A few weeks ago, Zambia’s agency responsible for food security the Food Reserve Agency (FRA) set its buying price for maize in this year’s crop marketing season at K110/50kilogram bag, a K40 increase compared to previous year’s K70/50kilogram bag. This announcement, was made by FRA Board Chairman Joe Simachela. FRA pegged soya beans at K150/50kilogram bag while paddy rice would be priced at K70 for a 40kilogram bag. Maize meal just a few days ago spiraled to levels deemed too pricey for the average citizen K145-K150 for a 25kilogram bag.
Unions and associations representing farmers such as the Zambia National Farmers Union (ZNFU) opposed these floor prices citing that these are underwater in light of prevailing market prices especially for corn that is priced circa. K130 – K140 for a 50kilogram bag.
Zambia grapples with food security risks fueled by the worst drought since 1981 that saw maize yields plummet to levels 400,000 metric tons below previous year’s output at 2million metric tons. The FRA however has enough maize stocks to hedge against the fluctuation in annual output.
COMMODITY ANALYSIS
For a very long time, the FRA has played a key role in managing food security and had supported the soft commodity marketing cause. It has set the floor price of commodities with which it has purchased directly from subsistence farmers – especially those that do not have direct access to mass markets to leverage off competitive commodity prices. Commodities trading initiatives through the Zambia Commodities Exchange – ZAMACE ideally was meant to deepen grain market liquidity, exploit supply and demand fundamentals in the region thereby allowing farmers maximize return from their crop sales as opposed to settling for a minimum floor price. What most Zambians have failed to understand and comprehend is that FRA maize price is a floor and not a market price. (The floor price is not only the minimum price but a good security price at which the FRA will purchase grain as it manages its grain inventory for the nation).
Pressure on the fiscals? How?
Because commodities trading has failed to take off, the burden of buying grain from subsistence farmers has been shifted to the state adding to their fiscal pressure. Any government will be concerned about the plight of its underprivileged and as such it has found itself buying above what it needs widening storage costs for the excess grain whose opportunity cost would have been to find itself in higher demand markets to maximize margin. It is for this reason that subsistence farmers have not morphed into commercial farmers because they have settled for the minimum they can get through FRA offering very little scope for growth.
Spiraling maize meal prices
Suffice to say the uptick in mealie meal prices reflects the autopsy effects of current supply demand fundamentals given a drought on one end. However arguably other analysts see this an indication of the margin the subsistence farmer is not getting because of a dysfunctional commodities trading lacuna. This is a sheer case of market failure as consequence of over dependence on the FRA (whose role is not to set market but food security pricing). A dysfunctional commodities gap puts pressure on the government to always step in. This is a very purely based public finance concept that governments will always look at the plight of the poor. In layman’s language, ZAMACE, ZNFU and other bodies that have the concerns of farmers at heart, have failed to influence exploitation of market opportunities thereby forcing the state to purchase maize from subsistence farmers (above the FRA quota) to address their livelihood which is a strain on the fiscals. Programs such as e-voucher handouts to farmers are liabilities to the state coffers but only to the extent that all associations that represent farmers have failed to develop grain trading functionalities that will allow even the smallest farmer to benefit from price arbitrages the market continues to see.
Delays in market development for commodities trading
A few years ago, in 2016, the commodities exchange announced that Zambia’s grain futures would make a debut on the Johannesburg Stock Exchange (JSE) and with this development, farmers would then be able to use grain futures to hedge against price fluctuations and volatilities. This form of derivatives trading would deepen Zambias commodities markets and create requisite visibility in the region. The South African Reserve Bank – SARB granted the JSE special dispensation to provide Zambian referenced grain derivatives contracts in US Dollars to non-residents qualifying South African and Common Monetary Area – CMA entities.
“We are working with JSE and this partnership will assist yield liquidity to the market through ZAMACE. This development will enable ZAMACE to project prices of crops not yet harvested or even planted as in the case in most developed countries,” ZAMACE Executive Director Jacob Mwale said in a phone interview.
This was welcome move seen as setting a hedging mechanism for farmers who face uncertainty in harvests due to weather or fluctuations in commodity pricing. With these futures then farmers would be more certain about cash flows to enable them meet obligations with lenders. However this has not materialized fully.
In response to a press query on whether Zambia’s grain trading futures where active on the JSE, Vuyo Mpumza a Capital Markets Analysts commented via e-mail:
“We need to test the settlement processes between the SARB, the JSE and the clearing members, and ensure it works seamlessly before go live. We will embark on this test in the second quarter of 2019, once the JSE’s Integrated Trading and Clearing (ITaC) project is live.”
The agriculture ministry had committed to erecting grain storage silos across the districts to assist farmers save on transportation costs to delivering grain to markets. Upon successfully storage, the farmers would then be given a warehouse receipt that farmers could use for collaterised finance through discounting etc to enable them access finance or liquidity. The warehouse receipt system (WRS) is under the agriculture credits Act 35 of 2010.
