zamace - institutional changes and persistent challenges - dec 2011

8/3/2019 ZAMACE - Institutional Changes and Persistent Challenges - Dec 2011

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ZAMBIAN AGRICULTURAL COMMODITYEXCHANGE: INSTITUTIONAL CHANGESAND PERSISTENT CHALLENGES

Nicholas Sitko and T.S. JayneIndaba Agricultural Policy Research Institute (IAPRI)

Presented at the Agricultural Cooperating Partners MeetingLusaka, December 13th, 2011


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Objectives of Presentation

1) Why commodity exchanges would be beneficial toAfrican food markets

2) Institutional challenges impeding ZAMACEs

development

3) Recent restructuring at the exchange

4) Persistent policy challenges

5) Conclusion


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Institutional solutions to Africas food

market challenges? In developed agricultural markets, commodity exchanges

serve to:

Manage risk

Reduce costs Provide transparent price discovery

Increase market activity and decrease price volatility


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Yet they remain under-utilized

Total value of trade onZAMACE $US 72million (2008-2010)

Estimated annualvalue of wheat trade inZambia $60 million


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Why has it failed to develop?

Institutional Challenges

1) Limited capacity to enforce contracts;

2) Insufficient incentives to develop competitive brokerage

services;3) Costs of operating the exchange exceed the benefits of

using it for many potential participants;

4) Exchanges perceived as vehicles for manipulating

markets, rather than as forums to achieve pricediscovery


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Market environmentcharacterized by highrisk of contract default

Perception that theexchange is unable to

protect against

contract shirking andopportunistic behavior

Perception thatexchange can attractrisky trading partners

Raises the potentialtransaction costs ofusing the exchangerelative to traditional

trading

Limited participation incommodity exchanges

Risk mitigation intraditional tradinginvolvesinvestments in long-term relationshipwith a knownbuyer/seller, whichare not well-suit toan anonymous andtransparentexchange

Constraint #1:Contractenforcement

challenges


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Thinly tradedexchange

traditional tradingmargins exceed

brokeragecommisssions

Limited incentivesto invest in

brokerageservices

Exchange enrollsexisting market

actors

Exchange brokerswear two hats:broker/traders

Potential conflict

of interest

Opting out bypotential

participants andlimited outreachby brokers

Constraint #2: Limitedincentives forbrokerage services


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Thinly tradedmarkets increases

unit cost ofoperating an

exchange

Increasedmembership fees

Increased relianceon donor funds tocover operating

costs

Costs ofparticipation

exceed benefitsderived from the

exchange

Potentialparticipants opt

out of the

exchange

Raises questionof sustainability

Constraint #3: Costsexceed benefits


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Small spotmarket/thinly

tradedexchange

Potential for

pricecollusion

Potentialparticipants

remain on thesideline

Deprivesexchange of

possible tradevolume

Existingmembers opt

out ofexchange

Exacerbated by highnumber ofregistered trades:

68% of all tradesbetween 2008-2010

Constraint #4:perception thatexchange is used tomanipulate markets

not for fostering pricediscovery


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Restructuring at the Exchange

July 2011: Members given a choice to relinquish theirseats or to continue as members Four members remained (Cargill, CHC, Quality and Afgri)

Their future contributions will be converted to an equity share once

an equity partner is found August 2011: trade suspended on the exchange as

restructuring began

ZAMACE is negotiating ownership arrangement withLuSE Seeking to address perceived conflict of interest in ownership

structure

What the investment will look like is not yet finalized: majorityshareholding, a share swap or even a full absorption of ZAMACEinto LuSE.


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Restructuring at the Exchange

Streamlined it arbitration procedures: Set scale onduration, costs, and is developing a group of ZAMACErecognized arbitrators.

Nominated as the warehousing authority under theagricultural credit act: Pave the way for WHR?

ZAMACE CEO is in high level discussions with GRZ,WFP, and ZNFU

HOWEVER


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Policy Unpredictability Remains a Binding Constraint

Unpredictability:Imposition of import/exportrestrictions, changes in tariffrates, variations in marketing

board procurement, andrelease of government stocksat discretionary prices

Disincentive to speculationDraws maize away from theexchangeDisincentive to store grainDisincentive to enrollingfinancialinstitutions


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Lusaka Maize Retail Prices

0

100

200

300

400

500

1996 1998 2000 2002 2004 2006 2008

Lusaka retail

c.i.f. from

South Africa

nominalUS$perme

tricton


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Conclusion

ZAMACE is undergoing significant beneficial restructuring

However, we must temper our expectations:

By their very nature commodity exchanges are designed toenhance the efficiency of already functional food markets.They cannot create functional markets in dysfunctional

policy environments.

For those interest our report is available at:

http://www.aec.msu.edu/fs2/zambia/wp53_revised.pdf
http://www.aec.msu.edu/fs2/zambia/wp53_revised.pdfhttp://www.aec.msu.edu/fs2/zambia/wp53_revised.pdfhttp://www.aec.msu.edu/fs2/zambia/wp53_revised.pdf


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THANK YOU

zamace - institutional changes and persistent challenges - dec 2011

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