By Bunmi Ajilore
One of the nagging issues of African agriculture is market access or the availability of a ready market for agricultural products, especially for smallholder farmers who make up the bulk of the farming populace in Africa and produce most of what we consume.
Usually, farmers produce and wait for farm gate buyers, agribusiness agents, processors and consumers to come and buy at their farms or at the local markets near them. Oftentimes, this places farmers at the mercy of the farm gate buyers and middlemen who dictate price, with the knowledge that if they do not buy, the farmers have limited outlets to sell their produce, and many times force farmers to sell at ridiculous prices to prevent wastage.
This speculative form of production not only leads to the shortchanging of farmers – by receiving little remuneration for their hard labour – but also leads to an unsustainable wastage of food produce and all the resources that go into producing them. Besides, a lot of times farmers are not able to recoup their investment or run into debts and this, ultimately, leads to an increased rural poverty.
To break farmers out of this vicious cycle, many solutions have been proffered. One of the solutions that has been used well in more developed climes and is being increasingly adopted in African countries is the commodities exchange platforms and the structured trading they provide.
What is Structured Trade
Structured trade is an organized networking between different interdependent stakeholders within a sector – farmers, transporters, traders, warehouse managers, bankers, processors, agribusiness agents and even commodity exchange operators; according to a special report on structured trading by the Spore agricultural magazine published by the CTA in August last year.
Structured trading brings players in a value chain closer to one another and eliminates or reduces inefficiencies while ensuring that players in the chain benefited and are well remunerated for their labour – provided they get adequate information and adhere to strict standards and regulations.
Perhaps one of the most important advantages of structured trading is the provision of better access to agricultural finance. It makes it easier to convince banks and other credit institutions to fund agribusiness – as banks play a crucial role in a functioning structured trading system. Apart from banks, other entities that are crucial in the setting up of a functioning and sustainable structured trading system include: the warehouse operators/managers and the mainly the government.
Warehousing and Commodity Exchanges
An efficient warehousing infrastructure is central to the success of any functioning structured trading system. In this trading system, farmers deliver their produce to the warehouse just after harvesting for storing, to prevent deterioration and to provide time to get the most favourable buyer. This prevents farmers from selling their produce just after harvesting, usually a glut period, when prices are often very low.
Moreover, a warehouse receipt is issued to depositing farmers. This receipt, stating the quantity and quality of product stored, makes it possible for farmers to access credit – using it as a collateral – to cater for their pressing needs while waiting for the most appropriate and profitable time to sell their produce. This receipt also shows that the produce is being managed by a professional warehouse manager which encourages banks to give out the loan.
At the appropriate time, after selling their commodity, the money earned by farmers can then be used to repay their loans, clear the warehousing charges and – if there is anything left – save or invest the profit into their farming business.
However, farmers need prompt and clear access to information on current market prices to know and decide when is the best time to sell. To this end, there is a need for the provision of market price information from neutral and unbiased experts to avoid misinforming farmers or ripping them off through distorted or doctored price information.
This is where commodity exchanges come into the picture. They facilitate the process of providing market information and pricing on specific products. The information provided by the exchange often reflect the true market price of a commodity at any point in time because of the high volume of demand and supply usually handled by them.
Role of the Government
The government plays a huge role in the setting up and smooth running of any structured trading system. The main role of the government is to act as a facilitator, to provide the required frameworks and support for the success of the system. This will be in form of bringing all stakeholders together, providing needed infrastructures and the setting up the legal frameworks to ensure and enforce contracts implementation. Besides, the government needs to ensure stable legislation and policies, and the protection of all stakeholders in the network – provided they are operating within legal confines.
Photo Credit – IITA