‘Two’ good to be true

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South African maize producers have produced two record crops in a row. While that sounds good, the sheer volume of maize is putting downward pressure on the maize price.Maize prices vary between import and export parity levels. Export parity in Durban is currently at R1 282 and import parity at R2 354. If we produce less maize than we use annually, we’ll have to import the rest and prices will rise towards import parity level. But another large crop will push prices down to export parity level.

Grain SA’s recommendations
Grain SA recommends farmers plant 50% less maize this year. If everyone abides by this rule, prices will rise to import-parity level. Grain SA calculates that if the area planted to maize is reduced by 50%, maize farmers will make a profit of about R750/ha.This is true for the maize industry as a whole, but individual farmers’ situations differ vastly. I recently spoke to a prominent maize farmer in the North West.

With the favourable climate he harvested 5,5t/ha off his normal hectarage of maize in 2009. He locked in his producer price on Safex when the July 2010 price peaked at the start of the growing season. Currently, Safex July 2011 white maize trades at R1 442, and farmers who can make a profit at that price won’t willingly plant less maize.But there’s another scenario. If most farmers plant less maize, then those who plant their normal hectarage will get the double bonus of a large crop at a high price. While this may seem disloyal to other farmers, it’s in accordance with the principles of the free-market system.

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Other options
Sub-Saharan Africa needs large quantities of grain to feed its population, and developing the export market will be crucial to the maize industry’s future survival. Unfortunately, government didn’t approve Grain SA’s proposed joint export programme, even though the Competition Act specifically cites exports as a possible reason for granting exemption from its terms. Farmers must diversify their operations.

Price and yield volatility are too great to gamble away more than the value of a farm on input costs for a single production season. During the past season, farmers who used Safex to hedge prices did much better than those who ignored the futures market. In a free-market, those who ignore Safex actually gamble that prices will rise as a season progresses. They’re seldom correct.

There are markets for maize in South Africa that are still largely ignored by major maize producers. Intensive livestock producers use a lot of maize, and in most cases buy it from co-ops at higher prices. The maize producer can deliver it to the silo at a Safex price, less the transport differential.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy.