From Subsistence Agriculture to Agribusiness in Africa: the Role of Commodity Exchanges

Following the 2008 food crisis, increased attention has been given to the roles that globalization and “financialization” play in determining agricultural commodity prices. For the many African countries that are net food importers and for the small holder farmers that comprise much of the continent’s agriculture sector, these trends have come at a high cost, most noticeably in terms of increased price volatility.

However, they have also come with an opportunity. They have potential to promote the rapid growth and restructuring of the agriculture industry from a largely subsistence-based form to a more sustainable and profitable form of agribusiness. An obvious question policymakers must wrestle with is: what can be done to accelerate this transformation while simultaneously ensuring that African countries and smallholder farmers benefit the most from its consequences?
 
Thankfully, the issue is receiving some attention; the G-20 agricultural and finance ministers have it as an agenda item and will discuss it in their upcoming November summit.

But G-20 policymakers need to change their thinking on the topic. They need to better appreciate how important the private sector’s role is in transforming the agriculture industry in Africa. Neither the public sector nor smallholder farmers can affect the necessary change by themselves. Neither have good experience managing volatility (hedging, arbitrage), improving price discovery (information), ensuring adequate storage facilities or linking farmers effectively to diverse markets.

Part of the G-20’s current approach has been to support the creation of regional food reserve facilities that would serve as a safety net, providing grains in the event of a humanitarian emergency. The G-20 also plans to create an Agriculture Market Information System (AMIS) to enhance commercial transparency. While laudable, these efforts use public solutions to try to address problems that are driven largely by private incentives. Consequently, if implemented in isolation, they will fall short of their intended goals. Ultimately, the public sector must create room for the private sector to provide the sustainable and transformative solutions needed to complement these efforts.

The G-20 should endorse market-improving solutions for agriculture trading and one practical way to do so would be to assist Africa in developing a network of viable, privately-held commodity exchanges. These instruments have been used effectively in countries such as the United States, Brazil, Chile, Argentina, Ukraine and Russia. To ensure the breadth and depth of these exchanges, the network of African exchanges should be merged onto a single platform to create a virtual network regional commodity exchange platforms. The exchanges should be underpinned by a number of privately-run warehouse receipt systems effectively functioning across major commodity-producing countries.

Such a system would have a number of benefits. It would provide both national and regional price discovery points, improve transparency of the commercial system and build on the Agriculture Market Information System (AMIS) initiative. It would allow smallholder farmers to smooth any income volatility they experience by enabling them to better stagger the sales of their commodities and, in some cases, by prompting them to switch cropping varieties altogether based on market demand and price information obtained through the exchange. It would give these farmers a predictable conduit into a global market and direct access to multiple trading options and partners.

The system would also help mitigate the problem of price volatility. Commodity exchanges could be used to anchor the G-20’s vision of a series of humanitarian food reserve facilities; participating countries could purchase rolling 30 – 90 day commodity futures from a regional commodity exchanges as a way to prepare for the worst. The World Food Program could pilot this initiative working with a national commodity exchange in Africa as part of the G-20 agenda. Since the World Food Program is a large buyer of grains on the African continent, its support would help significantly in the development of these markets.

The G-20 can meaningfully inject an appreciation for the private sector into a discussion that has, to a large extent, focused primarily on public sector solutions. Following the successful experience of the South Africa commodity exchange and the emerging experience from the Ethiopia Commodity Exchange, Ghana, Tanzania, Nigeria, Kenya and Zambia, among others have begun to put in place the building blocks for the development of commodity exchanges supported by a system of warehouse receipts. The international community and G-20, in particular, should applaud, support and expand upon these efforts.