Low maize price: your options

The current low maize price, with supply greatly exceeding demand, is a problem for most maize farmers. Henry-Ben Rheede, Standard Bank’s agricultural adviser for the northern Free State shares some creative ideas on how to counter, survive and even profit from the situation.

It is amazing what options farmers actually do have when trying to get rid of maize in a depressed market. Crucial to the long-term survival of any maize enterprise, however, is to make the correct short-term decisions as the success of this industry revolves around price. And as farmers are price-takers, price can make or break a maize farmer in a year.

To start with, farmers must make the mind shift that an average price is better than no price at all. The technical side of maize – how to plant it, when to plant it and how to handle it – is a given. You wouldn’t be farming if that knowledge wasn’t good enough.

So how can a maize farmer manage the maize price? The answer to that question begins with what it costs to produce 1t of maize per hectare on your farm. Then add a percentage profit you are comfortable with to that cost. Bear in mind what you can get at the bank if you invested that money. On 10 June 2010 the Stanlib Money Market rate was 6,95% (effective rate).

Now use your farm’s long-term yield average on the lands you intend to plant. For example, if your yield averages 5t/ha over a five-year period on a 1 000ha, you can calculate the average cost of producing 1ha of maize. This cost will be different for every farmer as everyone has different equipment and debt loads, while economy of scale also plays a role in the cost per hectare. Now look at the sustainability of your maize enterprise as compared to the Stanlib Money Market investment (see box).

Farmer A has to obtain an average (Safex) price of R1 324/t to achieve a 6,95% return on his investment in inputs to produce 1ha of maize. His long-term average is 5t/ha with a total cost of R6 189/ha, including all his expenses plus a 6,95% profit. This will be different for every farmer, so make sure you estimate your unique costs accurately.

So, in theory, if the Safex price is higher than R1 324, you will make more profit with maize than the 6,95% interest you would earn at the bank. This of course poses problems with the current low maize price. So how about, for example, marketing 25% at planting, 25% after emerging, and 20% from emerging up to March (which is the 70% marketing cost included above) and 30% at harvesting. This strategy will differ from farmer to farmer, depending on the price at the time.

The secret remains to know what it really costs you to produce 1t of maize and if you can make profit. Your motto must be: An average price is better than no price. Having said that, knowing your production cost per ton helps to determine your hedging strategy. This is sustainable thinking, and will lower price risk at the end of the day to ensure a profitable future for your maize enterprise.

How to increase productivity

We know how expensive it is to replace ageing equipment and so increase capacity. Nowadays farmers increasingly buy expensive capital items together and share the cost, thereby staying up to date with the latest technology, while renting the equipment out when it is not used.

More efficient equipment lowers costs, thereby decreasing the cost per ton. It makes good business sense to rent out equipment to pay instalments. After the instalment period of three to five years, the team replaces the equipment, again keeping up to date with technology.

The problem here is that this can only succeed if you choose the right partners who will pull their weight.

Is adding value an option?

Maize farmers can also increase profit by adding value to their maize. Why not invest in a maize-milling plant to produce maize meal, one of the major food groups in South Africa? While mills do decrease price risk by adding value, one must do your homework before investing in capital-intensive equipment, and remember, maize meal needs a market.

Managerial expertise is also important, and you must be in a position to be able to afford the right people to manage a mill.

And feedlotting?

Maize can be fed to livestock to ensure a better return at current low prices. By putting maize through animals, the low maize price can often be doubled. However, this option is capital intensive as livestock needs to be bought. A weaner, for example, will consume about 1t of maize before it is marketable. So if you plant 3 000ha with a yield of 5t/ha, you will have to feed 15 000 weaners, which will cost you some R52,5 million. Then there is also the investment in infrastructure and byproducts.

If you decide to feed lambs with the same yield from 3 000ha, you will need 150 000 lambs, which will cost you about R67,5 million. Remember, 1t of maize has the value of a 1 000 grazing days. Lambs need about 100 days to grow from 25kg to between 48kg and 50kg. The management inputs will be almost beyond belief. A lot of expertise is needed for feedlotting and new entrants can expect to pay heavy school fees.

What about storing?

Maize can be stored at a co-op for a long period until it can be sold for a better price. This is a huge advantage maize farmer have compared to say vegetable farmers, who are obliged to accept market prices daily. But storage can also be the downfall of farmers who don’t pay attention to storing, handling and interest costs.

Farmers can also hold on to maize stocks for too long, sometimes selling at lower prices than could have been realised originally. By paying more attention to the input cost per ton and the acceptable profit needed, deciding when to sell will be easier.

Maize farms remain a good investment

As investments, maize farms remain sound if one considers the R25 000/ha to R40 000/ha paid for dryland farms in the Wesselsbron, Hoopstad and Bultfontein areas. Such prices far exceed the productive value of the land, so one can expect respectable capital growth maize farms. Good rent is also obtainable.

The low maize price problem

Part of the reason why maize prices are currently so low is because alternative crops, such as wheat, are also yielding low returns. Where wheat traditionally has been a production mainstay, like in the eastern Free State, this is no longer the case.  Maize has effectively replaced wheat in these areas, adding to surpluses and lowering prices. If the wheat price was improved through import tariffs stopping cheap, low-quality wheat imports, the maize price problem would be partly solved.

Producing ethanol from maize, and feeding the byproducts to cattle can also lower maize stock levels. The state, however, doesn’t allow this as it believes ethanol-from-maize production could threaten food security. Erecting an ethanol plant is also of course extremely capital intensive.

The problem remains that maize technology improves yields each year, due to the considerable investment made by seed companies. That means higher stock levels and lower prices will be a reality for some time yet. What’s more, maize consumption remains constant, and is not reflected by the pace of population growth, meaning that consumers are increasingly buying maize alternatives.

Therefore, a lot more needs to be done to market maize. Why not look at making “putu pap” mandatory with braais? It remains number one in my book!

Contact Henry-Ben Rheede on 083 704 0806.