Evaluation of the prospects of hedging Botswana's maize prices against the Johannesburg Stock Exchange commodity market derivatives

Abstract

Maize is an important source of food consumed in Botswana and it helps the country to achieve food security status. Food security refers to everyone always having access to healthy, dependable, and adequate food to meet their dietary requirements and live a healthy life. Botswana imports maize primarily from South Africa and is a net importer. The study evaluated how maize prices in Botswana are linked with maize prices in South Africa. To explain hedging opportunities in minimising price risk in Botswana, cointegration and vector error correction models were used in this study. Secondary data on monthly white and yellow maize prices from 2008 to 2019 were used in this study. The empirical data show that maize prices in South Africa and Botswana have a long-run equilibrium relationship. In the short run, results indicate that the previous years’ maize prices in the Botswana market positively impact all Botswana maize prices at a 1% significance level on average ceteris paribus. South Africa’s maize market does not respond to any market changes in Botswana for white maize prices lagged for one and two periods. The Botswana maize market, on the other hand, reacts to price fluctuations in the South African market for both white and yellow maize. The adjustment speed in the Botswana maize market ranged from 17% to 29% while the adjustment speed in the South African market ranged from 13% to 17%. Overall, the empirical data show that the two markets have a positive long-run equilibrium relationship and a short-run asymmetric relationship. The empirical findings prompted the Botswana maize value chain assessment to understand how it operates as well as the existence of relationships among the actors. The study ascertained that Botswana’s maize value chain faces an array of challenges that limit the country’s food sufficient. The assessment of the Botswana maize value chain was vital to promote policy formations that will promote the development of the Botswana maize sector. The study focused on the interaction between smallholder farmers and the intermediaries focusing on the challenges and opportunities therein. The Agency and Social Network theories were used to assess the economic behaviour of the two farmers and middlemen. The investigative methods used included a thorough assessment of the literature and key informant interview. The challenges identified from the investigation included poor coordination, lack of trust, information asymmetry, lack of cooperatives, and inadequate access to finance. The study thus recommended contract farming, prioritisation of training programmes for farmers and extension workers, third-party enforcement of regulations, and revival of cooperatives to improve the quality of the relationship between the middlemen and the smallholder farmers, and thus improve the overall performance of the chain.