Modelling Preferences of South African Grain Farmers for Adopting Derivative Contracts Using Discrete Choice Models

The authors of the present paper apply a discrete choice model to determine specific characteristics that influence South African grain farmers’ preferences in hedging against uncertainties. This is the first empirical study conducted in the country regarding such preferences of producers for adopting derivative contracting based on the survey data of Grain South Africa for the year 2006. By means of 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 indicate that the preferences of grain farmers for adopting derivative contracting are mostly influenced by the farmers’ preference towards prediction of daily grain prices and market trends, farm size and geographic characteristics. From a policy perspective it has been indicated that the problems concerning food and income insecurity will be reduced if farmers can adopt derivative contracting on a large scale since the producers will then be able to produce the staple food on a continuous basis at a relatively profitable level.