamics indicated a 12.5% adjustment to equilibrium per term, which is a slow adjustment as a result of market conditions in Eswatini. The study also revealed asymmetry in price transmission and that the Eswatini prices only respond to positive changes (price increase) in the South African prices. This reveals that the two markets are poorly integrated. Due to the significant relationship between the two markets, it can be acknowledged that SAFEX could be used to hedge price risk by Eswatini through the NMC. Through mapping down the maize value-chain, the study discovered that the Eswatini maize market is not a liberalised one and value addition to maize through the chain is minimal. The relationship between the two maize markets, as well as the maize market of Eswatini, could still improve if means to liberate the market were to be exercised by the NMC and local government. This study can serve as the basis for understanding how risk management tools could be used by the Eswatini maize market and how the market could be improved or liberalised.

Suggested Citation

  • 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.
    • Handle: RePEc:ags:cmpart:334770
    DOI: 10.22004/ag.econ.334770
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/334770/files/Sihlongonyane_Evaluating_2021.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.334770?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. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 44(3), pages 371-396, August.
    2. Babatunde O. Abidoye & Marlene Labuschagne, 2014. "The transmission of world maize price to South African maize market: a threshold cointegration approach," Agricultural Economics, International Association of Agricultural Economists, vol. 45(4), pages 501-512, July.
    3. Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages 145-159, Supplemen.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Geyser, Mariette & Cutts, Michela, 2007. "SAFEX maize price volatility scrutinised," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 46(3), pages 1-15, September.
    6. van der Vyver, A. & van Zyl, J., 1989. "A Futures Market For Maize In South Africa," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 28(1), February.
    7. Jeff Madura & Nivine Richie & Alan Tucker, 2006. "Trading Halts and Price Discovery," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(3), pages 311-328, December.
    8. Ankamah-Yeboah, Isaac, 2012. "Spatial Price Transmission in the Regional Maize Markets in Ghana," MPRA Paper 49720, University Library of Munich, Germany.
    9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    10. Mabuza, Majola Lawrence & Hendriks, Sheryl L. & Ortmann, Gerald F. & Sithole, M.M., 2009. "The impact of food aid on maize prices and production in Swaziland," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 48(1), pages 1-21, March.
    11. Kelvin Balcombe & Alastair Bailey & Jonathan Brooks, 2007. "Threshold Effects in Price Transmission: The Case of Brazilian Wheat, Maize, and Soya Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 308-323.
    12. Abdulai, Awudu, 2000. "Spatial price transmission and asymmetry in the Ghanaian maize market," Journal of Development Economics, Elsevier, vol. 63(2), pages 327-349, December.
    13. F. T. M. Kilima, 2006. "Are Price Changes in the World Market Transmitted to Markets in Less Developed Countries? A Case Study of Sugar, Cotton, Wheat, and Rice in Tanzania," The Institute for International Integration Studies Discussion Paper Series iiisdp160, IIIS.
    14. Minot, Nicholas, 2010. "Transmission of World Food Price Changes to African Markets and its Effect on Household Welfare," Food Security Collaborative Working Papers 58563, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.

    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. Tsiboe, Francis & Dixon, Bruce L. & Wailes, Eric J., 2016. "Spatial dynamics and determinants of Liberian rice market integration," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 11(3).
    2. Nzuma, Jonathan Makau & Kirui, Patrick Kipruto, 2021. "Transmission of global wheat prices to domestic markets in Kenya: A cointegration approach," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 16(1), March.
    3. Badolo, Félix, 2012. "Chocs de prix internationaux et transmission : cas du marché du riz au Burkina Faso," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(3), pages 317-346, Septembre.
    4. Kanjilal, Kakali & Ghosh, Sajal, 2017. "Dynamics of crude oil and gold price post 2008 global financial crisis – New evidence from threshold vector error-correction model," Resources Policy, Elsevier, vol. 52(C), pages 358-365.
    5. Mohammad J Alam & Raghbendra Jha, 2016. "Asymmetric threshold vertical price transmission in wheat and flour markets in Dhaka (Bangladesh): seemingly unrelated regression analysis," ASARC Working Papers 2016-03, The Australian National University, Australia South Asia Research Centre.
    6. Sun, Changyou, 2011. "Price dynamics in the import wooden bed market of the United States," Forest Policy and Economics, Elsevier, vol. 13(6), pages 479-487, July.
    7. Hillen, J., 2018. "Protecting the Swiss milk market from foreign price shocks: Public border protection vs. quality differentiation," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 276015, International Association of Agricultural Economists.
    8. Ben Kaabia, Monia & Gil, Jose Maria, 2005. "Asymetric Price Transmission in the Spanish Lamb Sector," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24631, European Association of Agricultural Economists.
    9. Ikudayisi, Adesola Adebola & Salman, Kabir Kayode, 2014. "Spatial Integration Of Maize Market In Nigeria – A Vector Error Correction Model," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 2(3), pages 1-10, July.
    10. Rahman, Mohammad Chhiddikur, 2020. "Welfare Impact of Asymmetric Price Transmission on Bangladesh Rice Consumers," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 242248, July.
    11. Bairagi, S. & Mohanty, S., 2018. "Analysis of Price Transmission along the Cambodian Rice Value Chain," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277022, International Association of Agricultural Economists.
    12. Abidoye, Babatunde O. & Marlene, Labuschagne, 2012. "The Transmission of World Maize Price to South African Maize Market: A Threshold Cointegration Approach," Working Papers 206515, University of Pretoria, Department of Agricultural Economics, Extension and Rural Development.
    13. Rahman, Mohammad Chhiddikur, 2018. "Welfare Impact of Asymmetric Price Transmission on Bangladesh Rice Consumers," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 251114, July.
    14. Ankamah-Yeboah, Isaac, 2012. "Spatial Price Transmission in the Regional Maize Markets in Ghana," MPRA Paper 49720, University Library of Munich, Germany.
    15. Mohcine Bakhat & Klaas WŸrzburg, 2013. "Co-integration of Oil and Commodity Prices: A Comprehensive ApproachAbstract," Working Papers fa05-2013, Economics for Energy.
    16. Bagnai, Alberto & Mongeau Ospina, Christian Alexander, 2015. "Long- and short-run price asymmetries and hysteresis in the Italian gasoline market," Energy Policy, Elsevier, vol. 78(C), pages 41-50.
    17. Arestis, Philip & Mariscal, Iris Biefang-Frisancho, 1998. "Capital shortages and asymmetries in UK unemployment," Structural Change and Economic Dynamics, Elsevier, vol. 9(2), pages 189-204, June.
    18. Gabriella Deborah Legrenzi & Costas Milas, 2010. "Spend-and-Tax Adjustments and the Sustainability of the Government's Intertemporal Budget Constraint," CESifo Working Paper Series 2926, CESifo.
    19. Zouheir Ahmed Mighri & Majid Ibrahim Alsaggaf, 2019. "Asymmetric Threshold Cointegration and Nonlinear Adjustment between Oil Prices and Financial Stress," International Journal of Energy Economics and Policy, Econjournals, vol. 9(3), pages 87-105.
    20. Asche, Frank & Oglend, Atle, 2016. "The relationship between input-factor and output prices in commodity industries: The case of Norwegian salmon aquaculture," Journal of Commodity Markets, Elsevier, vol. 1(1), pages 35-47.

    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:cmpart:334770. 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: http://www.agriculturaleconomics.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.