UNCTAD Study Market

7/28/2019 UNCTAD Study Market

1/88

AFRICAN UNION UNION AFRICAINE

UNIO AFRICANA

Addis Ababa, ETHIOPIA P. O. Box 3243 Telephone 517 700

Fax: +251-1-517844

2nd EXTRAORDINARY SESSION OF THECONFERENCE OF MINISTERS OF TRADE21 - 24 NOVEMBER, 2005ARUSHA, UNITED REPUBLIC OF TANZANIA

Ext/Exp/Trade/6 (b) (II)Original: English

STUDY OF THE POTENTIAL FORCOMMODITY EXCHANGES AND OTHER

FORMS OF MARKET PLACES IN EASTERNAND SOUTHERN AFRICA


2/88

2

CONTENTS

Acknowledgements

Terms and abbreviations

Summary

Introduction

What is an agricultural commodity exchange and what purpose does it serve?

Country reports

Assessment of feasibility of a regional commodity exchangeRequirements for successful operationPotential volumes of trade

Attitude and response of potential stakeholdersFeasibility analysisConclusions

Consultants proposalsImmediate objectivesProject activitiesInputs required

Financial feasibilityExternal funding required

Other comments and suggestionsDevelopment of warehousing systemsDevelopment of a dispute resolution mechanismDevelopment of national commodity exchanges

Appendix !: Overview of agricultural marketing in COMESAAppendix 2: A review of contracts currently in useAppendix 3: Arbitration in COMESAAppendix 4: List of CFC representatives in each of the countries visited.Appendix 5: List of participants at the meeting with COMESA


3/88

3

Acknowledgements

The authors would like to thank the following for their assistance: -

All those people who gave so willingly of their time to meet with us, listen to ourpresentation and both ask and answer questions. As is usual however, therewere those who did more than most and in this context, we would like to makespecial mention of the following: -

Mr. Hagos Aregay Ministry of Trade and Industry, EthiopiaMrs. Mary Nizigiyimana Advisor to Minister of Commerce, BurundiMr. Jerome Gahungu Advisor to Minister of Commerce, BurundiMr. Louis Nyawenda Advisor External Commerce, BurundiMr. R. Matipa COMESA Secretariate, Lusaka


4/88

4

Terms and abbreviations

COMESA Common Market for Eastern and Southern AfricaSAFEX South African Futures Exchange

ZIMACE Zimbabwe Agricultural Commodity ExchangeCBOT Chicago Board of TradeNYBOT New York Board of tradeOTB Office du The du BurundiOCIBU Office Du Caf Du BurundiOCIR Caf Office des CafesOTC Over the counterLIFFE London International Financial Futures Exchange

ACE Agricultural Commodity Exchange (Zambia)FRSP Federation Rwandaise Du Secteur PriveTCB Tanzania Coffee Board

UCE Uganda Commodity ExchangeNASFAM National Smallholder Farmers Association of MalawiSHEMP Smallholder Enterprise and Marketing ProgrammePAMA Paprika Association of Malawi


5/88

5

SUMMARY

The authors were contracted to investigate the feasibility of establishing aregional agricultural commodity exchange in the COMESA Region and, to make

proposals and recommendations based on existing and foreseeable demand fora regional agricultural commodity exchange. This study focused on Burundi,Ethiopia, Kenya, Malawi, Rwanda, Tanzania, Uganda, Zambia and Zimbabweand looked specifically at coffee, cotton, grains and sugar as the maincommodities to be traded across the proposed commodity exchange. Thepotential for other commodities to be traded on the exchange were alsoinvestigated and recommendations are also included in this report.

In making these recommendations, they have looked at a variety of potentialtrading practices relevant to the operation of an agricultural commodity exchangeand, the benefits for the direct participants as well a the effects on the wider

economy in the countries concerned. These include reduced transaction costs,greater contract security, more predictable and improved product quality, muchgreater market transparency leading to wider market participation, a reduction inthe risk to market participants generally and, improved access to trade financeand external markets.

They then analyse the case for a regional agricultural commodity exchange in theCOMESA Region against the following key criteria

1. Market forces should determine prices.2. There is a need for many participants in the market, both from the buying

and selling perspectives.3. There should be strong farmer support, preferably including commercial

farmers.4. Substantial volumes need to be traded, to give credibility to the commodity

exchange itself and, to establish a market price based on supply anddemand.

Interviews with potential stakeholders show that some of the benefits to bederived from conducting trade over an exchange are very highly desirable. Theissue most commonly raised and perceived to be of paramount importance, isthat of reliable market information, the identification of markets and access to

them. Perhaps of equal importance would be the introduction or improvement ofcontracts and contract enforcement systems and the introduction of both qualityclassifications and better grading of commodities traded. Problems currentlyexperienced in these areas greatly increase transaction costs and depress pricespaid to producers. More transparency and an environment, in which trade canbe more formalised, without being regulated, are seen as essential.


6/88

6

A number of countries have already made, or are making, efforts to establishtheir own exchanges, but to date have not been successful. This is however avery clear indication of the thinking regarding the marketing of agriculturalcommodities and is one which those interviewed are keen to pursue. It wasaccepted that the concept of a regional agricultural commodity exchange is a

sound one and should be vigorously followed up, so that it can be established assoon as is possible. The point was made, by participants, in a number of themeetings attended that individual exchanges in each country, whilst beneficial tointernal trade, could not possibly trade in sufficient volumes to make it attractiveto international buyers. A regional exchange would however, by virtue of the factthat it would be quoting prices for commodities throughout the region, havesignificantly larger volumes traded across the floor and could therefore attractattention from international markets in due course.

It was noted that international traders see Africa as a high-risk area, resulting inlower prices and significantly fewer buyers in the market. It is believed that a

regional commodity exchange would help address this and enable brokers to puttogether larger parcels for the buyers, which should also help to reducetransaction costs.

Whilst most countries have freed certain aspects of trade in agriculturalcommodities, there is still a long way to go in this regard. This should not be seenas a hindrance however, as trade in agricultural commodities does take place inthe region. The exchange itself would not be directly involved in these trades, butwill provide the environment in which they can take place. The traders workingthrough registered brokers, whether local, regional or international would beresponsible for these issues, as is the case at present.

It is felt however that governments within the region will need to play a facilitativerole with regard to this initiative. There is a buzz of excitement about thisconcept, with market participants very keen to have the opportunity ofbroadening their horizons. A number have already expressed an interest inbecoming members of the exchange. The authors are of the view that if anexchange were to be established, market forces would dictate what wouldhappen thereafter, as the demand is very strong for such a facility.


7/88

7

INTRODUCTION

This report has been produced as a result of a study commissioned by theCommon Fund for Commodities (CFC), of the United Nations. The objective of

the study was to establish whether or not a need or desire exists for a regionalagricultural commodity exchange within the COMESA Region, having regard toits economic and institutional viability. The specific objectives were

Evaluate the potential and viability for the establishment of a regionalagricultural exchange in the COMESA Region.

Review the technical and organisational components, institutional andfinancial, necessary for the establishment of the exchange.

Make an outline of the potential stakeholders in the exchange in theproposed region.

Provide technical recommendations for the possible exchange, its nature,

organisation, institutional mechanisms, infrastructures and any necessaryfunding.

The consultants were to assess the level of interest for an exchange in theCOMESA Region, as well as the scope for encouraging participants to tradesome of the commodity presently traded by other means, both formally andinformally, across the exchange.

Agricultural commodity exchanges have greatly enhanced trading practices inmany countries and have brought more formality to trading methods, enhancingmarket transparency whilst also helping to improve the quality of commodities

traded. A great deal more detail on the operation and advantages of anagricultural commodity exchange is covered elsewhere in this report.

Reasonable volumes of commodity to be traded is considered to be one of theprerequisites for an exchange and for this reason, the study focused on four maincommodities, namely coffee, cotton, grains and sugar, but also looked at othercommodities considered suitable for trade over an agricultural commodityexchange.

The study was carried out between 5th September, 2002 and, 31st March, 2003,by

Ian Goggin, the manager of the Zimbabwe Agricultural CommodityExchange (ZIMACE), which is, to date, the only successful cashagricultural commodity exchange operating in Africa and who has carriedout various assignments in a number of COMESA countries, and

Brendon Longhurst, a former broking member of ZIMACE, who iscurrently the market linkages officer, commodities enterprise andinnovation, with an international organisation.


