Modelling South African grain farmers' preferences to adopt derivative contracts using discrete choice models

Abstract

This paper applies a discrete choice model to determine specific characteristics that influence South African grain farmers' preferences to hedge against uncertainties. This is the first empirical study on South African grain producers' preferences to adopt derivative contracting and is based on the survey data of Grain South Africa for 2006. With the application of separate binary logit models for each major grain commodity, this paper establishes that different grain farmers are significantly heterogeneous. The results also show that grain farmers' preferences to adopt derivative contracting are mostly influenced by the farmers' prediction of daily grain prices and trends, farm size and various geographic characteristics. From a policy perspective it has been indicated that food and income insecurity will be reduced if farmers can adopt derivative contracting at large scale since it will enable the producers to produce staple food on a continuous basis at a relatively profitable level.