Is there Need for an East African Commodity Exchange?

In the East African Community (EAC) region, the food production, processing and preparation sector is a key in the economies of the member states. It is estimated that between 70 and 80 per cent of the labour force of the EAC is involved in the food sector. Between 24 and 48 per cent of the GDP of the member countries is attributed to the agriculture sector. The region adopted market liberalization more than two decades ago, resulting in an increase in the number of private sector actors in the market, improved market integration, and reduced marketing margins. However, these market reforms did not reduce the volatility of grain prices, and therefore, the government continued to intervene in the food markets in order to stabilize prices and assure supply in an effort to ensure that food prices are affordable to consumers and at the same time profitable for producers to stay in production.

Why Commodities Exchange? A commodities exchange can serve two purposes: First, it can raise agricultural productivity by ensuring substantial margins for farmers. Secondly, it can reduce inefficiencies of agricultural marketing by streamlining trading, delivery and payment systems and consequently, reducing transaction costs. The EAC region is ripe for a commodity exchange and is in many ways suited to follow South Africa’s example in organizing market institutions.

On the demand side is a large urban population and large-scale quality-conscious food and feed processors. On the supply side is a significant commercial farming sector and commercially-oriented smallholders. There are supporting institutions such as an innovative banking sector, insurance, transport, ICT services, and even inspection services. Evidence has shown that in the Southern African region,  other factors remaining constant, the use of futures and option contracts has resulted in stabilizing the spot market prices for white and yellow maize in that region. From experience in other countries, national food staples are not subjected to the commodity exchange due to food security concerns.

However, the following prerequisites need to be put in place: i) Assured supply or storable commodities; ii) Product homogeneity within a system of grades and standards; iii) Interested parties; iv) Legislation and rules; v) System and technology; vi) Market infrastructure; vii) Warehouse receipts system; viii) Education; ix) Macroeconomic stability; and x) Legal and regulatory infrastructure. The formation of a commodity exchange however, needs to be supported by a holistic approach to ensure that the production system becomes more efficient. This is because currently, the region suffers from a number of setbacks: (i) Low productivity i.e supply to trade, (ii) Limited size of formalized food markets, (iii) Weak infrastructure, and (iv) Inadequate supportive legal and regulatory frameworks. Other factors that can limit the success of such an exchange include trading in food crops which are susceptible to unpredictable policy intervention and integrating already existing exchanges.

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