Commodity exchanges bring new hope to Africa’s farmers

Posted on :Thursday , 29th September 2016

At the recent African Green Revolution Forum in Nairobi, one of the outstanding take-outs was that Africa may need $400 billion (Sh40 trillion) in investment in food production over the next decade to meet its needs.

But while finance is the problem, it is not the solution if we do not reorient its deployment. Many African countries and donor programmes have invested billions of dollars in the development of agriculture, focusing on increasing production and improving farmer yields, but there has been a less than comparative investment in broader market reforms.

Upping production without a corresponding effort to structure the market, and increase its size by creating platforms for farmers to link directly with domestic, regional and international markets, leads to plummeting prices. This truth is known and many models are being financed to address the market failures, from the new fad of outgrower schemes to the fading-in-popularity microfinance projects.

The conversation on Africa’s agricultural potential as a key driver of economic growth has been echoed at every forum and avenue. Yet, how is it that the transformation is yet to be realised, and a continent with such abundance is still not food secure? Why are farmers still victims in an industry that they anchor?

The resilience of small-scale farmers in Africa in the face of challenging conditions, vested interests and an un-level playing field proves that the odds are in favour of investments that take a long view.

Under such conditions, businesses and capital that offer disruptive innovations at scale offer the best path to transforming Africa’s agriculture to benefit its primary producers.

Disruptive innovations have heralded a renaissance in agribusiness. It is prudent that this renaissance is not stifled by ideologies that farming is largely a venture for the poor, uneducated populace.

Bargaining power Agriculture commodity exchanges present one such platform, creating a compelling and comprehensive approach to tackling some of the challenges inherent in the fragmented agriculture markets across the continent. First, a commodity exchange is a central marketplace where buyers and sellers come together to trade, often in contracts of underlying commodities, under set rules and regulations that provide price transparency to the entire market, enabling Africa’s food security.

Second, the commodity exchange’s warehouses offer storage to reduce post-harvest losses, and provide value-added services, like drying, fumigating and grading.

Third, and importantly, the collateralised product contracts or warehouse receipts de-risk bank loans to smallholder farmers, giving them more freedom of action to decide when to hold versus sell in the market, and thereby reap the value of their labour. Commodity exchanges address multiple challenges at once and at scale.

They can catalyse the agricultural sector, develop capital markets, and increase regional trade integration to drive Africa’s growth by shifting bargaining power to smallholder farmers.

Perhaps then, the question on whether Africa is ripe for a commodity exchange should be re-evaluated to achieve these structural market adjustments. Fragmented markets have failed to unlock Africa’s agriculture so why not embrace disruptive tools?

The ecosystem of an exchange like the Kenya East Africa Exchange and its sister EAX-Rwanda is one that creates room for both public and private sector partnerships, in a platform that leverages the power of convergence. The requirements for volumes (increased production), multiple farmers and buyers, mobile technology systems, and de-risked financing require stronger links between governments, development finance and donor institutions, and the private sector.

Commodity exchanges have existed since 1864, and it is undeniable that they deserve further promotion in our quest to ensure food security, food safety, and food as an asset class in Africa. It is time to truly blend finance for agricultural transformation.

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