Policy Brief No. Regional Network of Agricultural Policy ...€¦ · Agricultural Policy Research...
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1 Agricultural Commodity Exchanges and the Development of Grain Markets and Trade in Africa: Key Messages • A comprehensive approach to overcoming trade barriers in grain markets and trade is needed alongside the development of agricultural com- modity exchanges. • Development organizations can play a meaning- ful role in developing agricultural commodity ex- changes. Their role should reflect the specific trade challenges and policy commitments within individ- ual countries. • Governments’ are most effective in supporting the development of agricultural commodity exchanges when they adopt transparent and systematic mar - ket and trade policies. Regional Network of Agricultural Policy Research Institutes A Review of Recent Experience Policy Brief No. 4 Vibrant agricultural commodity exchanges will greatly enhance the performance of Africa’s agricultural sectors and contribute to overall economic development. Yet specific conditions in grain markets are required for agricultural commodity exchanges to de- velop. The absence or short-lived nature of many of these con- ditions explains why commodity exchanges for staple grains have remained stunted in sub-Saharan Africa despite strong interest in their development by the international donor community and by most elements of the private sector. This policy brief identifies these preconditions and assesses the scope for governments and development organizations to support the sustainable develop- ment of commodity exchanges in Eastern and Southern Africa. Barriers to developing agricultural trade and commodity exchanges in Sub-Saharan Africa Six main factors impede trading on agricultural commodity ex- changes in the region: (1) limited success in attracting financial institutions’ commitment to commodity exchanges, both as agents who are able to com- plete the transfer of payments from buyer to seller and as lenders to exchange participants; (2) the failure of exchanges to offer contracts that respond to un- met trader needs, especially those seeking mechanisms for hedg- ing quality, price and delivery risk;
Transcript of Policy Brief No. Regional Network of Agricultural Policy ...€¦ · Agricultural Policy Research...
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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/
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RegionalNetworkofAgriculturalPolicyResearchInstitutesinEastandSouthernAfrica
SecretariatattheIndabaAgriculturalPolicyResearchInstitute,LusakaZambiaPleasedirectenquiriestotheChairman,
Mr.ChanceKabagheEmail:[email protected]
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.
