Proven results
The CropsProfit advantage has been put to the test
Testing a profit margin hedging model as a price risk management solution for crop farmers in South Africa
A success story.
Net profit comparison of new Profit Margin Hedging model to control group
| White maize seasons | Net profit above total break-even cost | ||
|---|---|---|---|
| Anonymous control group | Model using put options | Model not using put options | |
| 2013/14 | R 3,154 | R 3,465 | R 3,457 |
| 2014/15 | -R 134 | R 2,451 | R 3,316 |
| 2015/16 | -R 984 | R 798 | R 3,798 |
| 2016/17 | R 1,588 | R 4,231 | R 3,438 |
| 2017/18 | R 1,956 | R 3,011 | R 3,011 |
| 2018/19 | R 1,251 | R 2,800 | R 3,078 |
| 2019/20 | R 4,874 | R 7,518 | R 7,518 |
| 2020/21 | R 4,142 | R 5,303 | R 5,864 |
| Average | R 1,981 | R 3,697 | R 4,185 |
| Improvement on control group | 87% | 111% | |
Aim of this study:
This study aimed to suggest a solution for the price risk management problem in the crop production sector by providing evidence of the effectiveness of using a novel profit margin hedging (PMH) model. The following research objectives flow from the introduction:
- To determine whether a new profit margin hedging (PMH) model using put options as a pre-harvest strategy will significantly outperform the profit of the control group; and
- To determine whether a new profit margin hedging (PMH) model, without using put options as a pre-harvest strategy, will significantly outperform the profit of the control group
Conclusion:
The study found both a significant improvement in profitability and a stabilising effect when using a profit margin hedging approach. Integrating the components of crop price risk management into a platform allows a crop farmer to make more informed decisions on a daily basis. This approach assists farmers in maintaining a more profitable and viable business, especially amid the inherent risks in the agricultural environment. This study showed that crop farmers should have their crop marketing plans tailored to fit the unique circumstances of their farms.
The results of this study are valuable to crop farmers, traders, financiers and all other parties involved in the crop production supply chain. Crop farmers cultivating a large variety of crops, even in countries outside South Africa, commercial farming, and emerging operations, may benefit from applying the new PMH model. It is expected that with time and a larger sample, an even more evident effect could be expected.
You may read the full article at this link.