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Agricultural Commodity Exchanges and the Development of Grain Markets and Trade in Africa:

Key Messages

• A comprehensive approach to overcoming tradebarriers in grain markets and trade is neededalongside the development of agricultural com-modityexchanges.

• Development organizations can play ameaning-ful role in developing agricultural commodity ex-changes.Theirroleshouldreflectthespecifictradechallengesandpolicycommitmentswithinindivid-ualcountries.

• Governments’aremosteffectiveinsupportingthedevelopmentofagriculturalcommodityexchangeswhentheyadopttransparentandsystematicmar-ketandtradepolicies.

Regional Network of Agricultural Policy Research Institutes

A Review of Recent Experience

PolicyBriefNo.4

Vibrant agricultural commodity exchanges will greatly enhancetheperformanceofAfrica’sagriculturalsectorsandcontributetooverall economic development. Yet specific conditions in grainmarketsarerequiredforagriculturalcommodityexchangestode-velop.Theabsenceorshort-livednatureofmanyofthesecon-ditionsexplainswhycommodityexchangesforstaplegrainshaveremainedstuntedinsub-SaharanAfricadespitestronginterestintheirdevelopmentby the internationaldonorcommunityandbymost elements of the private sector. This policy brief identifiesthesepreconditionsandassessesthescopeforgovernmentsanddevelopment organizations to support the sustainable develop-mentofcommodityexchangesinEasternandSouthernAfrica.

Barriers to developing agricultural trade and commodity exchanges in Sub-Saharan Africa

Six main factors impede trading on agricultural commodity ex-changesintheregion:

(1)limitedsuccessinattractingfinancialinstitutions’commitmenttocommodityexchanges,bothasagentswhoareabletocom-pletethetransferofpaymentsfrombuyertosellerandaslenderstoexchangeparticipants;

(2)thefailureofexchangestooffercontractsthatrespondtoun-mettraderneeds,especiallythoseseekingmechanismsforhedg-ingquality,priceanddeliveryrisk;

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(3)theinabilityofcommodityexchangestoreducethetransactioncostsofexchange,whichisoneofthemajortheoreticalbenefitsofacommodityexchange.Theanonymousnatureof tradingonacommodityexchangecanexacerbate trading risks rather thanreducethemwhencontractsafeguardsaremissingandcontractcomplianceisonlyweaklyenforced;

(4)thepotentialforconflictofinterestamongbrokerswhoalsoactasoff-markettraders;

(5)thepotentialformarketmanipulation,whichoccurswhenmar-kets become thinly traded, for examplewhenmarketing boardspurchaseasignificantportionof thenationalmarketedoutputorwhenrisksassociatedwithtradingonanexchangeareasymmetricbetweenbuyersandsellers;and

(6)actors trading in thinmarketsare forcedtoabsorbhighfixedcostsassociatedwith theoperationof theexchange. Whenthecostsofoperatingtheexchangearenotspreadoveralargevol-ume of transactions, those that use the exchange must incurhighercostsoftradingontheexchangethanwouldbethecaseiftradingvolumeswerehigh.Exacerbatingallthesefactorsistheunpredictabilityofgovernmentinterventionincommoditymarkets.

Key indicators of market readiness for agricultural com-modity exchanges

Factors that signal a hospitable environment for the introductionofgraincommodityexchangesinclude(1)areadinessoffinancialandbankingfirmstofulfilcommodityexchangetransactionsandtolendtoactorsinthegrainsectorbasedonaperceptionthatitisprofitableforthemtodoso;(2)astrongdemandandwillingnesstopayamongactors in thegrain industry for risk-shifting instru-ments;(3)amanagemententitythatisperceivedtobetrustworthy,even-handed,andyetdecisiveinitsapproachtoresolvingcontractdisputes betweenmarket participants, based on clearly definedrulesofbehaviourforparticipatingontheexchange;(4)transparentrulesgoverningthebehaviourofbrokers; (5)acommitmentfromgovernmentstoadopttransparentandpredictablerulesfordirect

stateoperationsingrainmarkets,includingtradepolicies;and(6)vibrantspotmarketswithlargetradevolumesarealreadyinplace.

It is not necessary for all of these factors to be in place beforedonororganizationscanmeaningfullysupportthedevelopmentofagriculturalcommodityexchanges.Theimportantpointistocon-ceiveofsupportforcommodityexchangesholistically,recognizingthatallcommodityexchangesoperatewithinasystem,and thatsupportforovercomingweakaspectsofthegrainmarketingsys-temwillbeneededaspartofacomprehensiveprogramtosupportthedevelopmentofagriculturalcommodityexchanges.

Development partners role

Developmentpartnerscanplayacatalytic role insupporting thedevelopmentofagriculturalcommodityexchangesaslongasthereissufficientcommitment,firstfromactorsinthefinancialandcom-moditysectors,andsecondlyfromgovernmentstoensurestableandpredictablecommoditymarketingandtradepolicies.Donorscouldprovideinterimsupportforbasic“nutsandbolts”strength-

eningofthegrainmarketingsystem(e.g.,warehousecertificationservices,collateralmanagementandsettlementservices,contractdispute resolutionprocesses, investments in transportation infra-structure),whilealsosupportingtherealizationofthesixconditionsspecifiedabove.

Governments’ role

Fortunately, therearesignsof increasingcommitment to thede-velopmentofcommodityexchangesbysomegovernmentsintheregion.Detailedconsultationsareneededtoensurethatgovern-mentsunderstandhowcommitmenttothedevelopmentofcom-modityexchangeswouldcircumscribetheirbehaviourandpolicychoices. Inparticular,prospects for thesustaineddevelopmentof commodity exchanges are highest where governments areprepared to accept amore limited and predictable approach tointervening ingrainmarketsand to tradepolicy. Todate,mostgovernmentshaveconsideredsuchcommitmentsto imposeun-acceptableconstraintson theirmandate toensurenational foodsecurity.

Developing commodity exchanges as a comprehensive and multi-faceted approach to food security

Amajorconclusionfromthisstudyisthatcommodityexchangesshouldnotbe viewedaspanaceas for rectifying themanychal-lenges facingAfricanagriculturalmarkets.Thedevelopmentofacommodityexchange isnotanend in itself,but is ratheran im-portantcomponentintheprocessofdevelopingefficientmarketingandtradingsystemsthatpromotesocialwelfare.Whilecommod-ityexchangescanimprovetheefficiencyofmarketsintheregion,theycannotbeexpected to imposeorderondysfunctionalmar-kets.Onlyoncethemajorgrainmarketsoftheregionareabletoachieveminimumthresholdlevelsofpolicystabilitywillinvestmentincommodityexchangesbegintocontributemeaningfullytomar-ketperformanceand toadvancingnational foodandagriculturalpolicyobjectives.

“ There are signs of increasing com-mitment to the development of com-modity exchanges by some govern-ments in the region...”

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JayneT.S,SturgessChris,KopickiRon,SitkoNicholas.2015.AgriculturalCommodityExchangesandtheDevelopmentofGrainMarketsandTrade inAfrica:AReviewofRecentExperience.ReportcommissionedbyFoodTrade/EastandSouthernAfrica,DaresSalaam,Tanzania,availablefrom:http://fsg.afre.msu.edu/gisaia/Ag_Commodity_Exchange_Report_FoodTrade.pdf

MbengMezui,Cedric,LamonRutten,SofianeSekioua,JianZhang,MaxMagorN’Diaye,NontleKabanyane,Yannis,Arvanitis,UcheDuru,BlemingNekati,GuidebookonAfricanCommodityandDerivativeExchanges,AfricanDevelopmentBank,2013.

Rashid,S.,A.Winter‐Nelson,andP.Garcia.2010.PurposeandPotentialforCommodityExchangesinAfricanEconomies.

IFPRIDiscussionPaperNo.01035.Washington,D.C.:InternationalFoodPolicyResearch

Whitehead,Eleanor,2013.Africa’sAgriculturalCommodityExchangesTakeRoot,ForbesandAfricanEditionof theFinancialTimes,August15,2013.LastaccessedMay26,2014:http://www.forbes.com/sites/skollworldforum/2013/08/15/africas-agriculture-commodity-exchanges-take-root/

Suggested Readings

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RegionalNetworkofAgriculturalPolicyResearchInstitutesinEastandSouthernAfrica

SecretariatattheIndabaAgriculturalPolicyResearchInstitute,LusakaZambiaPleasedirectenquiriestotheChairman,

Mr.ChanceKabagheEmail:chance.kabaghe@iapri.org.zm

Funding for underlying research provided by:

Food Trade Eastern and Southern Africa, Dar es Salaam Tanzania.

We recognize the contributions from researchers in ReNAPRI: 1. The Institute of Social and Economic Research (IRES), University of Kinshasa, Democratic Republic of Congo;2. Tegemeo Institute of Agricultural Policy and Development, Egerton University, Kenya;3. Centre for Agriculture Research and Development (CARD), Bunda College, Malawi;4. The Research Center for Agricultural and Food Policies and Programmes (CEPPAG),

Eduardo Mondlane University, Mozambique;5. Bureau for Food and Agricultural Policy (BFAP), Universities of Pretoria and Stellenbosch, South Africa;6. Department of Agricultural Economics and Agri-business, Sokoine University of Agriculture (SUA), Tanzania;7. Indaba Agricultural Policy Research Institute (IAPRI), Zambia.