Comparing hail risk management strategies through whole-farm multi-period stochastic budgeting for avocado production in South Africa

Steyn, Theunis Christian (2020-03)

Thesis (MCom)--Stellenbosch University, 2020.

Thesis

ENGLISH ABSTRACT: This dissertation compares hail risk management strategies for avocado production in South Africa. Avocado producers in South Africa aim to produce fruit of high quality suited for the export market to earn a price premium. To manage abiotic stress factors, which are seen as production risks, producers implement risk management strategies. The main abiotic stress factor investigated in this study is hail damage. Three strategies that can be used by producers are evaluated and compared from an economic point of view. The three strategies are: erecting a fixed shade netting construction over orchards, purchasing hail insurance, and self-insurance. The self-insurance strategy consists of producers carrying the risk within their enterprise and not implementing any risk management strategy. Shade netting alters the microclimate and can lead to secondary benefits, such as increased quality of fruit. To evaluate the risk management strategies, a whole-farm multi-period stochastic budget model is used to represent a typical avocado farm. The key output variables (KOVs) used in the stochastic budget model are yield, quality, price, hail insurance premiums and hail risk. These KOVs are used as they have been identified as the variables that will most likely influence the financial performance of the avocado farm system when choosing a risk management strategy. Empirical data and methods proposed by Richardson (2000) are used to simulate multivariate empirical probability distributions for the KOVs. Hail risk is an exception and is modelled by using a Bernoulli discrete probability distribution in combination with a triangular probability distribution. The stochastic budget model runs 500 iterations of net present values (NPVs) for each risk management strategy using Simetar. The 500 NPVs of the three risk management strategies are then converted into cumulative distribution functions (CDFs). Stochastic dominance is used to compare each strategy. The results of this study indicate that, as a risk management strategy only, shade nets are not economically viable and hail insurance is seen as the less risky strategy compared to self-insurance. Using the empirical data of a typical producer with an expected yield of 13.6 ton per hectare (average yield potential), shade nets will not be justifiable, even with an increase in the quality of the fruit. Self-insurance and hail insurance are stochastically dominant of first order over shade nets for all scenarios. Furthermore, self-insurance does not dominate hail insurance in terms of first- or second-order stochastic dominance in any scenario, meaning that it is a riskier management strategy. The simulated results based on empirical data from a top producer with an expected yield of 18.4 ton per hectare (high yield potential) show that shade nets are stochastically dominant (of first order) over all other strategies when there is an increased quality of fruit without a decline in yield. If there is no increase in quality of fruit cultivated under shade nets, hail insurance and self-insurance will have first-degree stochastic dominance over the shade net strategy. As with the typical producer, there is no scenario where self-insurance is stochastically dominant (of first or second order) over hail insurance. It is possible for hail insurance to have second-degree stochastic dominance over self-insurance.

AFRIKAANSE OPSOMMING: Hierdie proefskrif vergelyk risikobestuur strategieë vir avokado produksie in Suid-Afrika. Avokado produsente in Suid-Afrika streef daarna om vrugte van hoë gehalte te lewer wat geskik is vir die uitvoermark om 'n pryspremie te verdien. Produsente implementeer risikobestuur strategieë om abiotiese stresfaktore, wat as produksie risiko’s beskou word, te bestuur. Die belangrikste abiotiese stres faktor wat in hierdie studie ondersoek word, is haelskade. Drie strategieë wat produsente kan gebruik word vanuit 'n ekonomiese oogpunt geëvalueer en vergelyk. Die drie strategieë is: die oprigting van 'n vaste skadu net struktuur oor boorde, die aankoop van haelversekering by 'n finansiële instelling, en selfversekering. Die selfversekering strategie bestaan uit produsente wat die risiko binne hulle onderneming dra en geen risikobestuur strategie implementeer nie. Skadu nette verander die mikroklimaat en kan lei tot sekondêre voordele, soos verhoogde vrug kwaliteit. Om die risikobestuur strategieë te evalueer, word 'n geheel plaas meerjarige stogastiese begroting gebruik om 'n tipiese avokado plaas te verteenwoordig. Die kern uitset veranderlikes (KUVs) wat in die begrotings model gebruik word, is opbrengs, kwaliteit, prys, haelversekering premies en hael risiko. Hierdie KUVs word gebruik aangesien dit geïdentifiseer is as die veranderlikes met die grootste kans om die finansiële prestasie van die avokado-boerderystelsel te beïnvloed en in lyn is met die navorsingsvraag. Empiriese data en metodes wat deur Richardson (2000) voorgestel word, word gebruik om die waarskynlikheidsverdeling vir die KUVs te simuleer. Hael risiko is die enigste uitsondering en word gesimuleer deur ’n Bernoulli waarskynlikheidsverdeling in kombinasie met ʼn “GRKS” driehoekige verdeling. Die stogastiese begrotings model het 500 iterasies netto teenwoordige waardes (NTWs) vir elke risikobestuur strategie met behulp van Simetar rekenaarsagteware gedoen. Die 500 NPV's van die drie risikobestuur strategieë is omgeskakel in kumulatiewe verspreidings funksies (KVFs). Stogastiese dominansie is gebruik om elke strategie te vergelyk. Die resultate van hierdie studie dui daarop dat skadu nette nie slegs as 'n risikobestuur strategie ekonomies lewensvatbaar is nie. Vir 'n tipiese produsent met 'n verwagte opbrengs van 13,6 ton per hektaar (gemiddelde opbrengspotensiaal), is skadunet nie regverdigbaar nie, selfs nie met 'n toename in vrug kwaliteit nie. Die enigste situasie waar skadunet geregverdig kan word, is by top kwekers met 'n verwagte opbrengs van 18,4 ton per hektaar (hoë opbrengspotensiaal) en verhoogde vrug kwaliteit sonder 'n afname in opbrengs. Gevolglik is skadunet nie slegs as 'n risikobestuur strategie verantwoordbaar nie. Daar is geen scenario waar die selfversekerings strategie stogastiese dominansie van eerste of tweede rang vertoon oor hael versekering nie. Daar is wel gevalle waar hael versekering stogasties dominant (van eerste en tweede orde) oor selfversekering is.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/108243
This item appears in the following collections: