Factors Affecting Maize Producers Adoption of Forward Pricing in Price Risk Management: The Case of Vaalharts

H. Jordaan and B. Grove

Agrekon, 2007, vol. 46, issue 4

Abstract: Logistic regression is employed to analyse the factors which influence the decision of whether or not the respondent used forward pricing methods during the 2004/05 maize production season. Forward pricing methods include cash forward contracting and hedging with futures contracts and/or options, through the South African Futures Exchange (SAFEX). Based on the results, the use of forward pricing is associated with lower levels of risk aversion and higher levels of human capital. Factor analysis is employed to reduce the dimensionality of the personal reasons which help to interpret the underlying, common factor of the personal reasons why farmers are reluctant to use forward pricing methods. Three factors were extracted and were labelled “Lack of capacityâ€Â, “Distrust of the marketâ€Â, and “Bad experiencesâ€Â. The results from the factor analysis confirm the finding that farmers need higher levels of human capital to use forward pricing methods and that farmers do not believe that the forward pricing market is effective. Education should furthermore, focus more on the practical application of alternative forward pricing methods and not purely on the benefits of the use of forward pricing methods.

Keywords: Forward pricing; Logit; Factor analysis; Agricultural Finance; Risk and Uncertainty (search for similar items in EconPapers)
Date: 2007
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