Structured commodity markets can help unleash Africa’s agricultural potential – Quartz Africa

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With agriculture accounting for around 65% of the African workforce and 35% of the continent’s GDP, there is no doubt about the sector’s ability to contribute to the achievement of the continent’s main development priorities. Yet, as IIED argues, the agricultural industry in many African countries has not been able to “realize its full potential as an employer, equitable income distributor and national income provider”.

Many factors contribute to the current challenges and, as Dr Agnes Kalibata, President of AGRA and former Rwandan Minister of Agriculture, correctly stated in a recent interview, “we need to find financial tools that help us all. to step up the game.… prioritizing agriculture is not just the moral thing to do. It is an economic imperative.

Commodity exchanges offer important price risk management solutions for buyers and sellers.

Structured commodity exchanges represent one such financial tool and offer a compelling approach to tackling some of the challenges inherent in agriculture across the continent. Defined as “an organized market where buyers and sellers come together to negotiate commodity-related contracts according to the rules set by the exchange”, commodity exchanges should be seen as key drivers of development – they can make more inclusive economies and forge closer links between agriculture. and financial. As such, they deserve further exploration in our quest to achieve food security in Africa.

Importantly, commodity exchanges offer important price risk management solutions for buyers and sellers. Many require farmers to store produce in certified warehouses, ensuring crop safety and quality. This feature presents less risk for financiers who can use warehouse receipts as collateral, thus making it easier for farmers to increase bank loans. At the same time, structured markets also offer the possibility of “hedging” against volatile prices, which means that farmers can “lock in” their selling price when planting various crops. This characteristic is particularly valuable for small farmers, who represent around 80% of the continent’s producers, but are particularly vulnerable to economic shocks.

Small farmers who wish to participate in markets usually face the highest transaction costs. These are due to factors such as poor transport quality and lack of access to information and expertise – the main reasons why so many people struggle to escape subsistence farming. While the application of emerging ICT helps commodity exchanges integrate smallholder farmers into supply chains, exchanges also reduce transaction costs, as it is easier to find buyers and sellers through a centralized marketplace. . As a result, commodity exchanges can facilitate trade and stimulate economic growth in developing countries, potentially stimulating foreign direct investment.

The highly acclaimed Ethiopian Commodities Exchange (ECX), established in 2007, offers a tantalizing view of what can be achieved across Africa. ECX enabled farmers to access real-time price information, improve profits and productivity, reduce market segmentation and improve the quality of exports. On the latter point, Addis Ababa continues to innovate with the recent launch of a national traceability system – via new electronic tagging technology, international buyers are able to track the entire Ethiopian coffee footprint. .

However, despite some notable successes, it is important to recognize that trading is not a simple panacea. Their successful implementation requires an appropriate enabling framework, effective regulatory oversight and the commitment of governments to respect market pricing mechanisms. The challenges in Zambia, Zimbabwe, Nigeria and Uganda illustrate the importance of investing in the required infrastructure. Even in Ethiopia, Eleni Gabre-Madhin, founder of ECX, admits that the state has not built enough warehouses. To correct shortcomings like this in the government’s next five-year growth plan, current ECX chief executive Ermias Eshetu said they would “redefine their strategy from the bottom up.”

To ensure that the benefits arising from exchange activities are equitable and inclusive, education – a particular focus of the Planet Earth Institute (PEI), an international charity dedicated to scientific development in Africa of which I am a director – will also be essential. To this end, the 23rd In November, Prince Edward Island will host a fascinating meeting in partnership with INTL FCStone, a Fortune 500 financial services company that is currently leading major capacity building initiatives across the continent, with seminars on the commodity trade and risk management planned in several African cities in 2016.

As highlighted in a recent WEF report, achieving food security and making Africa a prosperous continent will involve addressing two fundamental challenges: how to facilitate the transition of smallholders to commercial production; and how to generate much needed private investment to help transform the agricultural value chain. While we must be sensitive to the individual needs of different African nations, the development of structured trade – integrated into a comprehensive commodity strategy that improves the productive capacity of farmers and encourages modernization of infrastructure – has the potential to help. significantly to address these two challenges. .

Very Hon. Lord Paul Boateng

Director of the Planet Earth Institute and new president of the Africa Enterprise Challenge Fund

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