Setting up an agric commodity exchange

Perishable commodities tend to have a high turnover and good prices if produced at the right time

Charles Dhewa Correspondent
One mistake that has to be avoided is trying to build an agricultural commodity exchange from external case studies. Each context is unique and requires carefully taking into account existing market dynamics.

In Zimbabwe, the diversity of commodities and activities in informal agricultural markets can signal reliable pathways in establishing an agricultural commodity exchange. One of the reasons is that agricultural commodity exchange has existed for generations in parallel with cash-based marketing systems.

When approaching the matter from informal agricultural markets, a fundamental first step is figuring out how much of commodities identified from a particular community go straight into the farmer’s market where breaking bulk happens.

What is the proportion that goes into the wholesale market for pushing to other markets in bulk?

For instance, if 60 percent of butternuts and potatoes travel from Harare to Bulawayo, there is need for a commodity exchange. Where lower volumes of commodities exchange value, there is no need to structure and formalise a commodity exchange.

A robust farmers’ market should not be swallowed by a commodity exchange because such a market acts as an option for the local ecosystem. Where a wholesale agricultural market exists, its main role is aggregating commodities, handling and rationalising food supply to food chain stores and other fresh produce markets.

Characterising the agriculture sector for the sake of setting up a commodity exchange should not just focus on farmers but look at all commodities in terms of volumes as well as how they are produced, handled, marketed and consumed.

Additional elements include knowledge, skills base, information access, technology, natural resources, individual resources/income and markets.

Towards a market scoring mechanism

Existing markets can be scored in terms of availability, volumes taken and price elasticity. Farmers’ markets may get a high market on price but score low on price elasticity because prices can fall below contract prices.

This connect with a guaranteed market as a related important factor. While knowing your buyer is key, in contract farming arrangements the buyer is known together with price.

On the informal market a buyer may not be clearly known but the market is always available. In this case informal markets can receive a higher score than contractual arrangements where contracting companies usually end up blaming external factors such as imports.

Uses of commodities at various levels including household level, end-user level and others should also be carefully considered. Due to competitive forces at the production level, some farmers can only decide to sell after knowing the surplus of staple crops.

It means the market cannot be guaranteed of surplus on staple commodities since they are influenced by diverse competitive forces. The situation is different with butter-nuts, chilli, sweet potatoes and others.

While farmers may not build storage resources for these other commodities, surplus for the market can ensured, especially if there are no other options or alternative uses.

Another powerful factor that is often taken for granted by many value chain actors is substitutability versus luxury perceptions. The market for necessities like tomatoes is always available but these have competing uses between the household and the market.

On the other hand, a luxury like peas can search for its high value markets. People who have fallen in love with luxuries often do not have substitutes for them.

It means the market can be assured except in cases where there is over-production. Although most value chain actors now understand its impact, perishability needs a lot of attention.

Perishable commodities tend to have a high turnover and good prices if produced at the right time but when ripe they must go with the price on the market. When a tomato starts ripening you cannot stop it.

Pros and cons of staple crops

While these can be produced once annually, their prices are often favourable because they can be stored or preserved. However, the appreciation of their price has a ceiling. For instance, the price of maize will not double irrespective of high shortage levels and demand.

While a maize farmer can be assured of income throughout the year, there is a price ceiling. Maize will never reach $15/bucket.

This situation is exacerbated by interventions by development partners and government programmes which can sometimes distort markets through free inputs, for instance.

It is important to figure out which crops they normally support so that farmers can achieve possible consistence in supply at a good cost. In most cases, too many commodities and players distort the market.

It should be a balance between food security for the nation versus wealth creation for the farmer and the nation. After satisfying food security, what about wealth creation? A model is needed to strike the right balance between food security and the market.

The power of tracking consumption patterns

It is important to keep tracking consumption patterns in order to discover whether they are going up or down for particular commodities. What is the situation with the consumption of small grains, sweet potatoes, potatoes or maize?

If they are on the increase that is a plus but if they are on the decrease, there is a problem with tubers like potatoes. A related issue is the substitutability of commodities by other commodities.

If things remain expensive consumers are forced to make choices. Where sweet potatoes substitute bread, the price of bread limits the price of sweet potatoes in the market. High value crops like carrots and peas do not have many substitutes.

The middle to high class who have developed a taste for these do not easily change their options unlike ordinary consumers who can easily substitute all kinds of leafy vegetables – Covo with Tsunga. But carrots are not always available for consumers.

How the export market is not a walk in the park

Getting into the export market makes a lot of sense for many African farmers. However, export markets demand a much tougher proposition and sophisticated mind-set. Collecting mangoes from scattered households and bulking them is a tough call.

Evidence and knowledge are critical for a good investment judgment. While tons of sweet potatoes are required in Europe, a lot more discipline and social mobilisation is required to aggregate such commodities for a foreign market.

Agriculture is a sparsely distributed activity and requires distributed management. There is no money that lies in a busy street. You need others to succeed and have to sweat for real money and profit.

Unfortunately, too many fragmented agricultural interventions not backed by evidence. There are cases where development partners have invested hoping that the private sector would take advantage but that has not happened maybe due to lack of readiness or capability.

On the other hand, most big institutions are not reaching out, preferring to stay distant from ordinary people’s socio-economic action. While top down approaches have not always worked, bottom up approaches have also been found wanting.

That is why brokers are critical. Success comes from taking into account many factors including people’s capacity of meet their social needs, not just income.

Seeing the market as an ecosystem

Farmers and all value chain actors should broaden their view of agricultural competitors and opportunities. That will enable them to see markets as fast moving ecosystems in which they should be able to identify new sources of value.

A critical part of understanding agricultural ecosystems is following the data which are becoming the coins of the realm. Competing effectively means collecting large amounts of data and developing capabilities for storing, processing and translating the data into actionable agribusiness insights.

Data diversity is a real source of value as opposed to relying on narrow pools of data which hinder finer micro-segmentation in the whole ecosystem.

Better data can support analytically driven scenario planning and inform how ecosystems will evolve. For instance, data enables informal markets to become superior at interpreting the integrated nature of agriculture and nutrition.

Without data, it is easy for value chain actors like financial institutions to become irrelevant. Instead of meeting entrepreneurs where they are, financial institutions will continue changing labels and recycling models.

For instance, most conventional lending models force women and youths into chicken projects and cross-border trading instead of meaningful and innovative enterprises. Funding innovation is one way of unlocking dormant potential in most of our communities and build trans-generational businesses in ways that tap into reservoirs of soft knowledge that have made other economies grow.

  •  Charles Dhewa is a proactive knowledge management specialist and chief executive officer of Knowledge Transfer Africa (Pvt) (www.knowledgetransafrica.com) whose flagship eMKambo (www.emkambo.co.zw ) has a presence in more than 20 agricultural markets in Zimbabwe. He can be contacted on: [email protected] ; Mobile: +263 774 430 309 / 772 137 717/ 712 737 430.

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