8/88

8

Most of the work for the study was carried out in major centers in the countriesvisited, in consultation with a large number of experts in a variety of fields, bothindividuals and organisations and members of the civil service and government.Some emphasis was also placed on obtaining and analysing NGO data on the

production and marketing of agricultural commodities in a number of thecountries, as this was perceived to be more reliable than official figures in anumber of instances. In fact, in some cases, this proved to be the only source ofinformation.

Some time was spent with the COMESA secretariat in Lusaka, which was timewell spent. The enthusiasm and understanding of agricultural markets and of theneed to improve marketing opportunities for small-scale producers, was evident.Views were also expressed suggesting that the initiative be expanded to includeSADC countries as well, as this would further enhance the ability of the exchangein the international markets, as well as increasing overall volumes available.

Reasonable volumes of commodity to be traded is, of course, one of theprerequisites for a successful commodity exchange and for this reason, the studylooked at all the commodities that could possibly be traded across it. In somecases, these are seasonal and only available for relatively short periods ofbetween six to twelve weeks, but it was felt that an exchange would afford awindow of opportunity, to producers in particular, which is something they areunlikely to have had before. It was also felt that any agricultural commodity whichwas needed or desired between consenting parties, should be tradable acrossthe exchange.

What is an Agricultural Commodity Exchange and WhatPurpose Does it Serve?

In most COMESA countries, all types of agricultural trade have been liberalised,in varying degrees and there are fewer central Government controls. So, is anexchange necessary in such a liberalised environment and if so, how can it assistin the marketing of agricultural commodities? The advantages of an agriculturalcommodity exchange are many and varied, some patently obvious and othersless so. However, with the liberalisation of trade and reduction ofgovernment participation in the agricultural sector, one needs to ask thequestion will there ever be a better opportunity to create an agriculturalcommodity exchange than under these conditions?

Definition of a commodity exchange

In its simplest form, a commodity exchange provides a venue at which buyersand sellers are brought together to conduct business through a team of brokers.


9/88

9

An exchange properly run should reduce transaction costs, by accommodatingpeople active in the production, trade, processing and consumption ofcommodities. The provision of market information and discipline in the marketenvironment will help to provide those who are active in the market with the toolsand incentives to improve the way they operate.

The venue may be physical or virtual. A physical venue involves brokersmeeting for trading sessions in a room or exchange floor, and trading by openoutcry. A virtual venue is where brokers use remote computer terminals to tradethrough a central exchange facility to which they are linked electronically.Internationally speaking, such electronic exchanges are gradually displacing thepractice of open outcry, for trading of both commodities and stocks and shares.

It is also important to have a clear understanding of the role of a broker, and howthis differs from that of a trader. In simple terms, a broker is an individual whoconducts business (deals across the exchange floor) on behalf of a buyer or

seller, acting solely on his clients behalf and who relies solely on commissionsfor his/her income. A trader on the other hand, is someone who takes a positionin the market and is directly involved in the purchase and sale of the commodityconcerned, with a view to making a margin between the purchase and sellingprices.

Apart from acting as a commission agent, an exchange-registered broker offershis client other important advantages, notably:

credibility with a range of trade counter parties with whom he/she mightotherwise have difficulty in doing business, and;

specialised advice in how and when to approach the market.

Which Type of Exchange for COMESA?

We can identify three types of agricultural commodity exchange

A cash exchange with spot delivery (i.e. typically up to 30 days) A cash exchange with spot and forward delivery (i.e. beyond 30 days) A futures exchange, where the principal objective is hedging (i.e. insuring

against price fluctuations), where the majority of contracts are offset and

do not lead to physical delivery.

In futures exchanges contracts are standardised with regard to grade ofcommodity, the size of lot represented by an individual contract, date andlocation of delivery. As such they are ideal for hedging. For example: In May aSouth African farmer sells 10 contracts (1,000 tonnes) on the South AfricanFutures Exchange (SAFEX) at R1, 500 per tonne, for September delivery. Inearly September he sells 1,000 tonnes on the physical market, outside the


10/88

10

SAFEX exchange, at only R1, 300 per tonne. He then offsets his position withthe exchange by buying 10 contracts of September maize at R1, 300 per tonne.By selling futures he has locked in a price of R1, 500 per tonne which he couldget back in May, and insulated himself against an eventual price fall. In this casethe farmer makes a profit of R200 per tonne.

Cash exchanges involve less standardised contracts, so it is not possible tohedge, for example canceling out a sale with a purchase as shown in the aboveexample, although contracts are often done on a back to back basis, whichprovides additional security to producers in particular. The physical commodity isalways delivered to the buyer.

In all these exchanges, the goods can be bought and sold either by open outcryor electronically, with the latter becoming more common in recent years; a singlelocation has a mechanism for guaranteeing performance of buyer and seller.

A futures exchange needs a significantly higher volume of trade than a cashexchange, which often results in the same contracts changing hands a number oftimes. It also requires a wide ranging and number of participants includingspeculators and would not work in any of the countries visited, with the possibleexception of Ethiopia, although the authors have serious reservations about thesuccess of a futures market there. The option of using SAFEX (the South AfricanFutures Exchange), the CBOT (Chicago Board of Trade), or NYBOT (the NewYork Board of Trade) for example, is available to the markets in all of thecountries visited.

As far as the establishment of an exchange in COMESA region is concerned, theonly option is a cash exchange with spot delivery, which would gradually evolveinto an exchange with both spot and forward contracts, i.e. the type of exchangewhich has been established in Zimbabwe, but with trading sessions conductedelectronically, rather than the physical open outcry method employed byZIMACE. In a cash exchange all contracts go through to physical delivery on thedate and terms specified, and there is no offsetting mechanism of the kind, whichexists on futures exchanges.

Owing to the unsophisticated nature of the majority of the producers who will beutilising the exchange, this is seen as the only realistic alternative. There would,however, be nothing to stop the brokers and traders from utilising the facilities ofexisting futures exchanges to hedge their deals, and this would seem to be themost logical way forward.


11/88

11

Potential structure and Operation of an Exchange inCOMESA

For reasons explained above, this is best illustrated by describing the current

organisation of ZIMACE. This exchange was started by interested parties in theprivate sector, who became shareholders and the financial backers. A Board ofDirectors was appointed and tasked with establishing a commodity exchange.Initially, while the administration was being set up, ZIMACE employed brokerswho traded for the exchange itself. On 1 March 1994, ZIMACE started sellingblocks of shares (or seats), which entitled the purchaser to appoint a broker ontothe Exchange to conduct business on their behalf.

At the time of writing this report, the main components of the exchange were the members (23), who had purchased seats (i.e. shares) in the exchange,

and met specified membership criteria. Members are players with a direct

interest in the trade and fall into the following categories: millers, graintraders, producers associations, trading houses, Grain MarketingBoard, banks and other financial institutions and broking houses.Members elect the Board of Directors and are entitled to trade on theexchange for their own account, or as brokers. They may also appointbrokers of independent status.

a Board of Directors, broadly representative of the membership. a secretariat, consisting of three staff: a manager, a secretary and an office

messenger/board marker the registered brokers who trade within the exchange on behalf of their

clients, and who are bound by the rules and regulations. Members may be

required to guarantee the financial security of the brokers they appoint.

It is the members who are responsible for the financing of the exchange. Bypaying for seats, they finance the establishment of the exchange, and they alsopay a levy to cover annual operating costs.

Buyers and sellers of commodities (i.e. the public) appoint registered brokers totrade for them on the exchange, signing 'agency contracts' specifying terms ofengagement. Brokers then bring their clients business to the exchange followingany specific instructions as to quantity, quality, price and date of delivery.

Trading sessions are carried out daily in a trading room in Harare. The brokersare seated round tables arranged in a horseshoe, and facing a whiteboard,where current trading positions are marked. The manager and the secretary areseated in front of the whiteboard.


12/88

12

FIGURE 1: THE ORDER PROCESS

Trading sessions start at 8.30 am and may last up to midday. For a givencommodity to be traded on any particular day, brokers must notify the exchangeof at least one initial bid (buy price) and offer (selling price) in that commodity atleast 24 hours before the beginning of the trading session. the exchange runson the basis that the highest bid and lowest offer rule, but it is highlyunlikely that a seller would offer a commodity for sale at a lower price thana buyer is prepared to pay The manager leads the trading session, by takingbids and offers for each commodity in sequential function. When brokers agreeon a price, usually somewhere between the bid and offer prices indicated,

the manager announces that a deal is struck, and it is then registered on theexchange. A contract specific to the deal is drawn up in the 'back office'specifying:

The quantity of the commodity The quality or grade Price and terms of payment Inspection procedures

CUSTOMER(buyer and seller)

APPOINT REGISTEREDBROKER

BROKEREXECUTESTRADE ON

EXCHANGE ONBEHALF OF

SELLER

BROKEREXECUTESTRADE ON

EXCHANGEON BEHALF

OF BUYERDEAL PUT TO

CONTRACT ANDREGISTERED ON

EXCHANGE

CONTRACT DETAILSCIRCULATED TO ALL

PARTIES TO THEDEAL


13/88

13

Type of transport and responsibility for payment Place and date of delivery The packaging used The time at which ownership title passes to the buyer Force majeure, including Acts of God such as tornadoes and floods, as well

as strikes and unforeseen political intervention, which may frustrate contractperformance

Certified copies of the contract are circulated to the buyer and seller (theprincipals) and the two brokers representing them. If a financial institution isinvolved in any way, such as having loaned money to one of the parties, a copywould also be sent to them. Once the parties have been notified, the process ofclearing ensues, i.e. delivery and payment.

Contracts invariably have an arbitration clause in which the parties agree that inthe event of a dispute which they cannot resolve amicably, they will refer it to a

mutually agreed arbitrator (or arbitrators). Contracts are binding in law and in theevent of a dispute arbitration provides a speedy means of resolution. A numberof the COMESA countries are signatories of the New York Convention on

Arbitration, which means that the role of Courts is reduced to one of executingthe arbitrators award, by attaching property or other means, in the event that theparty blamed fails to comply voluntarily. (The Courts will not challenge theaward, unless appeals are made under exceptional circumstances, e.g.allegations of insanity. In Zimbabwe, the courts have only heard two appealsagainst arbitration awards under ZIMACE contracts. In both cases, both theHigher and Supreme Courts confirmed the awards.) In the case of ZIMACE, themanager of the exchange is responsible for referring to arbitration cases brought

to his attention by one of the parties. Most awards are made within two weeks ofthis date, and at no time have they subsequently been over-ruled.

Apart from arbitration clauses, exchanges have developed various other meansof ensuring that contracts are enforced, and/or minimising damages to the injuredparty. Typically brokers are held responsible for their clients non-performance,and the exchange can apply a series of sanctions against them, includingsuspension, publication (of their failure to perform) and ultimately revocation ofthe right to trade on the exchange. In the case of ZIMACE, the cost of failure isvery high for the broker who, while being suspended, must continue payingcontributions to the exchange. Not surprising, they take considerable care in

finding reliable clients, and so far ZIMACE has only had to suspend one broker.

Integrity and transparency are the cornerstones of the system. Trading sessionsare open for public viewing, all deals are published, and closing prices arebroadcast on a daily basis. The integrity of member companies is monitored forproscribed practice such as doing deals outside the view of all parties on thetrading floor, market manipulation and front-running. i.e. disloyal brokerbehaviour: the broker sets up a favourable position for his client, and then takes


14/88

14

the position in his own name or that of another client.) If the system is correctlymanaged, both producers and consumers (buyers/end users) can be assuredthat they are getting the most advantageous possible price. Indeed the successof ZIMACE an increase in trading volume from US$1.1 million in 1994 to $500million in 2001 - is founded on the generalised perception of integrity, among the

membership and the public in general.

Other functions of the exchange

Apart from providing a venue for trading, the exchange has the followingfunctions

monitoring the conduct of the members and their brokers, and enforcement ofthe rules, regulations and guidelines of the Exchange (as indicated above)

taking of disciplinary action in the event that rules, regulations and guidelines

are not observed dissemination of market information (also mentioned above). Exchanges

cooperate internationally on the exchange of information for the benefit oftheir members, and disseminate through Reuters and other internationalnews media.

continuing informational and educational activities directed towards users andpotential users of the exchange. Where the exchange provides a reliableservice and integrity is high, an 'evangelical approach' can be critical instimulating growth. The exchange also stipulates the way members maycommunicate expert knowledge of the exchange.

representation of the exchange before Government, the international

community including foreign exchanges, and the public in general

What can an exchange bring to the Market?

There are a number of advantages and benefits that an exchange can bring tothose utilising its services. If one were to isolate transaction costs for example,most participants in agricultural markets would be surprised at the relatively highcosts of the trade they conduct. By organising a physical market, where buyersand sellers can be more confident in their ability to trade, transaction costs canbe significantly reduced. Disorganised markets also add to transaction costs. Forexample where each bag delivered has to be inspected by the buyer before adeal is struck, many man are hours are wasted usually resulting in a lower priceto the producer. If a grading system were to be introduced, so that buyers andsellers are able to talk the same language in respect of commodities beingtraded, this too will help to reduce these costs as sales/purchases can be madesight unseen, based on these known and accepted grading standards. This isthe sort of initiative that could be undertaken by an exchange, in the interests ofthe whole agricultural industry.


15/88

15

Some of the other potential benefits to be derived froman agricultural commodity exchange are: -

Reduction in the costs of identifying a market outlet or source.(Remember, markets are alive and what may be a supplier or buyertoday, might not be tomorrow!).

Vastly improves the amount and quality of market information available toall those active in specific commodity sectors, including price information.

Allows more security in trade transactions. Can facilitate access to cheap commodity finance. (From experience in

this part of Africa, this will probably occur very gradually and is unlikely todo so before the exchange has come of age.)

Allows easier price risk transfer. Provides a system of contracts, which are binding in law and which can

be resolved through arbitration in the event of a dispute.

A Regional Agricultural Commodity Exchange?

If a regional agricultural commodity exchange were to be opened in theCOMESA Region, great care would need to be taken to ensure that it developsand evolves on the basis of market needs. This need is likely to create problemsin itself, as it is unlikely that common ground will be found between such adiverse range of countries, at least in the initial stages. In our view there wouldbe no benefit to be derived from trying to model it on exchanges operating

elsewhere. It will be extremely important to ensure that people using theexchange be permitted to trade the commodities of their choice, rather thanrestricting such trade to goods desired in other parts of the world.

Commodity exchanges can play many different roles, and which of these roles itwill need to play will depend on regional needs. If these needs are not met, thenthe exchange will have little or no chance of survival. When setting up anexchange and formulating the activities it will undertake, it is important to identifywhich of these specific functions need to be fulfilled. This should preferably bedone in consultation with each commodity sector, and these targets or strategiesmay well change as markets develop and the needs and requirements move in

different directions. It is also important to determine the type of trade to beconducted on the exchange such as spot contracts, for immediate delivery, orforward contracts for delivery at a later date, or a combination of the two. Inreality, it would be most likely that a spot market would develop first, with aforward market emerging later. Of interest is the way in which spot and forwardmarkets can compliment each other, mainly as a price discovery mechanism.Particularly significant is the swing between volumes traded in the forwardmarket, for specific commodities, from one season to the next. In Zimbabwe,


16/88

16

huge swings were seen, influenced by general market sentiment, weatherpatterns, hectarages planted, the regional position in that commodity andperceived demand and supply. Most physical markets react to needs at specifictimes and this simple requirement can have considerable influence at the end ofthe day.

Exchanges themselves can do a number of things to make spot trade moreefficient. We have discussed earlier the question of grading standards specific toeach commodity. This is an area in which a commodity exchange can have a biginfluence, not only in the local market, but ultimately in the regional andinternational markets as well. The introduction of good grading standards andsystems, will allow trade to be conducted on the basis of quality descriptionsrather than the need for the buyer to see and physically check each sample. It isunlikely, although not unheard of, that a commodity exchange would succeed inintroducing a grading system in isolation, although others will need to beencouraged to participate in the initiative. As already indicated, there are many

benefits to be derived from a standardised grading system, which would need tobe discussed with potential market participants.

Additionally, the use of contracts, standardised as far as possible, will bringfurther stability to the market place. Whilst, given the manner in which trade ispresently conducted in the region, it will not be possible to standardise all thespecifications in these contracts, many of them can be. Obviously, by the verynature of the market, physical delivery, there is certain information, which willvary on almost every contract. This can be seen as an advantage however asspecific contracts can be written to meet each customers needs.

Once transactions take place on an exchange floor, these will provide a veryvaluable barometer for supply and demand conditions. It should be a requirementthat any exchange disseminate such information to as wide a spectrum of thepopulation as possible. This will help to provide price and market information toeveryone involved in the commodity sector, from farmers to the end user. We, inthis part of Africa seem to operate in splendid isolation, believing that eventstaking place in other parts of the world could not possibly have any influence onus. Nothing could be further from the truth. Other markets do affect us and thereis ample proof in support of this. In our view, we can no longer afford to operateas we have in the past and never has the term global village been morepertinent than it is today. There is an incredible amount of market informationavailable, mostly at no charge, but the trick is to collect, collate and utilise asmuch of the pertinent detail as possible. In most cases, people have somemarketinformation, usually local, but rarely regional or international, which wouldassist in enabling them to trade against known facts.

In order to establish an exchange, it is essential that a good and strongorganisation be formed. It is absolutely vital that this organisation is abovereproach and that the integrity of it be guarded, almost at any cost. In order for


17/88

17

an exchange to succeed, it has to be able to apply the law and in order toachieve this will need a good set of rules and regulations under which themembers operate. Again, it is imperative that these rules are strictly enforcedfrom the outset and that no exceptions are made. To compliment these rules, amethod of quickly resolving disputes needs to be found. To this end, we feel that

the best way of achieving this is through a system of arbitration under theauspices of and administered by the exchange. This, world wide, has been foundto be a speedy and cost effective way to resolve such disputes. We feel verystrongly however that an exchange should not get involved in resolving otherpeoples problems and should therefore confine itself to those problems arisingfrom contracts traded over the exchange floor.

Ideally, although not essential, it would be of great benefit if storage facilitieswere available for use by those persons utilising the exchange. Such storagewould need to be of an acceptable standard, capable of storing perishablecommodities safely. Such storage facilities should operate to a set of rules under

the auspices of the commodity exchange, which could in time issue warehousecertificates against stored commodity. The introduction of such a system couldand should lead to a form of credit finance against stored commodity, which isboth classified (graded) and quantified. Through this system, farmers could storetheir product after harvest, instead of selling it immediately, and use thewarehouse receipt to obtain credit. Processors too, can use working stocks ascollateral, ensuring that the need to store physical commodities is no longer aburden to them.

In time, with the evolvement of the exchange and as markets become moredeveloped, trade in warehouse receipts can replace physical delivery to a largeextent. Provided such receipts clearly reflect the grade and quantity of theproduct (commodity) and identify the owner of the product as being the holder ofthe warehouse certificate, there should be no reservations in this regard. In fact,this is a much easier way of conducting business than that of having to acceptphysical delivery, as all the details, including a guaranteed volume are alreadyknown.

The realisation that an exchange needs to be opened in the COMESA Regionneeds to come from the agricultural community in each of the countriesconcerned. However it is our view that it is not necessary to have all of thecountries concerned participating in the early stages of the exchangesevolvement. Presuming that such a decision is reached at some stage, a largeand intensive educational programme will need to be embarked upon, to informthe public at large all about the proposed operations and to attract the properusers. There should be no illusions about the fact that this will be a long and hardprocess. Exchanges represent a new way of doing things, and it takes a longtime to overcome resistance to change. Exchanges should therefore anticipateand work towards a medium to long lead-time, between formulation of the ideaand the opening of the exchange itself. Key groups of the potential users should


18/88

18

be identified and be involved in the process of defining contracts, theorganization of the exchange, the rules by which the exchange will be run anddecisions on trading procedures to be followed. This involvement should ideallycontinue after the exchange has been set up, to allow for continuity and to permitthe exchange management to react swiftly to changes in the users needs. Such

involvement can result in a feeling of belonging and it is amazing how often thosepeople sitting on the fence can become firm supporters of the concept.

Having said this, it our view that if an exchange were to be set up in the region,the many advantages would soon become apparent, which would encourageother participants to come on board.

Even though an exchange may, or should, fulfill a useful function for thecommodity sector concerned, it may still not succeed for this reason alone andadditional conditions will also probably need to be met. For exchanges trading

commodities on a spot basis, the following points are also important

Supply and demand for the commodity should be in reasonable quantities,with a number of players operating in the market, and the commodityshould be a fairly important component of these players operations.

The commodity traded should be standardised with a good set of gradingclassifications. Trade is also easier if the commodity is storable.

Pricing must be left to market forces, without monopolistic participation inthe market, or government price control.

If possible, major commercial interests should support the exchange. Ideally, well functioning and easily accessible services and infrastructure

facilities are necessary, e.g. good, or at least passable, access roads,availability of transport companies, weigh bridges, quality control services,an efficient administration, warehousing, telecommunications etc. ( Note: ifthe warehouses or the transport companies are controlled by relatively fewbusiness interests and are not generally available for public use, then theywill be of little use from the exchanges point of view).

Judicious government support is needed, but this must not be allowed tobecome all embracing.

Commodity Exchanges in General

No exchange can operate in a vacuum. As mentioned earlier, an exchangeshould adapt to the needs of the community it is serving, but there will also be aneed to take cognisance of others as well. These include

Public opinion. Government regulation, if any, concerning the commodity

exchange. (This should be avoided if possible).


19/88

19

Government physical market intervention. Taxation policies. Banking policies and regulations.

Public opinion can be extremely important in the context of an exchange, as this

opinion can influence the thinking of the government. Although exchanges onlylist and report on market determined prices, there is a real danger that they willbe blamed for price developments seen to be unfavourable to one of theparticipating groups. Farmers, for example, may protest if prices fall whilstconsumers could do the same if they increase. It is important that any exchangeestablishes the fact that it does not set a market price, but rather provides theforum for such activity to take place, based on the simple market concept ofsupply and demand. A good relationship with the media and good public relationswill be very important in this respect.

With regard to government participation in the market, it is essential that they

provide the enabling environment, within which the exchange can operate. Thismust include acceptance by government that it shall not interfere in any way withnormal market forces. Government activity in the market will often lead to adistortion of prices, which will undermine the market fundamentals making it lessattractive to other participants. If this activity is sufficiently severe, this caninfluence the market to the extent where other participants, whilst not excluded,will have their operations affected to the point where their capacity and interest inusing organised market places is reduced dramatically.

Taxation policy is important. It can be used to provide incentives, such asobtaining tax rebates only for those participants who sell their products across an

exchange. Imported products, which are sold through an exchange, could havetax payment delayed until the buyer takes delivery of the product, by theexchange being able to operate a system of free port warehouses for example.

Banking regulations in some countries do not allow banks to participate inactivities such as commodity trade or commodity storage. This can be a greathindrance to the proper functioning of a commodity exchange and banks andexchanges would need to work together under these circumstances, to havethese regulations amended.

In most cases, commodity exchanges will be initiated either by private sector

initiative, or more rarely, by a government department responsible for domestictrade. Both these groups have their own agendas and will have differentexpectations of what an exchange should do. In both cases it needs to berealised that if an exchange is indeed to be introduced, then a much widerinterest group needs to be involved.

Traders, for example, tend to see an exchange as being a place where they canbuy or sell commodities more easily. They can be averse to introducing


20/88

20

producers and processors into the management of the exchange and in manycases would like to keep speculators out for as long as possible too. They alsooften want to limit delivery locations, so as to suit their own operations and limitany unnecessary exposure. All these preferences are actually detrimental to thedevelopment of an exchange and ultimately to the traders themselves.

Government officials on the other hand see the exchanges as a way to replacegovernment procurement and pricing policies. In many cases, however, they stillbelieve in the goals of these policies and therefore try to ensure that theexchange serves these goals. This often results in overly restrictive legislation,with direct intervention in the event that prices on the exchange are seen to bepolitically sensitive. (See what has happened in Zimbabwe in this context).

If an exchange and the contracts it offers are to be designed in the interests ofthe whole agricultural industry, then those tasked with this design need to haveopen minds and a direct link to all those potentially concerned. Representatives

of traders, producers, processors, brokers, banks and other interested partiesshould all be involved, in one way or another, in exchange trading practices andcontract design.

To a large extent, whether or not an exchange will prove to be successful or notwill depend on the management. Managing an emerging exchange can prove tobe one of the most difficult tasks there is. Management needs to think, to planahead and to formulate a mission statement. At the same time, it should beactively promoting the exchange, making its mission statement known and beimplementing development programmes. There is a need for management tofollow its members wishes, but these wishes should never be followed blindly. Inreality, management should be driving the exchange concept and leading itsmembership, rather than the other way round. To lead or manage an exchangeeffectively requires a number of different skills. The ability to actively andaggressively pursue potential commercial possibilities, even those activitiesoutside the traditional area of operations, needs to be tempered with the ability toshow caution where necessary and not be too optimistic about commercialpossibilities, or introduce new contracts too hastily.

Strangely enough, it is often more difficult for existing commodity exchanges toadapt to an ever changing environment. Experience shows that exchanges areoften controlled by a relatively small group of people with a narrow range ofinterests, who because they have been making large sums of money arereluctant to change. What is more they have often lost the ability to see futuremarketing opportunities and feel threatened by the mere suggestion of anychange. This can be the cause of very real problems for exchanges, if notaddressed urgently and effectively.

Creating an exchange will require investment in contract development, arbitrationsystems, infrastructure and promotional activities. There will be a need for


21/88

21

suitable premises, a vehicle, office furniture and equipment and computersamongst other things. As these costs will be relatively high, one way of raisingthis finance would be through the sale of seats on the exchange. This methodcan be used to check the credentials of prospective members and ultimately ofthe brokers they wish to appoint to act on their behalf. The integrity of the

exchange is vitally important and nothing should be allowed to occur which mightundermine this. Careful vetting of members and their agents is therefore ofparamount importance.

The sale of seats will also help to align members interests and those of theexchange. This can also be a good way of overcoming initial resistance to theidea of an exchange. If for example the exchange is to replace an existingmarketing system, participants in that system can be offered seats on theexchange on preferential terms. This method will also make each of the seatholders ambassadors for the exchange, so helping to spread the word about thebenefits of exchanges.

It is unlikely that the running costs of an exchange will be met for some time,even in circumstances where good, sound and much needed contracts aretraded, it may still take years for turnover to reach the levels at which theexchange becomes self financing. Raising usage fees to the required levels tomake the exchange self-financing is not the solution to this problem either, asthis will erode use. Accordingly, exchanges need to plan for sufficient financialreserves for a five to seven year period, or to look for alternative sources ofincome. One such method, which was successfully applied in Zimbabwe, wouldbe to charge members an annual fee based on the budgeted running costs of theexchange. In the Zimbabwe example, this fee was collected in two tranches, withpunitive interest charges applied to late payments. (7% per mensem capitalizedquarterly), to ensure that the interests of all the members are protected.

There will be a need for rules and regulations to be introduced, governing tradingpractices and the conduct of members and their brokers on the exchange. It isabsolutely vital that these be applied equally to all members without fear orfavour from day one. Exchanges operate on a system of trust, built around theintegrity of its members and the way it operates. Without this trust, the exchangewill inevitably fail. Having said this, these rules and regulations need to bepractical and should be based as far as possible on local market conditions,bearing in mind the possible need to satisfy regional and international traders aswell. It is also important that these rules move with the times and system ofreview is essential. In Zimbabwe for example, seventeen (17) amendments wereissued to the rules and regulations of the exchange in a period of seven (7)years, whilst there were five (5) amendments to the arbitration rules over thesame period. Every member should be required to sign an oath indicating that heis fully conversant with the rules of the exchange and undertakes to be bound bythem at all times. It is also important that members be required to conduct alltheir broking business across the exchange floor.


22/88

22

There will be a danger in a system such as this that government will interfere,unless the system is seen to be working. For this reason alone, it is importantthat the members and brokers show good discipline and operate within theframework of the rules and regulations. Ultimately, some form of examination for

all persons operating on the exchange will need to be introduced, to ensure thatthey are not only aware of trading practices, but are also conversant with thecrops in which they are dealing. In Zimbabwe, this was done annually withcertificates issued to successful candidates. Failure required that the candidatere-write, with a ban on trading effective until such time as he/she was successful.

The operations on the floor of the exchange need to be carefully monitored at alltimes. It essential that for all transactions conducted properly designed formsneed to be used to record the transactions. In Zimbabwe, these consisted of buyand sell brokers notes, in duplicate, colour coded and numbered and the contractitself, all of which were signed by both parties to the deal. As much relevant detail

as possible will need to be recorded on these documents. Once all thedocumentation has been completed, it needs to be processed by the exchange.This should include a method of recording all the contract details onto acomputer, the allocation of a contract number and the circulation of certifiedcopies of the contract to all parties in the deal. Under no circumstances shouldthe original copies of any of these documents be permitted to leave the premisesof the exchange.

Having become operational, one of the most important exchange functions of anexchange will be the dissemination of price and market information. This can beachieved relatively inexpensively through fax and email and where possible themedia, particularly radio and television. Where possible, such market informationshould not only relate to local prices, but should quote regional and internationalmarkets too. This is easy to gather through the Internet, where a number of sitesproduce this information and where daily prices can be accessed from otherexchanges around the world.

Conclusions

Getting an exchange started, as a place where physical trade is conducted isprobably a relatively easy objective to achieve, provided there is a need for such

a service. The manner in which an exchange operates in the longer term ishowever likely to be more complex, as it is unlikely that it will be able to operatepurely as an exchange for any length of time. Sooner or later additional serviceswill need to be provided such as forward contracts or warehouse receipts. Ofparamount importance though is the need to ensure that exchanges are safeplaces to do business.


23/88

23

Exchanges need to be well regulated, through a sound set of rules andregulations. This self-regulatory responsibility needs to apply not only tomembers doing business on the exchange, but to all their clients too. Suchregulations need not only to be perceived as being tough and uncompromisingon those who may try to beat the system, but fair and just as well. This is

considered particularly important in developing counties, to minimise anypossible abuse of the market. With the liberalisation of agricultural markets andthe withdrawal of government from the marketing and pricing functions on mostcommodities, a whole new category of risk takers is likely to emerge. This is anatural progression in most markets and these new players will develop ways tomanage risk and facilitate the discovery of counter parties. This will also usuallylead to a reduction in credit risk and better contract security and ultimately to thecreation of an exchange. It is emphasized however that potential exchanges willnot find it easy to move from opportunity to success and will need a realistic viewof what they can achieve and what needs to be done.

An important development in the life of any commodity exchange will be theintroduction of some sort of negotiable warehouse receipt, operated through aseries of warehouses registered to operate by the exchange. This works by theowner of the grain depositing it in a registered/certified warehouse and beingissued a warehouse receipt by the warehouse operator. The warehouse ownerbecomes liable for the goods he holds in store, for which he is paid a storage fee.

All warehouses operating under this programme would need to supply proof ofadequate insurance cover before they are registered.

Warehouse receipts need to clearly state the location of the goods, the type andgrade of the commodity stored, volume in store, together with details of the dateto which storage charges have been paid. In time, these documents can be usedas a means of raising finance through banks and other financial institutions. Agood method of recording all warehouse receipts issued will need to beintroduced, both at the point of issue and also in a central registry. The benefitsto the market, not only through the provision of more liquidity in the market, butalso by the added ease of transactions by the transfer of the receipts themselvescan be enormous. It is noted that this system may be somewhat difficult tointroduce in some of the countries in COMESA, but this should not be used as ameans of discouraging those who have the facilities and who would like toregister and utilise them.

At the end of the day, any initiative to start an agricultural commodity exchangemust be driven from within. As many recommendations, suggestions andproposals as you like can be made, but the truth of the matter is that it is the localmarket participants who must make the final decision as to whether or not anexchange is needed or desirable. There must be a genuine desire, not only forthe exchange to open, but also for it to succeed in the objectives it sets itself. Todo this, a small group of dedicated people with vision will be needed, who will not


24/88

24

give in at the slightest hurdle. This will not be any easy task, but then who saidanything we really wish to achieve in life would be easy?


