Factors affecting participation in livestock lease agreements : a study of dorper sheep and jersey cattle farmers in South Africa.

Thesis (M.Sc.)-University of KwaZulu-Natal, Pietermaritzburg, 2007.

This dissertation investigates the hypotheses that high transaction costs contribute to relatively low participation rates in livestock leasing in South Africa; and that specific contractual characteristics contribute to minimising total transaction costs of livestock leasing contracts in South African commercial agriculture. Many emerging livestock farming businesses may value the option of leasing-in livestock. Likewise, many established livestock farming businesses are currently undergoing expansion (especially dairy farms) and may also value the option of leasing-in livestock. A reduction in transaction costs and an improvement in efficiency of the livestock lease market could prove beneficial for emerging/expanding livestock farms. Likewise, investors, who anticipate competitive rates of return from investments in livestock, may value the option of owning and leasing-out livestock to suitable farm businesses. Transaction costs in livestock rental contracts include costs of information about contracts, costs of monitoring and enforcing contracts, costs of finding party members to contract with, the costs of risk of an agreement being terminated due to exogenous factors such as land claims, the risk of incomplete contracts and the costs of risk bought about by adverse selection and moral hazard. The magnitude of transaction costs incurred by participants of a livestock leasing contract are a function of how costs and risks are shared between the lessee and lessor, the inclusion of specific contractual clauses, the type of leasing contract, the relationship between party members and additional contractual characteristics. A census postal survey of two populations of livestock farmers, namely members of the Jersey Breeders' Societies of South Africa, was conducted during April and May 2007 to collect data on farmers' perceptions of and their participation in livestock rental contracting agreements. Elicited data was analysed using a multinomial discriminant analysis to identify factors that discriminate between non-participants of the livestock leasing market, lessees of livestock and lessors of livestock. Ordinary least squares regression was used to identify preferred characteristics of livestock lease contracts. Results of the first analysis suggest that a livestock leasing market does exist in South Africa; however, the market is characterised by high transaction costs. Non-participation in livestock leasing markets amongst survey respondents is partially attributable to the high perceived costs of obtaining market information and establishing and enforcing livestock lease agreements. Findings of the second analysis show that survey respondents, on average, showed a preference for formal agreements, leasing commercial animals for shorter periods and keeping detailed inventories. It is concluded that providing livestock farmers with information about important characteristics of successful livestock lease agreements may reduce transaction costs, and thus reduce market inefficiency in the market.