Africa’s second largest red metal producer, Zambia, is richly endowed with arable land and an expanse of water bodies. This makes realization that it has potential to be Africa’s bread basket. Zambia also has 18 commercial banks. However, commodities trading efforts have been frustrated by either lack of risk appetite for structured products altogether or poor structures to support trading.
Asides the traditional bourse the Lusaka Securities Exchange – LuSE, a soft commodities exchange dubbed Zambia Commodities Exchange – ZAMACE does exist. This 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:
- 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 bas 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;
Farmers are not using grain futures to hedge against commodity price volatility
The South African Reserve Bank – SARB sometime in 2016 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, the benefits of the grain futures trading have yet been appreciated as there has been little appreciation in the Zambian market.
State of the art trading platform yet ineffective price discovery
ZAMACE unveiled a trading platform where buyers and sellers can now search on a daily basis for prices of agricultural commodities.
According to a press statement from the Zambian Commodity Exchange (ZAMACE), the discovery of prices of grains was now a reality in the Zambia following the ‘live’ trading that was fully operational.
ZAMACE is the authorised 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.
Financiers still shy away from the commodities market
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?
FRA has morphed into a de facto commodity’s exchange
Maize pricing in Zambia is very topical issue whose burden to determine has been erroneously lumped on the Food Reserve Agency – FRA. Its saddening to note that even the Millers Association of Zambia – MAZ have failed to distinguish between food security pricing and market pricing. The FRAs mandate is to ensure the nation has adequate grain stock to mitigate the advent of hunger or fluctuations in the price of maize meal. Reference can be made to previous periods where maize meal inflation was on the rise at a time when the FRA had adequate maize stock. However, this food security pricing must not be mistaken for market price of maize. Market price is the level at which a willing buyer is ready to pay for the commodity. The time when demand for maize was high in East Africa following El Nino weather, the pricing EA was willing to pay for Zambian maize was the real market price of maize which ideally should have been reflecting on the ZAMACE score boards.
“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. However this is struggling to happen and as such has forced the FRA to assume the role of a commodities exchange in setting prices to protect small scale farmers from being exploited,” The Business Telegraph said in a note.
For as long as FRA plays both a food regulatory role and sets maize pricing mistaken for market prices, competitiveness will remain a mirage.
Emergence of a maize parallel or black market
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.
*****Editor Kapesa Singogo********contributor Munetsi Zulu******