25/88

25

COUNTRY REPORTS

The consultants commenced their study of the potential for the establishment ofa regional agricultural commodity exchange by visiting Ethiopia, Burundi and

Rwanda. The following constitutes a brief summary of these visits.

Ethiopia

A number of meetings were held with organisations, individuals and groups, todiscuss the concept of a regional agricultural commodity exchange.

Ethiopian Grain Trade Enterprise

This organisation was represented by Mr. Gima Bekele, who indicated

The company was keen on the idea of opportunities to trade regionally,as this would increase their volumes.

The local market operates through a series of small, medium andlarge-scale traders, all of whom are interdependent on each other.Regrettably, this method of trade does not provide any transparencyand undoubtedly leads to higher prices to the consumer.

Small traders conduct the majority of the trade and because there areso many links in the chain, transaction costs are high.

The market in Ethiopia focuses on cereals and pulses, but has a greatdeal of potential to expand into other areas.

The lack of market information is a serious problem, particularly forproducers, but this also affects all market participants.

Logistics continue to create problems, with the transport of producefrom the surplus producing areas in the west and central regions to thedeficit areas in the east of the country of particular importance.

The main commodities produced are pea beans, niger seed, sesameseed, white teff, chick peas and grains including maize and wheat.

There are export opportunities for pulses and grains, although theexport of grains is linked to the countrys grain balance sheet, which ispresumably based on food security.

Trading is based on daily delivered prices for producers and through

direct contracts, mostly verbal, for State run and commercial farms. Small-scale producers mainly produce maize and pulses. State owned farms produce maize, pulses, wheat and oilseeds. Commercial farms utilising leased land, grow all types of produce. The general feeling was that an exchange would be a good idea for all

concerned, as this would introduce transparency into the market, aswell as a means of establishing a price discovery mechanism.


26/88

26

Meeting Hosted by the Ministry of Trade and Industry.

A meeting hosted by the Ministry of Industry and Trade was attended by across section of the agricultural industry and the following points emerged

There was a view that perhaps East Africa might not be ready for anagricultural commodity exchange yet, as it appeared that otherexchanges were not working very well. (Reference was made to boththe Kenyan and Zambian exchanges in this context, but reasons as towhy these exchanges had not achieved potential were raised anddiscussed in some detail).

It was suggested that existing exchanges should be looked atanalysed in detail to establish what the problems had been.

The point was made that there might be a need to establish localexchanges in each country first, before looking at a regionalexchange. After some debate however, it was agreed that this was not

necessarily a prerequisite to the success of a regional exchange. It was established that a regional commodity exchange would not

preclude local trade from being conducted across the exchange, andthat local, regional and international trade should be encouraged on aregional exchange.

In addition to other commodities, it was suggested that livestock andfresh produce be traded.

There was a great deal of interest in an exchange, particularly as thiswould assist to establish new markets, but some concern wasexpressed regarding the ability of such a venture work.

There is no doubt that Ethiopia has, not only sufficient volume, but

also a great deal of variety in commodities produced which is a goodbasis for the establishment of an exchange.

Sugar is exported to Kenya and Tanzania and could be exported toother countries, but other export opportunities have not yet beendeveloped.

Burundi

A number of meetings were arranged through the Ministry of Industry and trade,who accompanied the team to all these meetings and facilitated all ourarrangements whist in the country. The ministry officials provided us with broad

details regarding the production and trade in agricultural commodities. These are,in brief

Main agricultural production is in coffee, tea, sugar, rice, sorghum, cottonand cassava. Indications were given that, in view of the weather patternsand good growing conditions, many other crops could be produced,provided markets could be identified.


27/88

27

Indications were given that the market is generally liberalized, althoughthere are import tariffs on foodstuffs, including raw materials. Thisstatement was belied by information given subsequently and duringdiscussions with other stakeholders.

All the wheat requirements for the country are imported and milled inBurundi, by a State owned mill. Maize is only the staple diet in some areas of the country and is therefore

not milled commercially, but rather by hand, by small-scale millers. Rice is exported when a surplus has been produced; otherwise the entire

crop is absorbed in the local market. Coffee is sold using the New York Board of Trade for Coffee, Sugar and

Cocoa. There is a coffee auction system in place in Burundi, which takes place on

a weekly basis. A much larger coffee crop has been produced this year and an urgent

need therefore exists to develop additional markets. Efforts are being made to establish a system of Internet trade in coffee

and cotton, but there is still a great deal of work to be done in this respect. Cotton is produced mainly by small-scale growers, who are provided

inputs through Cogerco, which is a State controlled company. Any excess production of cotton is exported, but in most years, all cotton

production is utilised by the State run company Kotebu. Rafina Oil Company, which is privately owned, crushes all the cotton seed

locally. The marketing of the cotton is done by agreement or direct contract, in

view of the inputs provided to growers. Indications were given that a need exists for increased marketing

opportunities and exposure to regional and international markets. Concerns were expressed regarding the grading of commodities through

a regional agricultural commodity exchange, but after some discussionthese were allayed.

Requests were made for the introduction of new varieties of cotton seed,in order to improve the quality of local production.

A great deal of concern was expressed about potential membership feesfor a regional commodity exchange. However, after some discussionthese concerns were overcome.

Tea

Office du The du Burundi (OTB), the only tea producing company inBurundi, is a parastatal.

Average production is about 8 000 tonnes per year.


28/88

28

Marketing is done through direct contracts and the Mombassa teaauctions, which accounts for more than 50% of tea traded and isorganised as the tea is harvested.

Transport to markets is a major expense and shipping is arranged tointernational specifications, palletised and wrapped at the port.

There are five tea-processing plants in Burundi, all of which are run byOTB, who have a total of fifteen different buyers around the world.

Efforts are being made to privatise the industry with funding from theEuropean Union and therefore access to additional markets, both regionaland international, would be improved. It is intended to sell existing teacompanies as going concerns to private investors over the next five years.

The idea would be to privatise each of the factories, which would operateautonomously through private funding.

A view was expressed that the introduction of a regional commodityexchange might be in conflict with traditional markets, although thisargument did not make a great deal of sense to the authors, as new

markets may well provide more opportunity. Some concern was expressed about the fact that tea and coffee are both

traded through international markets, which might not be assisted by aregional exchange.

It was established that there are no arbitration facilities in Burundi.

Department Of Agriculture

This department collects statistics of crop production and makes estimatesof potential production, prior to the season.

Part of this information is related to input costs, production figures,

weather and disease effects. These figures cover a total of thirteendifferent crops.

Of interest was the fact that no consumption figures are produced and thefact that there are problems in collating statistical information, due to thelarge black market trade.

There is very little crop specialisation, due to the fact that most productionis at the subsistence level and due to a lack of information concerningmarketing opportunities.

It was felt that a regional exchange would not only enhance opportunitiesfor trade, but also assist with data gathering and market information.

Agricultural Research Station

The official agricultural policy is to diversify into potential export productssuch as horticulture and oilseeds.

The Government is looking to encourage the involvement of the privatesector in all sectors of the agricultural industry, but to date little progresshas been made in this regard.


29/88

29

There are commodities which are produced in large quantities, such asdried beans for example, but access to markets for the surplus have notbeen established.

Wheat is now being grown and the potential is good, but major problemshave been experienced with the varieties grown.

The maize that is grown is for local use only, mainly due to a lack ofknowledge concerning potential markets.

There is a crying need for information regarding potential markets andaccess to finance, particularly for the productive sector.

A major problem is the lack of suitable storage facilities, which inhibits theability to offer large parcels into the market.

The Sugar Sector

A meeting was held with Sosumo Sugar, which is a State owned companyand the only player in the sugar market. It was noted that that both white

and brown sugar is produced. There appears to be a genuine desire to privatise the sugar industry,

although little seems to have been achieved in this respect to date. Currently, 75% of production is absorbed into the local market, whilst 25%

is exported, most of which goes to Burundi. It was felt that a regionalcommodity exchange would help to establish more marketingopportunities.

Indications are that the largest restriction to production is the lack ofmarket information.

Production costs are very high, due to the current economic situation,which mitigates against commodities being competitive in the market.

