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Bad pricing costs maize farmers 'millions'

Johannesburg - Maize farmers in South Africa are losing millions of rands by not carefully making use of pricing opportunities available to the sector, according to FNB.

According to the Crop Estimate Committee, this season’s maize crop will be the biggest crop produced in South Africa in the past 30 years. However, Jan van Zyl, FNB head of agric information and marketing, raised concerns about pricing models.

“As this season’s harvesting draws to a close it is becoming more and more evident that the largest majority of maize farmers will not be seeing the financial benefits due to injudiciously neglecting to appropriately price their crops through options and contracts available to them,” he said.

Graph:

The graph illustrates the course of white maize prices that were available to farmers for maize to be delivered in July 2014. With the onset of the planting season – between September and November, white maize for delivery in July 2014 could comfortably be priced at R2 150 per tonne.

Priced to plant

Generally, it can be accepted that the market will provide a price to farmers at the beginning of the season that will make it feasible for them to plant. Due to the risk of possible adverse growing conditions (the so-called mid-summer drought) from December to February, maize prices trended higher, up the R2 479 per tonne, but stayed comfortably above R2 300 per tonne for the whole month of January 2014.

What subsequently happened to white maize prices after February is very clear as indicated in the graph – a progressive decline from R2 200 per tonne to R1 700 per tonne in July when the bulk of the season’s crop lands on the market.

“Farmers who neglected to exercise their pricing options prior to February were in other words forced to accept the July price - or store their maize in the hope that prices will improve,” said Van Zyl. “Revenue wise, they have forfeited a minimum of 23% of their gross income and most probably will not be recovering their production costs.”

Lock into prices

“No two marketing seasons are exactly the same, but the principle of taking a view, by the farmer, of the up or downside potential in the maize price as the season progresses is essential. Farmers know what their production costs are, and when the JSE commodity markets offer prices at which the farmers can at least cover their production costs and make a fair return, they must exercise their discretion and lock in these prices.”

Listen to Van Zyl's podcast:



“The most probable reason why farmers do not timeously lock in their selling price is that they are always holding out for higher prices,” said Van Zyl. “In South Africa, higher maize prices can only be driven by, firstly, higher international prices.

"This usually results from poor harvests in the larger producing countries, notably the US, resulting in world stocks declining. Secondly, if the size of the local harvest is precariously close to domestic demand and shortages could necessitate imports.

“Domestically, maize prices would then trend towards import parity prices. Lastly, a weakening rand/dollar exchange rate would inflate the domestic import and export parity prices, thereby raising the band within which domestic markets are priced. In retrospect, the possibility of a further weakening in the rand/dollar exchange rate was the only possible reason for expecting higher maize prices.”

Downside risk

This possibility was far outweighed by the effect of world stocks that are at high levels due to the 353 million tonne US crop last year and present plantings outlook for 352 million tonnes.

Furthermore, as the production estimates for the local crop emerged from January, each successive report indicated a larger harvest, now at almost 14 million tonnes, indicating a sizeable surplus which has pushed prices down towards export parity.

“Since January it has been abundantly clear that there was a massive downside risk in the maize price – yet many farmers neglected to hedge their prices.

“The highest price for white maize fixed by a client using the FNB Pre-Plant Package for the past season was R2 477 per tonne, while the average price received was R2 167 per tonne,” said Van Zyl.

Now read:

- Good news for SA maize output

- SA maize crop could increase due to rain

- SA maize stocks fall

- Fin24

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