AFRICA’s smallholder farmers have long been victim to fragmented, disorganized 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. Africa’s poor tend to be its smallholder farmers.
They remain poor because they have no money to buy good quality seeds and fertilizer and no money to invest in machines or techniques that can optimize their
farming (e.g. 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.
UNCTAD noted that the fragmentation of farmers led them to exploitation of farmers.
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 contactwith.
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 ofthe on-going market price (UNCTAD, 2014).
Organised and regulated commodity exchanges were noted as effective platforms for the provision of revolutionary changes to the way African smallholder farmers fare.
UNCTAD (2014) explained the benefits of commodity and derivatives exchanges
as well as a concise explanation of why they are important:
“Commodity Exchanges are highly efficient platforms for buyersand 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 UNCTAD 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 which farmers would not otherwise have access to.
This 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 which ensures farmers can 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, meaning farmers can ‘lock
in’ their sales price at the time of planting particular crops.
This way farmers can enjoy an element of certainty about the price they will receive at harvest and can budget accordingly.
They can choose which crops to grow and judge when is the best time to sell them on the market, minimising the risk of losing revenuesas prices fluctuate.
Fewer risks to financiers, who 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 standardmodes 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.
A stimulus for infrastructure development, as an exchange, by definition, 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.
As Zimbabwe is working on establishing the commodity exchange, it is important
that 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 are put in place. Source UNCTAD (2014)