adminDr Gift Mugano
In January 2011, the Ministry of Industry and Commerce launched the Commodity Exchange (COMEX). The facility is supposed to help farmers in smoothening trade in agricultural commodities. However, to date, smallholder farmers are still waiting in anticipation for this project to take off the ground in the hope that it will address their marketing challenges. One of the challenges constraining the take-off of the COMEX is lack of finance. In the region there are examples of successful commodity exchanges including the South African Futures Exchange (SAFE).
Smallholder farmers face a multiplicity of challenges associated with production and marketing of their produce.
Farmers lack proper storage facilities hence incur heavy post harvest losses due to damage by weevils, rodents and at times fungal infestation. Farming areas are inaccessible due to poor road infrastructure.
This also translates to high transaction costs as the few transporters available charge high prices on account of using the poor roads. Smallholder farmers also lack market information. Farmers grapple with the questions; what price to sell at? Who to sell to? and what is the best time to sell?
Liberalisation has its benefits mainly attributed to price determination as a result of market forces of demand and supply.
Lack of marketing information, however, renders the marketing process non- transparent with no protection to the large number of smallholder farmers.
Market liberalisation in Zimbabwe has resulted in layers upon layers of dubious dealings without any consideration of quantity, description, quality and price.
The multi-currency system has resulted in a liquidity challenge for smallholder farmers leading to farmers selling at unviable prices to cover living expenses.
As a result some unscrupulous middlemen resort to barter trade using soap, sugar, second-hand clothing, etc, in exchange for produce. In these deals farmers are always on the losing end.
GMB is well placed to deal with farmer’s problems given its widely distributed infrastructure and as the buyer of last resort. Despite a strong presence in the farming areas late payment of delivery has been the main challenge. As a result farmers sell to intermediaries at low prices just to have some cash to cover day-to-day family costs. These challenges call for alternative efficient marketing systems and the commodity exchange can be one such avenue. But what is a commodity exchange?
A commodity exchange is a market in which multiple buyers and sellers trade commodity-linked contracts on the basis of rules and procedures laid down by the exchange, such exchanges typically act as a platform for trade in futures contracts, or for standardised contracts for future delivery.
In other parts of the developing world, a commodity exchange may act in a broader range of ways, in order to stimulate trade in the commodity sector. This may be through the use of instruments other than futures, such as the cash or “spot” trade for immediate delivery, forward contracts on the basis of warehouse receipts, or the trade of farmers’ repurchase agreements for financing known as “repos”.
Alternatively, it may be through focusing on facilitative activities, rather than on the trade itself, as is the case in Turkey, where exchanges have served as centres for registering transactions for tax purposes.
By trading on a commodity exchange the benefits are numerous. There is an efficient price discovery mechanism since a commodity exchange is ideally bringing in large number of buyers and sellers. Because of the laid down rules and procedures which ensures a guaranteed settlement system it reduces price risks. Deals are transparent in that prices are published and market information is available to all players. Availability of rules of transacting across the exchange ensures the integrity of member companies and brokers is monitored.
The exchange system makes available a dispute settlement system through rules of arbitration which offers a shorter route to the court system. The exchange ensures maintenance of standards of quality of commodities and trading practices. It also offers cost effective marketing system through transparent transaction costing and pricing of the commodities.
Commodity exchange contracts are signed by both parties and are legally binding hence there is security, certainty and transparency. The contracts will cover, quality, quantity, passing of ownership and risk, price, payment terms, inspection, transport, delivery and weight, packaging, force majeure, demurrhage, interest and arbitration. The futures trading allow producers and buyers to offset the effects of adverse future price movements through transparent, standardised, and efficient hedging of agricultural commodity prices.
Functions of a commodity futures exchange
One of the primary functions of a commodity exchange is price discovery. Price discovery refers to the mechanism through which prices come to reflect known information about the market. The price level established on the open market can therefore represent an accurate depiction of the prevailing supply/demand situation in the underlying commodity markets, whether in the spot market for current deliveries or in the forwards/futures markets for deliveries at specified time and place.
Farmers are more likely to find a market for crops when true level of demand is reflected in the price signals. Farmers become more informed about market and pricing information. There is improved received price from intermediaries because of authoritative and accurate reference price.
Cropping based on futures rather than spot price increases likely returns and facilitates crop diversification where farmers can better appreciate price, and ultimately income differentials. It reduces intra-seasonal spot price volatility, Increases returns to farmers as better enables them to hold until price level is good and empowers farmers as they can take more marketing decisions into their own hands.
The futures also take a price risk management function. Helps avoid serious losses when prices fall. Enables farmers to receive a guaranteed price from a purchaser or intermediary and facilitates more effective planning and investment because of greater income predictability
Despite the above obvious advantages there are barriers that will hinder smallholder farmers from participating in a commodity exchange. These include contract sizes that may far exceed the annual quantity of production those smallholder farmers are capable of; lack of knowledge, resources and capacity; infrastructure deficiencies; and cumbersome process of execution that may be beyond the farmer’s capacity.
Farmers may be able to break these barriers by participating through commodity associations or farmers’ associations who aggregate the hedging needs of several small-scale farmers and execute the trade on the exchange. The association or farmers’ union can manage the positions in the market and liquidate the contract at an appropriate time
Warehouse Receipt System
The use of warehouse receipts system allows for farmers as individuals or groups to deposit their produce in registered warehouses thereby reducing post harvest storage losses and solving lack of storage challenges. Warehouse receipts can be negotiable or transferable and used as collateral by smallholder farmers thereby improved access to finance. Farmers are well informed of movements in the markets and are able to access markets rapidly, so they can wait to sell at the right time for the best price.
Conclusion
For a commodity exchange to be successful there is need for policy consistence on agricultural marketing that is there is need to perpetuate the market liberalisation policy. Controls will literally make it impossible for a commodity exchange to operate. The Zimbabwe Agricultural Commodity Exchange (ZIMACE) case was killed by lack of consistency in policy.
For Zimbabwe, it was from controls and then liberalisation during the Economic Structural Adjustment Programme (ESAP) era to controls post ESAP to the present liberalization of grain marketing. Thus we have gone full cycle regarding marketing policy. If we are to address farmer viability and raise productivity, Government needs to expedite the operationalisation of the COMEX.
Actually, the monies Government is spending in input support schemes can be saved if the COMEX comes into life as market players will finance agricultural production themselves.
Dr Mugano is a Research Associate of Nelson Mandela Metropolitan University (SA), economic advisor, author and expert in International Trade and Competitiveness. Feedback: [email protected] <mailto:[email protected]>, cell: +263 772 541 209
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