Zambia has strengthened regulation around wharehouse receipts as registered collateral. This was a major step towards instilling market confidence to deepen commodities trading.
This would then have the benefit of exchange is ideally supposed to trade maize, wheat, soya beans and other grain futures in the journey to help the poor farmers with a price discovery mechanism to allow the benefit of maximizing value for their produce. Sadly, this role has not been played by the exchange because of the following reasons:
Lack of sensitization of commodities trading opportunities to small scale farmers
Small scale farmers are not fully sensitized about the benefits of selling grain on the commodity’s exchange. Small scale farmers have been made to believe the Food Reserve Agency – FRA is the sole authority in determining market pricing of key commodities such as maize. Operationalization of commodities exchange trading has taken longer than anticipated.
Commercial banks have also shied away from their role in extending credit in the form of discount finance to farmers with warehouse receipts and as such potential financiers still shy away from the commodities market.
Maize export bans absurd solutions
Grain export bans are absurd solution to the market failure in the commodities market and are an autopsy of a dysfunctional trading mechanism in the country. The ministry of agriculture institute maize export bans to curb smuggling. However the black markets should signal potential markets and margin local farmers would earn if a proper price discovery mechanism was in place. Let alone ban fixing and lifting mirrors policy inconsistency in the agriculture sector that impact stability and growth.
How ZAMACE should ideally function.
ZAMACE is the authorized agency for implementation of the warehouse receipt system (WRS) under the agriculture credits Act 35 of 2010.
The WRS entails that farmers could deposit grains like maize, soya beans, groundnuts, wheat, into ZAMACE-certified warehouses and receive a receipt which could be used to obtain goods and services from participating fertiliser suppliers, chemicals and seed companies.
“Further, one can use the WRS to settle their equipment and tools and loan accounts with suppliers and access credit from participating financial institutions. So far, there are two participating banks, namely Stanbic and First National Bank (FNB) where farmers can approach the financial institutions to present their requirements and redeem part of their WRS receipts for cash,” the statement read.
Only a handful of commercial banks are accepting warehouse receipts as collateral. Currently only players such as Stanbic (SBZ), First National Banks (FNB) and Madison Finance (MF) have bought into the ZAMACE initiative leaving the other banks undecided. The state through the Ministry of Agriculture had committed to building warehouses across the nation for maize storage. These would then save farmers costs of having to transport their grain to Lusaka. How can the commodities market deepen when financiers shy away?
The role ZNFU and MAZ has not played in deepening soft commodities markets in Zambia
Commodities pricing in Zambia is very topical issue whose burden has been erroneously dumped on the Food Reserve Agency (FRA). The distinction between food security pricing and market pricing is a paradox that sadly even the Millers Association of Zambia (MAZ) and ZNFU seem to grapple with. Because of these asymmetries, the FRA has by default assumed the defacto role of a commodities exchange in addition to its mandate to manage food security. Instead of wresting with the FRA on what the floor prices should be, the ZNFU should focus more on lobbying for deeper commodities trading to ensure the architecture required for farmers accessibility to market price discovery benefits can trickle to the agriculture sector. At a time as this where drought effects have supported higher commodity prices, farmers are able to tap higher margins of their produce can satisfy high price orders compared to FRA pricing which provides the bare minimum.
The role of the FRA should end at securing food reserves for which it sets a food security price which it is willing to buy maize or grain from farmers. Beyond that, the commodities exchange should facilitate price discovery by bringing would be buyers and sellers together. This has been a key pain point and has stifled market development because the players that are supposed to be championing this cause are misdirecting efforts to set floor pricing. There is need for the ZNFU to rethink its approach to play a more vocal role at market development than fighting the FRA on floor prices.
Emergence of maize black markets
Because the ZAMACE has not played its role a parallel (black) market for grain has arisen which is fueled by smuggling by players that arbitraged the market in exploitation. Small scale farmers are exploited by these players buying at record lows and selling at exorbitant margins to markets where demand is high such as DRC and Kenya.
We cannot entirely blame the existence of a black market because the system has failed to ensure the right structures are in place to monitor and control market prices. This gap has made the FRA a de facto commodity’s exchange; no wonder they are under pressure to keep changing the maize price to suit farmer’s needs. This has allowed political interference to cap prices.
However, lack of appreciation of market reflective pricing has the potential to extinct the maize market and create shortages because farming the crop will just won’t be attractive anymore and this could threaten food security in the long run. Additionally, because FRA has assumed a shadow role of a de facto commodities exchange, political interference has resulted in market failure which has crippled commodity market trading efforts and development.
There is need for market players, regulators and requisite associations to come to the party if this position is to improve.
Authored by the BT Research Team
