Governments across Africa are driving forward their plans to establish commodities exchanges, but will these new initiatives be more successful than previous attempts? Shannon Manders reports.


Africa’s first forays into the development of national commodities exchanges over the past few decades have nearly all stalled. Only two countries have produced lucrative models: South Africa and Ethiopia.

Armed with these success stories, many African governments are now reinforcing their efforts to either construct or renew their own commodities exchanges and accompanying warehouse receipt programmes.

The majority of African farmers are in debt by the time they harvest their crops, and are forced to sell their produce at any price. Commodities exchanges are intended to give small-scale farmers leverage in negotiating for their crops by providing them with reliable market information, both pre and post-harvest, which improves competition and communication, and ensures higher prices for higher quality.

Even though exchanges provide farmers with a guaranteed price on their goods, there is still some work to be done in terms of price management and securing a floor price for the smaller producers.

“Commodities exchanges are potentially of great value as they should be able to provide more transparent pricing and thus create more confidence in local markets,” explains Charles Morrison, DLA Piper’s international group head for finance and projects.

But without political will in place, initiatives to set up commodities exchanges are doomed to failure. For all their good intentions, governments are often to blame for why commodities exchange markets have not succeeded. Sporadic intervention in their nations’ commodities markets, whether it be in price-setting or commodity reserves, discourages investment and does little to instil confidence in commodities exchanges and their purpose on the African continent.

As a result, the launch of commodities exchanges is often caught up in a maze of bureaucratic bungling and political jealousies, as typified by recent occurrences in Zimbabwe, and to some extent Ghana. Despite much hype in both countries, the exchanges are not yet functional since their launch dates in 2011 and 2008 respectively.

Other hindrances include the lack of suitable storage facilities and the absence of viable payment systems, or warehouse receipt systems, all of which are considered essential to the operation of commodities exchanges in Africa.

“If you have a properly functioning warehouse receipt system, something like a commodities exchange can provide enormous opportunities for all sorts of farmers, from smallholders to co-operatives and companies, to raise finance,” says Edward George, head of soft commodities research at Ecobank.

He credits the failure of Nigeria’s Abuja Securities and Commodity Exchange (ASCE) to the fact that the country did not have a well functioning warehousing or warehouse receipt system in place. “No one is going to use an exchange if they can’t guarantee the quality of the commodity they’re going to get,” George explains.

Without a clear global plan for all countries to follow, it is still too soon to say exactly how commodities exchanges are going to develop.

“In the Africa region, such exchanges are in their infancy, whereas stock markets have had a longer run. In terms of raising finance, the jury is still out on either market,” says Joe Mensah, CEO of Ghana International Bank.

What is known is that with commodities exchanges in place, Africa’s agricultural sector could suddenly come into a whole lot of financing that it didn’t have before.

South Africa’s success
The Safex Commodity Derivatives market operates as a division within the Johannesburg Stock Exchange (JSE), and has been hailed by many as Africa’s most comprehensive commodity exchange. It is the only commodity derivatives exchange on the continent.

The exchange was established in 1995 when the South African government opted to move to a free market environment, and subsequently relinquished its control of the country’s agricultural marketing boards.

“Unlike government initiatives, we do not have the ‘right’ to exist. As a self-funded entity we have to ensure we continue to add value to the market through products that are relevant, delivery mechanisms that ensure efficient price discovery and at a cost-effective rate, otherwise we won’t be considered for price risk management purposes,” says Chris Sturgess, director of the JSE’s Commodity Derivatives market.

“The South African model has largely been a success because we’ve had consistent policy. Government has not intervened with price-setting in any way, or interfered with grain reserves since they made their commitment back in 1995 to deregulate the market place,” he adds.

What’s more, Sturgess notes that the business had a good foundation in place before it was deregulated. “It had good storage infrastructure and we had a sound commercial farmer base that was producing large tonnages already. So it was easier to plug a derivatives market in on top of that,” he says.

The exchange provides a platform for price discovery and price risk management for the grains market in Southern Africa. Before 2009 the business had always been focused on agricultural products, but following a licensing agreement with the CME Group that year, it now offers cash-settled derivatives on precious metals and crude oil as well.

Sturgess reports that last year South Africa exported 2.4 million tonnes of maize, and imported 140,000 tonnes of white maize from Zambia to help make up the resulting shortage. “That shows the fluid nature of the grains market in South Africa – we got rid of our own surplus production, but we also assisted Zambia in getting rid of some of its own surplus, thereby encouraging producers to plant more maize for the next season,” he adds.

“If you look at our trading activity, on our very liquid white maize and wheat contracts we trade the local crop around 10 times over and still manage to keep physical deliveries under 2% of all contracts traded, which is a healthy sign for a derivatives market.”

