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Price Discovery and Price Risk Management Before and After Deregulation of the South African Maize Industry

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  • Alexander Behar

Abstract

The withdrawal of the Maize Board in 1996 meant that farmers could no longer rely on its pre-planting price or "voorskot" for price discovery and price risk management. Some have claimed (UNCTAD, 2007) that the South African Futures Exchange (SAFEX) can provide these functions. We test this claim and analyse the implications of it. To do so, we build on an acreage response model developed earlier by Chavas and Holt (1990) by allowing for a futures market as well as accounting for farmer heterogeneity and the relative impact of price risk and yield risk. We first establish farmers’ responsiveness to risk by determining their risk aversion and, more specifically, whether they exhibit decreasing aggregate risk aversion (DARA). We find that farmers are risk averse and display positive wealth effects, which may be due to DARA. We can say little about how farmers have reacted to the price discovery function of expected prices both before and after the withdrawal of the Maize Board. However, we can conclude that farmers have responded less to price risk post-1996, even though prices were more volatile during this period. This supports UNCTAD’s (2007) claim. Combined with the finding of positive wealth effects the policy implication is that an improvement in the financial position of farmers as well as their access to futures markets can help reduce the impact and disutility of risk and, hence, improve their welfare without the need for regulation.

Suggested Citation

  • Alexander Behar, 2011. "Price Discovery and Price Risk Management Before and After Deregulation of the South African Maize Industry," Working Papers 263, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:263
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    File URL: http://www.econrsa.org/node/286
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    References listed on IDEAS

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    1. Badi Baltagi & Alain Pirotte, 2011. "Seemingly unrelated regressions with spatial error components," Empirical Economics, Springer, vol. 40(1), pages 5-49, February.
    2. Baltagi, Badi H. & Li, Qi, 1991. "A transformation that will circumvent the problem of autocorrelation in an error-component model," Journal of Econometrics, Elsevier, vol. 48(3), pages 385-393, June.
    3. Baltagi, Badi H. & Wu, Ping X., 1999. "Unequally Spaced Panel Data Regressions With Ar(1) Disturbances," Econometric Theory, Cambridge University Press, vol. 15(06), pages 814-823, December.
    4. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291.
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    More about this item

    JEL classification:

    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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