Commodity exchanges

Helping Africa's fragmented farmers
September 01, 2014

This content was first published in the 2014 edition of Cultivate, our quarterly food and agribusiness newsletter.

Africa’s smallholder farmers have long been victim to fragmented, disorganised markets where they have had to sell their products for lower than the market price. Commodity exchanges offer more stable, more ethical trading platforms whereby farmers can benefit from fairer transactions and learn how to make wiser marketing and investment decisions. There has never been a better time to increase the number of commodity exchanges in Africa and ensure fledgling farmers have every chance of survival.

Smallholder farmers

Africa’s poor tend to be its smallholder farmers. They remain poor because they have no money to buy good quality seeds and fertiliser and no money to invest in machines or techniques that can optimise their farming (such as irrigation). With little infrastructure to connect their villages to the markets where agri-products are bought and sold, they are left cut off from a stable and profitable supply chain. This type of market fragmentation means that many African smallholder farmers are caught in a cycle of poverty.

Fragmentation can lead to farmers being exploited. In a pattern established over decades, various intermediaries, from private traders to public marketing boards, have taken advantage of the disorganised markets. Typically, such intermediaries can enjoy being the only purchaser a farmer has contact with. This lack of competition means they can ensure that a farmer has no choice but to take whatever price is offered. This is sometimes as low as 10 per cent of the on-going market price.

Organised and regulated commodity exchanges can therefore provide revolutionary changes to the way African smallholder farmers fare.

The key benefits of commodity exchanges

The benefits of commodity and derivatives exchanges are well documented, but a recent guidebook1 on African commodity exchanges provides the most concise explanation of why they are important:

Commodity Exchanges are highly efficient platforms for buyers and sellers to meet; primarily to manage their price risks better, but also to improve the marketing of their physical products. They [make] economies more inclusive, boosting the links between agriculture and finance, and making the commodity sector more efficient and competitive.

A study conducted under the auspices of UNCTAD2 identified a total of 69 positive impacts that commodity and derivatives exchanges offer. The most important can be summarised as follows:

Quick and easy dissemination of market price and other information

Disseminating market information can be achieved without any dramatic technological advances: in India, for example, the national post office delivers daily price information to villages, which is then displayed on blackboards in prominent places. Once farmers know what the market price is, they can enjoy fairer negotiations with purchasers and can make more informed judgements on what to invest in the future and how to market it.

A free and open auction system

Farmers may sell their goods close to the market price, or even above it. This is another feature that can help farmers make more informed decisions on their future farming activities, such as what to invest in and how to diversify their sources of income.

The opportunity to ‘hedge’ against volatile prices 

Farmers can ‘lock in’ their sales price at the time of planting particular crops, enabling them to enjoy an element of certainty about the price they will receive at harvest and budget accordingly. They can choose which crops to grow and judge the best time to sell them on the market, minimising the risk of losing revenues as prices fluctuate.

Fewer risks to financiers

Financiers can use warehouse receipts as collateral ready to liquidate in an event of default. Traditionally, financiers have considered agriculture as a high risk and low profit business for standard modes of bank-lending. As a consequence, farmers and others in the commodity value chain pay disproportionately high levels of interest. Through commodity exchange ‘eco systems’ (such as warehouses) forms of financing have been developed that can reduce financiers’ risk and costs of delivery by linking traditional financial tools with commodity exchange services.

By definition a stimulus for infrastructure development, such as an exchange, can only truly flourish with as many participants as possible. More commodity exchanges would provide African governmental bodies and investors with an impetus to create better roads to connect farmers to markets and reduce fragmentation. 

Commodity exchanges in Africa – past and future

Africa created one of the world’s first commodity exchanges, in Alexandria, Egypt, which was disbanded in 1961. The Alexandria Exchange not only played an important role in Africa, but attracted participants from as far away as the USA and India. In the recent past, there has been a proliferation of initiatives across the length and breadth of the African continent, all aiming to establish commodity exchanges with an efficiency and scope similar to the original Alexandria model.

It is pleasing to see that African policymakers are increasingly embracing the idea of commodity exchanges as a catalyst for growth as well as for equitable, inclusive and sustainable development. As time passes, most governments are providing the necessary legal and other frameworks to ensure that the new exchanges will have a chance of success.

There has never been a better time to expand the number of commodity and derivatives exchanges across the African continent. All the most important elements in establishing a sustainable exchange (i.e. policy environment; rules relating to ownership of exchanges; rules and regulations to underpin a successful exchange; better product development; as well as the creation of clearing guarantee structures) have evolved dramatically in recent years – we now need to keep the momentum going.


Footnotes
  1. Guidebook on African Commodity and Derivatives Exchanges, African Development Bank Group, 2013.

  2. Development Impacts of Commodity Exchanges in Emerging Markets, Adam Gross and Leonela Santana – Boado, 2009