Banks have embraced the model and its warehouse receipt system. “They can easily offer finance packages because there is a liquid derivatives market to offload their price risk. So we see active integration between crop finance and input finance – all tied back to hedge on the derivatives market,” Sturgess explains.

He admits more work could be done to bring in the involvement of smaller producers so that they too can access the market. Although small producers do have the benefit of price discovery, they do not have the advantage of price risk management tools. “That’s one area where we would still like to partner, with perhaps a government body, so collectively we could simply use put options to guarantee a group of producers a floor price. In that way we could package a price risk management deal that could then be applied to a number of the smaller producers,” says Sturgess.

Another way in which the JSE would like to evolve is by using South Africa’s market liquidity to enable other African countries to access price risk management instruments. Sturgess explains that this may entail listing delivery points in other Southern African countries in addition to the 200 points in South Africa already registered with the exchange, and having that plug into the country’s liquidity.

“For a derivatives market, you strive for maximum liquidity so that if you wish to lock in a price for July next year, you know there’s a willing counterparty to trade with that will secure that price.”

He admits though that this may be problematic as many African countries do not yet have surplus production. Nevertheless, he believes countries such as Malawi and Zambia are already beginning to evolve in this regard by upping their production and sustaining the demand for commodities.

Sturgess adds: “They’ve got the potential; it just comes down to starting with a policy from the governments, and the free market guys will make it work. I’m optimistic.”

East Africa’s rising star
Working as an alternative model to the South African initiative is the Ethiopian Commodity Exchange (ECX), launched in early 2008, and led by the Ethiopian government.

Heralded a true African success story, the exchange has revolutionised the way that Ethiopian commodities are traded, and helped launch the country into the global market arena.
The ECX provides market players with a secure end-to-end system for handling, grading and storing commodities, matching offers and bids for commodity transactions, and a risk-free payment and goods delivery system to settle transactions.

Before the ECX was launched, agricultural markets in Ethiopia had been characterised by high costs and high risks of transacting, forcing much of the country into global isolation. But such has been the success of the Ethiopian model, that a number of other African countries are considering replicating the business.

In the last fiscal year, as reported in June, the ECX’s trading volume increased by 23% over the previous year to 601,000 tonnes and trading value reached Br21bn (US$1.2bn) –
a 21% increase from the previous year.

The exchange has also been on the forefront of agricultural commodity finance following its partnership with the IFC in 2009 to establish a warehouse receipts financing initiative to help expand access to financing for farmers, traders and co-operatives.

Last year a total of 42 borrowers pledged 122 warehouse receipts as collateral for short-term loans, and received a total of US$1.5mn of financing through 114 credit disbursements. According to the IFC, the volume of commodity finance via the warehouse receipts system represents less than 1% of the total trade volume of commodities on the exchange. But, as more banks start lending under the warehouse receipt system, the volume will increase, predicts Adamou Labara, resident representative at IFC Ethiopia.

A credit ceiling imposed by the National Bank of Ethiopia in 2009 to tame inflation remains a significant challenge in scaling up the project and in introducing IFC warehouse receipts financing investment facilities to the banking industry.

Although the National Bank of Ethiopia has since lifted the credit ceiling, it subsequently revised its directive in June 2010, requesting private commercial banks to purchase treasury bills close to the value of 27% of each loan disbursement. The new regulation presents serious challenges to the liquidity of banks.

“Because of the new regulation, banks are restricting their services to the agriculture sector in favour of medium-term loans, which has negatively impacted demand by local banks for IFC warehouse receipts investment,” explains Labara.

Commerical Bank of Ethiopia has already launched a warehouse receipts financing programme, and an additional three banks have signed agreements with ECX to start offering warehouse receipts loans: Dashen Bank, Nib Bank and United Bank. A fifth bank, Oromia Co-operative Bank, is also expected to sign an agreement soon.

“Warehouse receipts-based loans are expected to grow to Br100mn (US$6mn) by the end of next year, especially because agriculture is a priority sector for the Commercial Bank of Ethiopia,” Labara adds.

While the IFC has been helping out the Ethiopian system in an advisory capacity, it has yet to invest in Ethiopia under its US$500mn global warehouse finance programme, which was established in 2010.

“The IFC hopes to commit to contributing to the banking sector as soon as the credit environment changes, given the IFC’s involvement through advisory services in this country since 2008,” says Makiko Toyoda, product lead of the IFC’s global warehouse finance programme in Washington DC.

Different strokes
Ethiopia’s government-backed model is in stark contrast with South Africa’s private sector-led prototype, and countries keen to develop their own exchanges may decide to replicate either of these schemes. “If you look at the Ethiopian model, it is fortunate that the government is prescribing everything through the exchange. Is that a sustainable model? Is that a successful way to establish the market and then wean off the government’s participation? That’s a model we will look to the Ethiopian guys to answer,” says Sturgess at the JSE.

