Evaluating the prospect to hedge maize price risk against the Johannesburg Stock Exchange Commodity Derivatives Market prices: The case of Eswatini
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Date
2023
Authors
Sihlongonyane, Lindokuhle Nicholas
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
Maize production remains low in Eswatini. The small country is still unable to meet the local
demand through local production. Maize1
is Eswatini’s staple food but the country has not yet
reached self-sufficiency. This deficiency or shortfall in local maize production has been a
persistent problem since the country’s independence. To fight this shortfall and reach self sufficiency, the National Maize Corporation (NMC) was formed in 1985. The main purpose of
the NMC is to keep the local demand satisfied. The NMC, as the only importer of white maize
into Eswatini, does this by importing the deficit demand from South Africa. Stability of the
local white maize price is also one of the responsibilities of the NMC.
This study’s overarching aim was to determine whether or not a significant relationship exists
between the maize prices as quoted on SAFEX2
and the local maize price in Eswatini. This is
done to see if the importer of maize in Eswatini, the NMC, can hedge the price risk on SAFEX.
The study also maps the Eswatini imported and local maize value-chain through the current
price discovery mechanism. Secondary data offered by the NMC and data from the Ministry
of Agriculture in Eswatini and educational journals were used in the study. Econometric time
series methods were used along with monthly data from 2008 to 2019.
Two hypotheses were tested during the study. The first hypothesis tested for the existence of a
significant relationship between maize prices as quoted on SAFEX and the local maize price
in Eswatini. The second hypothesis follows the first, determining whether or not hedging on
SAFEX could be used as a tool to minimise price risk on the domestic price market in Eswatini.
The study confirms that a long-run relationship exists between the South African maize market
and the Eswatini maize market. The study showed that a 1% increase in the South African price
led to a 0.67% increase in the local Eswatini prices. This indicates a slow rate shift in prices.
Short-run dynamics indicated a 12.5% adjustment to equilibrium per term, which is a slow
adjustment as a result of market conditions in Eswatini.price transmission and that the Eswatini prices only respond to positive changes (price increase)
in the South African prices. This reveals that the two markets are poorly integrated.
Due to the significant relationship between the two markets, it can be acknowledged that
SAFEX could be used to hedge price risk by Eswatini through the NMC. Through mapping
down the maize value-chain, the study discovered that the Eswatini maize market is not a
liberalised one and value addition to maize through the chain is minimal. The relationship
between the two maize markets, as well as the maize market of Eswatini, could still improve if
means to liberate the market were to be exercised by the NMC and local government. This
study can serve as the basis for understanding how risk management tools could be used by the
Eswatini maize market and how the market could be improved or liberalised.
Description
Keywords
Price transmission, maize prices, hedging, value-chain, SAFEX, NMC, South Africa, Eswatini