A profitability and risk assessment of market strategies for potato producers in South Africa

Abstract

The South African potato producers have four primary forms of market channels to market and sell their fresh produce: export markets, direct markets, national fresh produce markets (NFPM), and online markets. Potatoes contribute the largest share of the vegetable gross production value, approximately 37% (DALRRD, 2020), with the majority sold through the NFPM. The NFPM has seen a decrease in market participation on the entire market channel in recent years and has been underperforming for five consecutive years (Lekgau, 2016, Meyer, 2020). Producers who are still choosing NFPM as a marketing channel see lower demand due to less buyers participating in the market channel. In the long run, lower demand will lead to lower prices received by producers, which affects their profitability. According to Meyer (2020), a solution to counter the effects seen on the NFPM is for producers to diversify their marketing channels. South Africa has an online fresh produce trading platform. Online markets provide an alternative to NFPM and are therefore a diversification option.

One benefit of market diversification is increased profitability (Dohlman, 2020). There is a need to provide producers with quantifiable research of the profitability effects of online markets and NFPM market diversification. The second benefit of market diversification is decreased risk. The way producers perceive risk depends on their risk preference. The preference affects their choice of market channel as each channel and combination of channels have different risks associated with it (Pennings and Wansink, 2004). To provide producers with a complete and comparable assessment of online and NFPM market channels, not only the market channels need to be evaluated, but the marketing strategies of different combinations of market channels also need to be analysed (Kim et al., 2014).

The purpose of this study is to provide fresh potato producers with a framework to compare marketing strategies comprising of different market channel combinations for online market and NFPM markets. The Study, therefore, determines which marketing strategies are the most profitable based on different combinations of market channels and evaluate if different risk preferences affect producers marketing strategy choice. Simulation models are commonly used to access production, market, and price risk in traditional agriculture (Curtis et al., 2014, Hardaker et al., 2004, Jordaan et al., 2007, Richardson et al., 2007b). Therefore, this study uses a simulation model analysis that combines market channel price, yield, and market channel risk to construct a probability distribution function that shows the profitability for eleven marketing strategies. The risk preference analysis is completed using stochastic efficiency with respect to a function (SERF) approach created by Hardaker et al. (2004) to analyse risk preferences of different marketing strategies. Ranking simulation and risk analysis enable a framework to compare marketing strategies comprising of different market channel combinations for online market and NFPM market. This study's main objective to provide a framework for producers to compare marketing strategies is also accomplished by ranking the results from the simulation and risk analysis methods. The first proposition proposed that fresh potato producers' profitability is higher for the online market channel due to lower marketing cost. The results from the simulation model have shown that the highest possible net return for all eleven marketing strategies is the M1 market strategy, sending all of the producers’ production to the online markets. The M1 marketing strategy can provide a potato producer with net returns of up to R105 381 per ha. The second proposition states that a fresh potato producer, who is risk-averse, will prefer to send most of their produce to the NFPM. The third proposition proposes that risk-neutral potato producers will prefer to send most of their potatoes to online markets. This study's risk preference analysis result disproves the second and third proposed propositions. The results found that a risk-averse producer prefers to send 40% of their potatoes to NFPM and not the majority, and a risk-neutral producer will prefer to send all their potatoes to NFPM.

The study will therefore make academic, managerial and policy contributions. The new information on online markets will add to the knowledge base of the current fresh produce industry within South Africa. The framework will assist producers in their farm management practices by providing a quantitative assessment of their marketing strategies based on personal risk preference and profitability. This study provides policymakers with a quantified risk assessment of alternative marketing strategies.