Countries may choose to follow South Africa’s route and move directly into a free market, or mirror the Ethiopian initiative and shelter participants with a regulated market or marketing board. “Obviously sheltering, or having a single-market system costs cash. South Africa in 1994 had to spend money on more social-oriented issues; it could not fund commercial agriculture in the same way. We’re cautious to say whether it’s the South African model or the Ethiopian model that is the success story. I think there is a model for each country.

“The important thing is whatever we do we must increase our production base and move the African continent into a net exporter of grains to meet growing demand. We have the potential.”

Failed attempts
George at Ecobank tells GTR that he knows of at least 24 projects that are underway on the continent to set up national commodities exchanges, although admits that some of these may be nothing more than government aspirations.

Another anonymous source tells GTR that he is familiar with two or three commodities exchange operations that have been particularly hopeless. “They raise the cash and just haven’t done anything,” he says. “People love to say ‘we’re launching a commodities exchange’, and then do not have the follow-up: the rules, the contract specs and the enabling environment to make it work.”

India-based Financial Technologies established Bourse Africa, a pan-African commodities exchange in late 2008, and announced that operations would commence in mid-2012. The company’s ambition is to provide commodity markets in a number of African countries, and have it all cleared in Botswana. However, as of late August, it has yet to launch a single product in a single market.

“This is an interesting initiative – it speaks to how complex it really is setting up a commodities exchange and making sure it’s successful. They’ve been going for four years now and haven’t traded,” says GTR’s source.

Bourse Africa was unavailable to comment on its progress when contacted by GTR.

The challenge, it seems, is getting the chosen model to work, and GTR’s sources all agree that for individual countries this starts with consistent government policy. The continent has had its fair share of disappointments, with Zimbabwe and Ghana’s efforts being particularly slow off the mark.

The Commodity Exchange in Zimbabwe (Comez) was launched in January 2011 but has yet to conduct its first trade, apparently due to political turf wars in the current inclusive government.
The country has been without a commodities exchange since the collapse of the Zimbabwe Agricultural Commodities Exchange (Zimace) in 2001, following years of successful trading in grains.

The failure of Zimace was largely attributed to the arbitrary setting of maximum buying and selling prices by the Grain Marketing Board (GMB), which distorted trade flows. According to reports, Comez will end the GMB monopoly, although the Zimbabwean government will continue to play a strong role. It is thought that the new commodities exchange will trade grains, cereals and oil seeds.

“The operation of Comez is now long overdue given its capacity to effectively deal with current challenges such as poor producer prices, government’s tendency to fix prices for agricultural products and market failure – as manifested by the Grain Marketing Board’s failure to pay farmers for grain deliveries in the last two years,” says Omen Muza, managing director at TFC Capital in Zimbabwe.

“Comez will provide an alternative marketing channel for smallholder farmers who now make up the majority of the farming community in Zimbabwe, and solve the farmers’ collateral and financing challenges since they can secure loans against warehouse receipts issued against deliveries to Comez warehouses,” Muza adds.

Zimbabwe’s cotton market has been facing much adversity in the last few months. An ongoing dispute over pricing between farmers and merchants was seemingly resolved in June when it was announced that the government had become the sole buyer of the crop.

But the Zimbabwe Farmer’s Union (ZFU) stated in a market guide on August 3 that “chaos continues in the marketing of cotton in spite of the intervention by government in determining its price – no clearly defined pricing structure is being used”.

Despite the current turmoil in the commodity sector, Muza remains positive that the exchange will begin operations in the next 12 months. Ghana’s attempts to launch a commodities exchange have been thwarted as many as three times due to the lack of a regulatory framework. Nonetheless, statements by members of the Ghanaian government made earlier this year say that the exchange will be launched by the end of 2012.

The Ghana Grains Council came forward in May to state that as part of the development of the exchange, it would launch a warehouse receipt system in August. It is thought that the receipt system will eventually feed into the exchange, though as GTR went to press in late August, news of the launch had not yet been publicised. The council has selected seven warehouses to pilot the system.

The Bank of Tanzania announced in March that it had begun the process of setting up a commodities exchange in the country, and called for bids for consultants to provide the legal and regulatory framework and design a trading system.

Tanzanian President Jakaya Kikwete has been backing the country’s plans, and has reportedly asked Tanzanian authorities to emulate the Ethiopian model.

Proposals to create the Rwanda Commodity Exchange are supposedly also on track, following the signing of a memorandum of understanding between US company Nicolas Berggruen Institute and the Rwanda ministry of trade and industry in November last year.

Kenya too has indicated that it would like to get a commodities exchange off the ground, and Uganda already has a warehouse receipt system in place.

Zambia’s Agricultural Commodities Exchange (Zamace) is also keen to resume operations after they were ceased in August last year.

Trading was halted so that the exchange might seek shareholders, but so far nothing has been signed. Delays in regulatory changes have ostensibly also hampered
a return to business.