Sources and management of risk in large-scale sugarcane farming in KwaZulu-Natal, South Africa.
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Date
2007
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Abstract
The South African (SA) sugar industry supports approximately 50,940 small and large scale
producers who collectively produce 22 million tons of sugarcane seasonally, on
average. SA farmers face many challenges that lead to an uncertain decision making
environment. Despite a general consensus among agricultural economists that risk
constitutes a prevalent feature of the production and marketing environment, various
authors have recently stated that risk-related research has failed to provide a convincing
argument that risk matters in farmers' decisions. The various shortcomings of previous
research have been identified and recommendations for the future proposed.
Recommendations include that the focus of future risk research should be on holistic risk
management.
This study firstly identified the perceived importance of 14 separate sources of risk for a
sample of 76 large-scale commercial sugarcane farmers in KwaZulu-Natal. Once a
sufficient understanding of the risk perceptions of respondents had been attained, their use
of 12 risk-related management strategies was determined. Principal components analysis
(PCA) was used to investigate how individual management instruments are grouped
together by respondents into choice brackets in order to make use of complementary and
substitution effects. The study then proposed and demonstrated a technique that may be
used in future research to isolate the effects of risk on individual risk-related management
responses by modelling the management strategies contained within individual choice
brackets with two-stage least squares regression analysis (2SLS).
The most important risk sources were found to be the threats posed by land reform,
minimum wage legislation and the variability of the sugar price, in that order. PCA
identified seven risk dimensions, collectively explaining 78% of the variance in all 14 risk
sources considered. These dimensions were: the "Crop Gross Income Index",
"Macroeconomic and Political Index", "Legislation Index", "Labour and Inputs Index",
"Human Capital and Credit Access Index", "Management Index" and the "Water Rights
Index". Respondents were also asked questions regarding risk-related management
strategies, including diversification of on-farm enterprises, investments and management
time. PCA identified six management response brackets, collectively explaining 77% of
the variance in the 12 responses considered. These response indexes were: the
"Mechanisation and Management Bracket", "Enterprise and Time Diversification
Bracket", "Insurance and Credit Reserve Bracket", "Geographic and Investment
Diversification Bracket", "Land Trade Bracket" and the "Labour Bracket".
Lastly, the study proposed a methodology for investigating the role of individuals' risk
preferences in decision making. The recommended technique involves the simultaneous
modelling of the major risk-related management strategies within each management
response bracket, using 2SLS. A measure of risk preference was included in the 2SLS
analysis to establish the influence of risk on decision making. By applying this
methodology to the data obtained in this study, respondents were shown to be taking
advantage of various complementary and substitution effects that exist between
management responses. This was evident from the PCA and confirmed for the first
previously identified management response bracket using 2SLS regression analysis. Risk
attitude was shown to be a significant determinant of management decisions regarding the
extent to which back-up management is kept in reserve.
Important policy recommendations stemming from this study include that government
review restrictive labour legislation and decrease the uncertainty surrounding new land
redistribution legislation. Farmers need to make better use of available information by
considering the effects of any single management decision on separate decisions, enabling
them to take further advantage of substitution and complementary effects that may exist
between management strategies previously considered in separate decision brackets. The
fact that mechanisation and labour use occur in separate risk-related management response
brackets in this study is an example of one such substitution effect that farmers do not
seem to be utilising in terms of their management decision making.
Future research using time series data is important in order to identify how risk perceptions
and management portfolios change over time. Also, further research using the
methodology proposed in this study may prove to be a useful means of more adequately
addressing the question "Does risk matter in farmers' decisions?"
Description
Thesis (M.Sc.)-University of KwaZulu-Natal, Pietermaritzburg, 2007.
Keywords
Sugarcane--Economic aspects--KwaZulu-Natal., Sugarcane--Economic aspects--South Africa., Sugar growing--KwaZulu-Natal., Risk management--Decision making., Decision making., Decision making--Mathematical models., Risk., Risk assessment., Uncertainty., Theses--Agricultural economics.