MARKETS
Profitability of crops
Make hedging decisions
together with plant decisions
When the new planting season commences, decisions have to be taken on the crops to be
planted, based on the relative profitability of the different crops. In order to ensure profit-
ability, hedging decisions have to be made at the same time (for more information in this
regard, see the articles in the previous editions of Senwes Scenario).
By Hansie Swanepoel
Senwes Market Analyst
A
SEASONAL TRENDS
s the production season pro-
gresses, the market responds
to current fundamental factors.
Should a dry period be predict-
ed during a critical time of the production
season, the market should respond by an
increase in prices.
Patterns form over years which clearly
indicate periods during which hedging can
be done at better levels than other times.
The challenge is that a fundamental prob-
lems such as drought, usually drive the
market, which makes hedging decisions
very difficult. See the July white maize sea-
sonal trend below.
It is evident from the graph above that
the first seasonal opportunity traditionally
arises during November (planting time).
During the period, when production
certainty is low, it would be sensible to
approach hedging by means of mimum
prices (put options). Producers are inclined
to hedge one third of expected production
during this time, while some hedge enough
to pay for input costs.
The next opportunity arises during
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SENWES SCENARIO | SUMMER 2018
February-March (pollination time), which is
mostly at the same time as the traditional
midsummer drought. Producers who have
more production certainty at this stage,
may consider buying back the minimum
prices bought during planting time and tak-
ing fixed prices instead. This consideration
will, however, depend on the difference
between the premium paid and the premi-
um which can be recouped with the resale.
Alternatively the next third of production
can be hedged by means of fixed prices.
The last third is left until approximately
May (harvest time), but producers are also
inclined to make sure of the final tonnag-
es harvested before the last production
portion is marketed. The traditional price
increase from July to December is, howev-
er, utilised by producers to a large extent
in the form of deferred pricing or deriva-
tive instruments, by means of which the
upward potential can be utilised.
The above strategy offers the opportu-
nity to utilise various opportunities in the
Graph 1: The longterm July contract white maize price and
2019 price movement on Safex.
Source:Thys Grobbelaar