The effect of procurement strategies of milling companies on the price of maize

Abstract

Since ultra-poor South Africans spend up to a fifth of their income on maize alone, the demand for this commodity is price-inelastic, i.e. consumers have no choice but to absorb price increases. As such the success of procurement strategies from milling companies will ultimately have a direct impact on the financial well-being of the poor. Even though derivative instruments are available to use as counter against market fluctuations, the price risk management success of groups with a concern on SAFEX suggests that this is not achieved as yet, ultimately to the detriment of consumers. The view exists that markets are efficient and the return offered by the futures exchange cannot consistently be outperformed. This paper argues the exact opposite, since the use of the proposed futures/options strategies result in returns superior to that of the market.