The logistics of getting inputs to farmers and the product to market areextremely difficult and expensive, which makes the commoditiesproduced, less attractive.

In order to improve its position, the industry requires much more accessto market information and to finance.

There is a concern that the civil strife in the Country has soured relationswith the other COMESA countries with regard to trade.

The Chamber of Commerce

The first point made by this organisation related to the lack of marketinformation and access to capital, particularly by the productive sector.

The question was asked as to what a regional commodity exchange wouldbe able to offer in the way of market opportunities and specific contracts. Itwas explained that these questions would be handled by the exchange,which would, through the brokers, look at both markets and contracts.

There is a desire to conduct business within the COMESA region, but seea need to have information regarding standards and grades. It was


30/88

30

explained that the brokers, who could conduct trade on a sample basis inthe early stages, until such time as standards become accepted, couldagain overcome this.

A view was expressed that there is a need to establish markets for drybeans, bananas and the processing of them, vegetables and horticultural

products. It was felt that the industrial sector would also benefit from an exchange.

(Presumably, this would be in the processing sector). Xxxxxxx Podge, again I am not sure what you mean by the concern

expressed as to whether a guarantee would be required to set up anexchange.

BCB Bank

Indications were given that the fact that smallholder farmers do not havetitle deeds to their land is a problem.

Where commercial crops are grown, these are financed and controlledthrough the public sector.

Banks guarantee both capital and production costs for commercialagriculture, but any finance for small-scale producers comes from co-operative banks, which are State controlled.

Some of the commercial banks are involved in imports and exports andhold commodities as surety.

Rwanda

Again a number of meetings were arranged with a variety of people, to ascertainthe basis of agricultural production and marketing in Rwanda.

It was established that the total area of Rwanda is 260 000 squarekilometers.

Of this, approximately 745 000 hectares is utilised for agriculturalproduction.

The breakdown of this isa.) 85 000 hectares to wheat;b.) 170 000 hectares to bananas;c.) 240 000 hectares to pulses;d.) 280 000 hectares to root crops.

Department for International Development

Currently undertaking a study to determine how best to re-vamp theagricultural sector, in view of its importance to the economy of Rwanda.


31/88

31

DFID is assisting with these studies and is providing links to financing andmarketing, to specifically improve these areas.

The main problem is that there is no ownership of land in Rwanda, whichmakes financing a particular problem, which is exacerbated by the factthat the average plot size is 0.6 of a hectare. This makes production in

large volumes difficult to achieve.

OCIR Caf

OCIR Caf is the regulatory body for coffee in Rwanda and is a parastatal. Average production id 18 000 tonnes per annum, but plans are in place to

double this over the next ten years. Most marketing is undertaken through a system of direct contracts, some

of which are arranged with private processors. Most of the coffee is exported in its green form for blending purposes. There are a total of five exporters in Rwanda, made up of both local and

international participants. Very little of the crop is processed locally, as the internal market has a

very small requirement. OCIR provides extension services in addition to market information

obtained through the Internet, quality controls and export certificates forgrowers. They also determine the minimum price to be paid to farmers,based on international market information obtained from London and NewYork.

Small-scale growers average 175 trees per farmer, based on the size oftheir property, but have no title deeds to the land.

Some small scale farmers have been able to increase the size of the area

they farm, by leasing land from those people who do not wish to utilisetheir land.

Most market information is obtained from the Kenya and Burundi auctions,as well as from international markets, but there are problems indisseminating this to producers timeously.

Some of the exported commodity goes through the East African FineCoffee Association in Uganda, but this is normally the excess not tradedthrough Kenya or Burundi.

Federation Rwandaise du Secteur Prive

This organisation represents the private sector in Rwanda and is fairly influentialin determining marketing policy in Rwanda.

They indicated that they believed that the proposed exchange would be ofbenefit to a number of sectors within the agricultural industry.

The point was made that such a venture would not only be of benefit in themarketing of agricultural commodities but could, if utilised properly, help to


32/88

32

ensure that producers made better profits by being better informed aboutmarket trends.

Traders and other buyers would have to pay market related prices toproducers.

At present there is very little competition between traders, which is based

more on the size of their respective operations than on quality issues. Thisis of great concern, as there is a view that good quality should berewarded with higher prices. This does not happen however andpurchases are made solely on the basis of the commodity type, ratherthan on quality.

Tea is currently marketed through the Mombassa auctions, whilst potatoesare sold via a number of outlets in East Africa.

Although indications were given that the communication system is goodcountry wide, it was acknowledged that relevant market information doesnot reach target groups at all in some cases, and is usually out of date bythe time it reaches others.

Storage belongs to traders in the main and is located in the major centers.Note was made of the fact that there is insufficient storage to cater for allthe commodities produced.

There are no exchange control regulations in place and there is a veryactive promotion of private investment and the privatisation of governmentowned businesses.

Access to finance is a major problem because no farmers have titledeeds, resulting in little collateral or any other form of guarantee, sufficientto satisfy the banks.

Chicago Board of Trade

Met with Mr. Eugene Kunda from the Market and Product DevelopmentDepartment and the following points were covered

Its members own the Chicago Board Of Trade, and determine how theExchange operates and which investment opportunities to participate in.

The Exchange does not develop markets, but rather provides a meetingplace to enable transactions to take place.

The Exchange assists in improving access to markets and marketinformation.

Mr. Kunda believes that fundamentally, there is only one world price forany given commodity, which in the case of certain wheat varieties andsoya beans for example is based on price indications from the ChicagoBoard of Trade.

It was made clear that the Chicago Board of Trade, whilst remaining opento new suggestions and ideas, was really looking for opportunities toimprove turnover for its members.


33/88

33

Despite this, they saw a need to provide risk management in marketsgenerally and, in view of their core business, may be in a position to help.

Indicated that the fundamental principle of an exchange should be toprovide price information and price discovery and should operate in anopen, transparent manner, offering financially sound contracts to the

agricultural industry. Felt that futures markets are really a form of access to capital, which can

provide new opportunities to participants in the market. Saw theopportunity for capital input to develop a new initiative such as this, withfunds from the United Nations, participating governments, banks and otherfinancial institutions. Funds would be contributed with a view to achievingset goals, such as increased production, income levels, health standardsor improved varieties for example. The financiers would be considered tobe the insiders and would determine the standards and rules. Therewould however be a need for outside participation to look at the riskmanagement aspect and this is where organizations, such as the Chicago

Board of Trade, may be able to help. Food security for the region would perhaps be the goal and there may be

an opportunity to introduce a futures contract for this. The thought was expressed that it might be an idea to establish local

markets, in each country first, before introducing a regional market. Theexample of micro and macro-economics was given in this context.

The point was made that the Chicago Board of Trade was unlikely to beinterested any direct involvement in a venture such as this, although it wasacknowledged that they could well become involved through importers,exporters, traders and speculators, who are members of the exchange.

An interesting point was made concerning trading practices, when it

emerged that more and more (OTC) over the counter trade is taking placeto meet specific customers needs. Note was taken of the fact that many ofthe processors have precise requirements as to quality and specialspecifications, which can only be met through special trades.

It was felt that any United Nations initiative to develop markets in East andCentral Africa might be good public relations for the Exchange, which maylead to more co-operation and perhaps, more direct involvement fromthem.

The point was made that in the event that a regional exchange isintroduced, some form of electronic trading system needs to beconsidered, as this is the way most exchanges are heading.

New York Board of Trade

As with the Chicago Board of Trade, the New York Board of Trade isowned by its members, who have similar decisions to make as CBOT.


34/88

34

Again, indications were given that the Exchange does not developmarkets, but rather provide a meeting place to enable transactions to takeplace and assists in improving access to markets and market information.

The New York Board of Trade (NYBOT), which was located in the WorldTrade Centre, is now situated in three different places in New York.

The New York Board of Trade is the parent company of the Coffee, Sugarand Cocoa Exchange (CSCE) and the New York Cotton Exchange(NYCE). Through these two exchanges, NYBOT offers an expandingrange of agricultural, currency and index products.

NYBOT continues to set new records for its Coffee C contract, whichstarted on 4th February, 2002, with a new record of 64 582 futurescontracts having traded recently.

