- Commodity exchanges are organized marketplaces that facilitate the trading of agricultural commodities such as grains, livestock, and even precious metals.
- These exchanges provide a structured environment for buyers and sellers to come together and exchange commodities based on standardized contracts.
- In Southern Africa, these exchanges have taken on a transformative role in empowering farmers and bolstering the agricultural sector.
Southern Africa’s agriculture is marked by its rich diversity of crops and products. According to International Fund for Agriculture (IFAD), agriculture is the largest sector in the East and Southern Africa region, employing 65 per cent of Africa’s labour force and accounting for over 30 per cent of the region’s GDP.
But it’s not without its hurdles. Smallholder farmers, who constitute a substantial portion of the agricultural workforce, often grapple with unpredictable market prices. They also suffer from limited access to credit, and inadequate information on market trends.
Additionally, the effects of climate change are becoming increasingly pronounced, posing threats to crop yields and stability. It is within this context that commodity exchanges emerge as a beacon of hope.
Commodity exchanges in Southern Africa
Commodity exchanges are organized marketplaces that facilitate the trading of agricultural commodities such as grains, livestock, and even precious metals. These exchanges provide a structured environment for buyers and sellers to come together and exchange commodities based on standardized contracts. In Southern Africa, these exchanges have taken on a transformative role in empowering farmers and bolstering the agricultural sector.
Malawi has two commodity exchanges – the Agricultural Commodity Exchange for Africa (ACE), and the Malawi Agricultural Commodity Exchange (MACE), both established in 2004. According to ACE’s website, the exchange’s journey began in 2004 when National Smallholder Farmer’s Association of Malawi (NASFAM) conceptualized the idea of establishing a commodity exchange in Malawi.
In 2006 ACE was born and set off to, not only to establish a thriving agricultural commodity exchange, but to develop structured markets in Malawi.
The Zimbabwe Mercantile Exchange (ZMX) is an agricultural commodities trading platform with automated electronic warehousing and receipting capabilities and was launched on August 18, 2021.
According to an article published by The Herald on August 19, 2021, the exchange initiative is a partnership between the Government and private sector participants that include Financial Securities Exchange (FINSEC), a licensed securities exchange, TSL Limited, a publicly traded agro-industrial business and CBZ Holdings, a publicly traded financial services business among others.
ZMX is not the first commodities exchange in Zimbabwe, the Zimbabwe Agricultural Commodity Exchange (ZIMACE) was the first and was launched in March 1994. However, according to an article by TechZim, ZIMACE was shutdown in 2001.
Benefits of Commodity Exchanges
In Zambia, the Zambian agricultural commodities exchange (ZAMACE) was established in 2007. But, could not start operations until the enactment of the Agriculture Credit Act, ZAMACE finally started operations to create a platform for farmers to deposit their grains at various warehouses countrywide where a receipt is issued and be redeemed for cash at the bank.
According to an article by Global Trade Review, the importance of commodity exchanges in the context of African trade was first mentioned in the Abuja Treaty of 1991, which established the African Economic Community (predecessor to the African Union).
“Commodity exchanges are highly efficient platforms for buyers and sellers to meet. They enable better and more transparent management of prices, whilst improving the marketing of physical commodities. They have significant and well documented developmental benefits, making economies more inclusive, boosting the links between agriculture and finance, and making the commodity sector more efficient and competitive,” states guidebook on African Commodity and Derivatives Exchanges – AfDB, 2013.
Commodity exchanges provide price discovery mechanisms
One of the most significant advantages of commodity exchanges is the establishment of transparent and fair pricing mechanisms. Prior to the advent of exchanges, farmers in Southern Africa often faced uncertainty in pricing their products. Through these commodity exchange platforms, farmers gain access to real-time information about market prices for their produce.
This empowers them to make informed decisions about when to sell, reducing the vulnerability to price fluctuations that has historically plagued the sector.
Transparent pricing not only ensures fair compensation for farmers but also encourages greater confidence and participation in the agricultural value chain.
Access to finance using commodities as collateral
According to Food and Agriculture Organization (FAO), there are an estimated 500 million smallholder farmers in the world. Only 7 per cent have access to financing for inputs like improved seeds, fertilizer or tools. The lack of financial access is primarily due to the lack of a formal credit profile of farmers and the cost of developing one.
For many smallholder farmers in Southern Africa, access to credit and financing is a perpetual challenge. Commodity exchanges can serve as collateral platforms, enabling farmers to use their future harvests as collateral for loans. This access to finance empowers farmers to invest in better seeds, equipment, and techniques, leading to increased productivity and improved livelihoods.
In a related article published by Business Chronicle on July 28, 2023, ZMX Trades and Markets Coordinator, Mr Dennis Chisevure said another key benefit to farmers is access to loans from financial institutions using commodities as collateral.
“Farmers now also have the benefit of accessing finance through banks while using their commodities as collateral. Most farmers had no collateral, a development that prevented them from accessing loans from banks.”
“Now they have an opportunity to use their commodity as collateral and get loans from banks and improve investment at their farms and other expenses,” he added.
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Commodity exchanges empower farmers
Commodity exchanges are not solely focused on trading. They also offer training programs and capacity-building initiatives for farmers. These programs impart knowledge about best agricultural practices, market trends, and risk management strategies.
Equipped with these skills, farmers can optimize their operations, enhance their productivity, and make informed decisions that positively impact their livelihoods.
Commodity exchanges can stabilize prices of produce
Commodities exchanges primarily deal with the trading of standardized, bulk commodities such as grains, metals, and energy resources. While these exchanges may not typically facilitate the direct trading of crop by-products, they can indirectly impact the pricing and trading dynamics of such by-products.
Crop by-products, like crop residues or secondary agricultural products, are often influenced by the prices of the primary crops they are derived from. When primary crop prices fluctuate on commodities exchanges, it can have a cascading effect on the pricing and demand for associated by-products.
Additionally, some specialized markets or platforms may exist to trade specific agricultural by-products or derivatives, but these are not as widespread or standardized as traditional commodities exchanges.
So, while commodities exchanges may not directly trade crop by-products, they can indirectly influence the market conditions for these products due to their impact on primary crop prices and overall market dynamics.
However, in Zimbabwe some associations urged ZMX to include crop by-products from listed commodities in warehouse receipting and on spot trading. According to The Herald, Stockfeed Manufacturers Association of Zimbabwe executive administrator, Dr Reneth Mano said the ZMX trading platform had come at an opportune time when more products, among them wheat, are being incorporated into the trading platform.
Strain on manufacturers’ budgets
“Grain millers end up with stockpiles of maize and wheat bran from their meal and flour processing operations. Their immediate desire is to get rid of these products from their store houses to avoid storage costs.
“They do so by selling them to stockfeed manufacturers. A glut in supply of the by-products strains manufacturers’ budgets, as they do not have capital to procure their annual requirements within a week or months’ time,” said Dr Mano.
The establishment of the trading commodity platform for the end products will take pressure off millers who must desist from exporting these raw products, as stockfeed manufacturers will need them later in the year.
“The same happens to oil expressers whose main interest is cooking oil, which accounts for 20 per cent of cooking seed volume. After oil expression, cotton meal and hulls are produced and are offloaded to stockfeed manufacturers. It is our hope that these products, which are not controlled are traded back on ZMX spot and futures market,” he added.
The inclusion of by-products on the trading platform will present livestock producers, among other manufacturers, with a low-hanging fruit that allows them to trim costs of production.
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