The C contract is for roughly 250 bags of coffee (or 37 500 pounds) ofexchange certified arabica coffee grown in nineteen Central and South

America, Asian and African countries.

NYBOT also has a Mini Coffee contract, which is 83 to 84 bags, or 12 500

pounds. Cocoa contracts are set at 10 metric tones in size, whilst those for cotton

and sugar are at 50 000 pounds net weight and 112 000 pounds,respectively.

Of interest is the fact that coffee and cocoa trade on delivery months ofMarch, May, July, September and December, with those for cotton andsugar are January, March, May, July and October.

It was also noted that all the contracts traded have prices and tradesthrough to September or October, 2004, except for the Mini Coffeecontract, which only has price indications and trades up to February, 2003.

Again, some doubt was expressed as to the need for another exchange to

deal with these commodities, in view of what is already in place. However,when it was suggested that larger volumes of given grades could becomeavailable through a single source, such as a regional exchange, theattitude did change somewhat. It was pointed out however, as hadoccurred with other exchanges, that there should only be one price forthese commodities, based on the NYBOT prices.

Some opportunities might exist for members to become involved in thedevelopment of a new venture such as a regional commodity exchange,although this would probably occur on the basis of individual choice, ratherthan more formally through the exchange it self.


35/88

35

EURONEXT LIFFE(London International Financial Futures Exchange)

Met with Miss Ritu Agrawal the production Development Executive,Commodity Products and Mr. Malcolm Wall Morris, a Product Manager,

Commodity products. Indications were given that there are underlying physical markets for

coffee, cocoa and cotton. Futures contracts for robusta coffee are traded on Euronext LIFFE, whilst

those for arabica coffee are traded on the New York Board of Trade. It was noted that exporters get the lions share of the money from both

coffee and cocoa, based on the fact that these commodities are producedin what are seen as high-risk areas financially.

Many companies are either reluctant to get directly involved, or simplyrefuse to take any risk on these commodities, on the basis that these aregrown in Third World countries, where risks are seen as being much

higher than normal. As a result, many opportunities for traders to take therisk and make huge profits present themselves.

Sugar indicative prices are provided through trades conducted on the NewYork Board of Trade, which effectively becomes the world price for thiscommodity.

Whilst there are some less scrupulous individuals who will try to avoidtransparency at all costs, most well known participants in agriculturalmarkets prefer to use exchanges specifically to achieve as muchtransparency as possible. Again, note was taken of the fact that there isan increase in over the counter trade, to cater for specific needs.

Quality specifications are laid down in respect of all contracts traded on

Euronext LIFFE and are stringently enforced, to maintain the integrity ofthe Exchange.

Other agricultural contracts traded on Euronext/LIFFE, include cocoa,white sugar, wheat (both for human consumption and stock feed) andbarley. It was noted with interest that they also trade a futures contract onthe weather!

Kenya

The first, of a number of meetings held in Kenya, was with the Coffee Board ofKenya, based in Nairobi. We were informed on arrival, that Mr. Murunga nolonger works there and there seemed to be some confusion as to who had takenover his responsibilities, insofar as his commitment to the Common Fund forCommodities is concerned. In the end, we saw Mr. Bernard Gichovi, who is theCoffee Information Officer, who described the various processes involved in thecoffee industry in Kenya. The salient points made were


36/88

36

Coffee production in Kenya has been declining for some time and from ahigh of 190 000 tonnes in 1983/84, current production levels are now at 50000 tonnes to 60 000 tonnes annually.

After growing the crop, producers partially process it by removing theparchment and getting the coffee to the pulp-parchment stage.

The grower then contacts a miller of his choice, who mills his coffee for afee. This procedure removes the parchment skin, whilst at the same timecleaning the bean. At the same time, the miller grades the coffee to seveninternational standards, on behalf of the grower.

Following this, the coffee will be sent to the auction floors for sale.

This system seems to work well, while the coffee industry remains fairly wellregulated, although continual efforts are being made to liberalise the industry. Inthis respect, the following points were made.

Until April this year, all the processed coffee was sent to the Coffee Board

of Kenya, to be sent on to the auction floors. Since then however, achange in the Coffee Act saw a move to get the private sector involved inthe marketing aspect of the coffee trade. Three companies, all coffee millsat this time, were appointed as interim marketing agents, to carry out thefunctions previously undertaken by the Coffee Board of Kenya.

In order to further enhance this initiative, applications have been invitedfrom interested parties wishing to become marketing agents. A total ofthirteen applications have been received and the names are presentlyappearing in the Government Gazette, to see if there are any objectionsfrom the public. It is hoped that these appointments will be confirmed earlyin the New Year and that the increased number of participants will help to

stimulate markets. Once the coffee has been sold at auction, the buyer has seven days in

which to pay the seller, which is done through the marketing agents, whothen pay the producer, less any costs such as commission, or millingcharges.

It was noted that the coffee auction is presently run under the auspices ofthe Coffee Board of Kenya, which is trying to get the private sector to takeover this function, without too much success to date. Further efforts are tobe made to encourage the private sector to take on this responsibility assoon as possible.

Most of the storage capacity in Kenya is owned by the marketers. Prices,

as with the rest of the region are very seasonal and generally peaktowards March. Additional marketing information would enable producersand other sellers to sell to best advantage, based on quoted bid and offerprices.

The feeling is that some form of structured market would be preferable toa completely free market, but it is felt that this attitude is as a result ofignorance of how the free market operates in reality.


37/88

37

The East African Fine Coffees Association, based in Kampala, is trying topromote East African quality coffees.

There are over 100 registered buyers on the floor, although active buyers usuallynumber between 30 and 35. Every producer is registered with the Kenya Coffee

Board, which in the case of small-scale producers is done through the co-operatives. Any producer, who owns less than ten acres of land, is required tojoin a co-operative, which is registered with the Coffee Board. All coffeeproduced in Kenya is required by law to be sold through the auctionsystem. Note all farmers in Kenya have access to title deeds on their land,unlike many other countries in the region.

A very successful coffee auction was held on the Internet and prices achievedwere considerably higher than those prevailing at the time, probably because thissystem provided much more access to a greater number of buyers. Sadly, owingto legislation in force in Kenya at the moment, this exercise is unlikely to be

repeated in the foreseeable future.

There would appear to be adequate storage for coffee in Kenya, some of whichis still owned by the Coffee Board, but this is rented out to the marketing agents,whilst producer groups through the co-operatives and the millers own otherstorage facilities. More commercial use could be made of this storage, includingthe introduction of a system of warehouse/silo certificates.

Some discussion took place about the need for COMESA countries to improvethe quality of coffee produced, before looking to increase volumes, as this ismost likely where the future market lies. This approach is currently being

investigated and promoted by the Eastern African Fine Coffees Association(EAFCA), which is based in Kampala and whose Executive Director is Mr.Frederick S.M. Kawuma.

It was agreed that despite a relatively successful auction system for coffee, muchmore can be done to provide detailed market information, including productionfigures in each of the COMESA counties, marketing opportunities (which couldbe enhanced by bulking up volumes), price discovery and trends, world marketsand production and niche marketing opportunities. The present auction system,whilst electronic, requires buyer to be physically present in order to conductbusiness. The programme being used has capacity to allow persons toparticipate from anywhere in the world and this development is beinginvestigated.

It was suggested that a regional agricultural commodity exchange could easilyoperate on such a basis and that the coffee auction system could beincorporated into the exchange itself. This was met with a great deal ofenthusiasm, although it was acknowledged that in the context on Kenya, thiswould require changes to existing legislation. Mr. Gichovi acknowledged that by


38/88

38

insisting that all coffee be traded through the auction process, prices do tend tobe suppressed. He went on to say that whilst further liberalisation needs to takeplace, care must be taken to ensure that undermining current market practicesdoes not compromise the industry. In this context he felt strongly that someclearly defined and formal trading method remains necessary.

Ministry of Agriculture and Rural Development

Saw Mr. Diru and Mr. Nduati to discuss the whole concept and the followingpoints emerged:-

Agreed that there is an opportunity, through a regional commodityexchange to have up-to-date market information for the whole ofCOMESA, making dealing in the market easier for all involved. It wasstressed that in addit

UNCTAD Study Market

Documents

Transcript of UNCTAD Study Market